Hi, welcome to this week's episode of Money with Alpha. Today, I wanted to talk about something I've just termed the wealth quadrant. Now, it's nothing too new, but I wanted to present it in a hopefully, uh, simplified way that you can start to conceptualize how to get from income to wealth.
Now, the concept of wealth often feels and seems unattainable, like it's this distant thing I don't know how to do, I don't know what it means, how do I get it, etc. Etc. And we get ourselves stuck in the. I don't know, but how, but how? Kind of, um, treadmill.
And that's where I want to try and interrupt that treadmill and help you understand what it all means. If you can imagine in your mind, if you're watching this, you'll see my hand gestures. But if you're listening, imagine a column, two columns, one left, one right, two rows. So two columns and two rows.
The top left quadrant of that, those four boxes that are essentially there is income. Underneath that is expenses. On the other column next to income, you're going to have assets, and below that is liabilities. So on the, on the top row, you've got income and assets, and below that you've got expenses and liabilities.
I realize they're sort of, they, they're kind of jargon, but just imagine for a moment that they're just regular words and they mean what they mean. So income is just money coming in, expenses is money going out. Assets is anything that you own that will grow in value or that you hope will grow in value.
Obviously sometimes we don't have control over that, but the intention is for it to grow. And then the liability is the amount you owe on those assets, on the things that you own. So a mortgage, for example, like the classic asset and liability that many of us have experienced, is buying a home and borrowing money.
So the home is the asset and the loan is the liability. Technically speaking, Lori, uh, we all need somewhere to live. So while your home is an asset, it's also something that you need anyway. So I quite often encourage my clients to look at the asset as, that's great, we're going to park that have, like a bit of a fence around that one.
And it probably does have a fence in reality as well. Put that to one side, we're looking at other assets, things that will grow, preferably also provide income. Uh, and that you, if you have a debt on them, you have a debt on them. So whether it's an investment property, so that's another one.
So it's an asset in general because you want the actual asset itself to grow in value. You want to earn income from that asset and you may have a loan against it as well because, you know, who of us actually owns our own home and then has enough money to go and buy another property outright.
And from a tax, um, effective kind of thing, you generally end up using leverage, which is, is borrowed money. But I'm not going to go down that path. But just think about that in terms of the asset and the liability. Then on the other side, you've got the income and the expenses.
Now a lot of business owners that I see confuse the two. They see their business as an asset and then there's the income. So, but where does the income come from? The income comes from your business. And yes, that's true. But unless you set your business up to be an asset, which is something that you could sell or you could, you're not needed in day to day so you can go do other things, it's not actually really an asset.
You've just bought yourself a job. So if that's you and you are in a small business and it is almost entirely reliant either on your effort or on your presence, then it's still not, um, an asset as such at the moment. It's an income vehicle. It might be a very lucrative income vehicle.
If that's the case. That's wonderful. Um, but we're going to see that as the income. So how do you build wealth? So if we're going to get from income to assets, and the assets are what will build your wealth. So that's why it's important to understand that distinction and why I was going through that as a bit of theory to start with.
So we're going to put your business part to one side for a moment and then just focus on, say on your personal life. Say you've got a business or even if you're employed, either way, something you're doing, some effort or something is providing you with income, whatever it is that you're doing, whether it's passive or active, even though, you know, we often hear the term, there's passive income, quite often there's still effort required in order to earn it.
Um, but whatever it, whatever the vehicle is that you're using to earn income, that you live on the income side, then if you think about the expenses, so expenses are then, you know, they bills essentially we're going to put debt off to the side because that, that sits under the Assets for the moment.
So how much do you spend on groceries? Um, school fees, insurances, eating out, uh, traveling, anything that actually costs money in life. And we all have them. Our mobile phones, our Internet, our subscriptions, you know, all of our, uh, like Netflixes and, um, streaming services, all of that, you know, whatever we choose to spend our money on.
And it's important to recognize that it is all a choice. Sometimes it might be like, for example, a mobile phone. These days it feels like less of a choice. It feels like something that we need. But then I don't have a home phone anymore. I remember, you know, everyone had a home phone.
