What do Warren Buffett, Bill Gates and Mark Zuckerberg have in common? They’re billionaires — in other words, they’re experts on accumulating wealth. So… What can we learn from them?
I’ve always been fascinated by the process of wealth accumulation. I know many people who generate massive streams of income, but on a balance sheet are in an average (or even below average) position.
On the other hand, I also know a few people that don’t generate impressive amounts of income, but have a very high net worth.
“It’s not your salary that makes you rich; it’s your spending habits.”
- Charles A. Jaffe
So, how do the world’s greatest wealth accumulators like Warren Buffett and Mark Zuckerberg do it? They apply 5 fundamental and universally applicable principles.
1. Know what you have and what you earn
If your goal is to have a high net-worth, you’ll want to have a strong balance sheet. (The equity on your balance sheet is your personal net worth.) The only way you’ll know if you’re moving in the right direction, is if you keep track of where you are.
Sure, you could just look at your bank account or your investment balances and do some quick math. But that wouldn’t give an accurate picture. If we don’t subtract our liabilities, the number we get is pointless. Having a thousand in the bank while we have a thousand in debt is no different from not having anything at all in equity terms.
Although we could use one of a thousand ways to track our net worth, why not use the time-tried method that the biggest companies and wealthiest people in the world use? A balance sheet.
It can be simple… Something like this:
How lengthy or complex it is will depend on your situation. This will allow you to keep track of your net worth over time.
“If you don’t know where you’re going… You’ll likely end up in the wrong place.” -Chinese Proverb
Since I started doing this, I’ve been spending my money differently. I’ve been focusing more on a) retaining my income, and b) buying assets rather than paying for services.
2. Spend less than you earn
Spending less than you earn is probably the most important principle.
The change in your net worth over time is equal to the difference between what you spend and what you earn. If you were a business, this would be your retained earnings. Retained earnings increases owners’ equity for a business — so in the case of an individual it will increase your net worth.
Applying the principle of spending less than you earn is like digging a trench with a dinner-spoon. It’s a simple prerogative, but difficult to do.
The simplest method is seeing where you can cut on your spending, and allocating that to your monthly savings. If you can save a hundred bucks on your budget, allocate another hundred to your savings. I’ve personally found this to be the easiest way to create a gap between your savings and your earnings.
I cancelled all my subscriptions except for the one or two I really use. I cancelled Netflix, Audible, iTunes, and a couple of mobile apps I was subscribed to. I called my service provider and lowered my internet to a cheaper, capped option. I negotiated a couple of other fees and premiums too.
All of these little savings ended up significantly increasing what I can contribute to my investments. Now, without having extra stress, I know that each month I get out on my budget my net worth has increased. All I have to do is stay within budget. Simple.
3. Increase what you earn without increasing what you spend
That’s how Bill Gates, Mark Zuckerberg and Warren Buffett made the Forbes’ list. They created value, in turn receiving compensation. They capitalised on the compensation and exploited the value to receive more compensation. Repeating this process over and over across the span of a couple of years created very large income streams for them.
In short: they made a lot of money. If they spent it all they wouldn’t be billionaires. Their spending may have increased dramatically, but at nowhere near the pace that their income increased.
The principle we can learn from them here is that to accumulate wealth, we need to increase what we’re earning at a faster pace than we increase what we’re spending.
Increasing your earnings is a separate (and lengthy) article, but it’s usually done through one of three ways:
- Get paid more for what we’re already doing, e.g. getting a raise, charging more for your products/services, etc.
- Find an additional source of income, e.g. start a side-business, get more customers, sell more products, etc.
- Earn passive income, e.g. via investing your money.
4. Exploit what works
Being able to focus and stay committed to what is working is a trait that all of these billionaires share. They found something that worked, and did it over and over and over again.
If you find something that makes money, and you can, scale it up. Otherwise, keep doing it until it no longer works. If it’s not making money, stop.
According to the Pareto principle, 80% of the results come from 20% of the efforts. This means that 80% of what you try probably won’t work. The key is finding the 20% that does work and exploit it to generate as much income as you can by focusing your efforts.
I’ve tried selling shirts on Teespring. After losing a bunch of money on Facebook ads, I realised it didn’t work and I stopped. I designed a video-game for PC. I lost a lot of money, and it didn’t work. I did logo designs for entrepreneurs. I made a tiny bit of money, but it didn’t work. I designed websites for businesses. It worked.
I’m still designing websites, and I’ve let go of the other things. At this stage creating websites is working for me. So I’ll continue to exploit it until it doesn’t work anymore. If it keeps working, I’ll scale it up. If it stops working, I’ll stop doing it.
This is the Pareto principle in action.
The Conclusion
Although principle 4 (Exploiting what works) is the key for both those who generate large amounts of wealth and those who accumulate large amounts of wealth, the other principles define the difference between someone who creates wealth and someone who creates and accumulates wealth.
Many of us may already be creating large amounts of wealth, and unknowingly paying it away to everyone else before paying ourselves. By applying these principles, we’re able to transition from generating money to accumulating money.
If you’re sceptical about my statement that many of us are already creating large amounts of wealth, head over to http://www.globalrichlist.com and input your income. Surprised?
We don’t always realise what we’re getting in, because we’re too busy paying everything and everyone from what we earn. We end up retaining a very small portion of what we generate. If we can spend less of what we earn and increase our income by exploiting what works (without increasing our spending) — we’re doing exactly what Warren Buffett, Bill Gates and Mark Zuckerberg did.