We even had an answering machine. And then when we got mobiles, we had both. When my husband and I moved into this house, we didn't even bother getting a home phone. We just live off our mobiles. So. And for a while there, we didn't even have home Internet because we couldn't get good Internet here.
And the Internet on our phones was better. So we just hot spot it, um, and just had high data plans on our phones. Now, uh, we've got proper home Internet as well. But, you know, so there's different choices that you get even within those things that don't necessarily even feel like a choice.
So it's important to recognize that you have agency over that. What you spend on groceries. I know a few years, uh, probably about 18 months ago now, I went down a whole rabbit hole of going, so how can I cut down on the cost of groceries? Because they were just going up and up and up.
So I started to research, uh, alternatives. Like, I go to Costco, uh, every three months, and I do, I have my list. I have to try and focus on the list because otherwise you can get really, you can really spend a lot of money there. What you do buy lasts.
But you've got to make sure, like, if there's something, my daughter will go, oh, I really want to try that. I was like, yeah, but I don't want to buy 50 of that so that you can try one, not like it. And then I have to, you know, either give it away or throw it away.
So when they have samples, I'm like, okay, if you like it at the shop, well, we'll even, we'll go around the shop before I'll even get it. So anyway, but there was Costco. Aldi is an alternative supermarket. I wonder that. It's cheaper. And I go to farmers markets. I try and buy directly from suppliers if I can.
So I went down the path of trying to actually reduce our grocery bill. And it worked. It dropped by about 20%. And that was across the way. I even did a cost analysis. I have an episode. It's probably almost a year old by now, so I should probably revisit it and see how things are going now, um, about how to actually compare the cost of the exact same goods across the different, um, supermarket chains.
So that's what I did for that. Subscriptions we review. We don't have a whole lot of streaming services. I've only ever said to our family, we can have two. That's it. Two. We pick and that's all that. That's all we get. And to be honest, there's still, you know, choice paralysis anyway, because there's, you know, you flick and flick and flick.
You're like, oh, there's nothing on. Adding another streaming service is not going to help that problem. Uh, so sometimes it's like, just turn the TV off and grab a book or get out of board game. Um, look at something else. Uh, travel is probably one of my bigger expenses, so I'm constantly saving for travel.
My travel account has, or my fun account often doesn't have a whole lot of money in it because I'm always using it. So I'm constantly like, feeding it to use it. Um, but then I've got other accounts for other things. So it's important to understand the income and the expenses.
And look at it like, um, running a household is a little bit like running a business. So look at it to make sure that you've got money left over at the end of every month. Then the challenge becomes, what do I do with that? I know people think, oh, you know, I'd love to have money left over, but if you don't actually have that money earmarked for something, and I'm constantly harping on about giving money a purpose.
If that money doesn't have a purpose, it will just disappear into thin air. It's amazing how that happens. So plan to have money left over, then earmark that money. I have the money pie system to put it into the different compartments like I said, or pie slices or buckets or envelopes, however you want to think about it, metaphorically or physically.
And, you know, always having money aside for emergencies, always having money aside for fun, having money aside for, um, extra bills. Like I, I have a bills overflow account where things go in school. Like, I have an account just for my daughter between activities and school fees and all of that, and saving up for high school fees, all of that.
So There, there's different. Or saving up for a car, like whatever it happens to be that you need or you want to save for, make sure that money is earmarked so that your net profit at the end of every month you've got money to put into each of these accounts and carve it up.
Then if you look at your asset side. So that's. And one of the carve ups should also be investing. If you're in Australia, we have the mandatory superannuation. If you're a business owner and you're not paying yourself enough, super, that in itself is an issue. So you need to look at making sure that you're putting money into your superannuation because it is a tax effective way of investing.
I also suggest looking at investing outside of Super 2. It gives you choices and that's what money is about, is giving you the tool of choice. So having that money, like I have money that I put into investments and I don't, I mean I know what's going on in the markets, but I don't get influenced by, I just like buy.
Obviously if, you know, at the moment we had like a recent dip, I thought, oh, now I should just buy a bit more now. Um, but I try not to get reactionary. I try to just keep it steady. I do the same thing every month or quarter. I alternate and I have my strategy, strategy and I stick to it.
Um, so that's, that's part of what you do with the extra income that you've got left that will then help feed into your assets. So that's where you're building whether you want to invest in property and, or shares and, or gold or whatever else it is that you understand and that you want to invest in.
And I emphasize the word understand because when I first started out investing, I did not understand. I did courses, I looked at share trading, not just share investing, share trading, technical analysis, candlestick charts, fundamental, all of this. And I'm there just going, oh my gosh. Like, I know this is not for me.
So I, I invest in index funds and I'm a buy and hold sort of person. I just like buy and hold, buy and hold. I just keep buying the same ones. I have about four that I buy and I just keep buying bits of them and I just hang on to them.
And then I get dividends every quarter and then I just, yeah, some of them I reinvest, others I take the income depending on what's going on. Um, and that's just, that's what works for me. Investment properties, you can go down that path as well. I personally don't like a whole lot of debt, so I know what my personality is like, I know what my level of comfort and my risk profile is.
So I don't like the idea of leveraging, certainly not our home, but even other investment properties to go buy more and more and more. I don't need the headache, I don't need the hassle. I'm quite happy to buy into property trusts and build uh, a property portfolio that way.
And I like to diversify a bit more. So whatever's going on, the property market versus what's going on in the share market, I'm incredibly grateful that we bought our home and we did though, because the prices have pretty much doubled in the last, I think. How long have we been in here?
About eight, almost eight years. So, um, it's. Yeah. So I'm, I'm very happy the timing worked out for us in that way. But it's a matter of understanding what it is that you want and actually going for it rather than hesitating constantly and not knowing what to do. How do I build wealth?
Wealth is when you build assets. Your business will fund you. Purchasing assets, your business itself may become an asset if it's something that you can sell and you've got to set it up to be sold and run it in a, uh, in a, with that mindset. But if it's a business that you're just running and then when you retire, the business will stop, it is not an asset.
The income you're earning, what you do with it can create the assets. But it's important to understand that differential between the income and the assets columns so that you actually get to the asset building because that is what, where your wealth is and that is what will set you up for the future.
So I'm going to reiterate that again. I won't go into too much more because that might be a little bit mind boggling. If you need to listen to this again, please do. If you have any questions, please reach out. I do not want. You are not understanding something being the hurdle.
So you've got two columns. Your income and expenses, your assets and your liabilities. Whatever you're doing to earn the income match, make sure that you've got income left over at the end of every month and so your expenses are less than your income and then you've got that income.
It has a, all that net income. What's left over has a purpose. And part of that purpose needs to be Building assets so that they can build wealth for you in the future. Understand for you what that looks like. Do you want to trade in shares? Do you want to buy property?
Do you want to do a property development where you actually, like, buy a property, knock it down, build units? Or do you want to buy a rundown property, do it up and sell it? Like, whatever that happens to look like for you, figure that out. And then whatever it is, though, uh, you have to actually commit to it and enjoy it.
Because if you don't, it will not be a fun exercise. Like I said, I, I looked at the shared trading concept and I was like, I'm an investor, I'm not a trader. I looked at property development and the risk level at that time was just too much for me.
And I'm like, uh, nowadays I might have a little bit more interest in it, but then there's debt. So I have to make a decision about the trade off of that. Um, you can buy static assets. I know at the moment the gold price is. You know, I had gold many years ago and I sold it to buy a different asset that was actually going up more and had more income potential.
But some, a little bit of me is like, oh, maybe I should have hung onto some of that gold because I look at the price down, go, whoa. Um, so whatever it happens to be, but that's your income and your. On your liabilities. If you, if you've borrowed any money to buy any of those assets, that's where the liabilities are.
But try and get it to the point where you're, you're seeing your asset base grow over time. If you need help with running some calculations or where to go to do that, there's the Money Smart website, which is moneysmart.gov au it's an Australian government website. Has some really good calculators on there where you can just punch in some basic information and it will show you what the future will look like.
Um, so you can go in there as well. So building wealth is attainable. You just have to understand the fundamentals between income, expenses and assets and liabilities, or what you own versus what you owe. And that is where you're going to build your wealth. So I will leave you there.
Have a lovely week. And like I said, please reach out if you have any questions at all. All right, I will see you next week. Bye.
