How To Build Wealth?

Part 1: Developing Financial Knowledge

Building Wealth is an art. Learning that art and executing it with a good plan will help us achieve financial independence. This would empower us with the freedom to do what we like in our life, rather than compromising all of our time for making money.

I will share some strategies that we can follow for building wealth in this series. This is part 1 – Developing Financial Knowledge.

When we were brought up as kids, we were asked to focus only on our studies. Why? Because education is the means to earn money. “Be a doctor, an engineer, or get any kind of professional degree” is what we were told, as they led to the jobs with the most potential to earn big money. But did anyone bother to teach us the skills or knowledge to invest those earnings and build our wealth? No one did. We can’t blame them, as they themselves do not know the true value of financial knowledge. 

While a college degree helps to earn money, having financial knowledge will help us manage and grow that money. We have seen many successful actors or sportsmen who made lots of money in their career but eventually lose everything and file for bankruptcy. How can someone who earned that much money end up with nothing? 

Let’s set that aside for a minute. What would happen if we suddenly had a huge amount of money set before us? Let’s say, for example, that we won a big lottery – we’ll say it was for 10 Crores (100 Million). What would we do right away? Well, we would buy a huge mansion. Of course a very luxury car is necessary. We would buy whatever we want that would make us feel rich. Because of the feeling that we have all the money in the world, we wouldn’t even watch our cash flow, and only after we run out of money will we realize that a lifestyle like that is not sustainable. We’ll be back at square one. How would we have been able to change this scenario’s outcome? One very important missing piece: Financial Knowledge.

If we lack financial knowledge, then even if we are settled in a very good job and making good money we would not be able to build wealth and move on to next level. We would try to mimic our friends and neighbors by upgrading our lifestyle every now and then. At the very best, we match our expenses to our income, ending up with no savings. At the worst, our expenses go over our income, which means that we are going into debt. So it is not important just to learn about earning money, but it is also equally or even more important to learn about how to manage that money.

Developing Financial Knowledge

Developing financial knowledge is not going to happen overnight. It takes time. The power of compounding is not just applicable for money. It is applicable for acquiring knowledge as well. We should start small with basic concepts and then start building over the fundamentals. When we learn a new concept, that will lead to two other concepts. When we try to understand those, that will lead to four more concepts. It compounds over time. As we learn more and more, we will realize that what we know is comparative to a drop in an ocean. How much we learn depends on the amount of our curiosity. What we should not try to do is jumping into complicated topics right from the beginning. That will lead to lot of confusion, and eventually frustration. 

As we develop our financial knowledge, it is important that we teach our kids as well. We do not want them to have the same disadvantage as us when we started our career. Having a strong foundation of financial knowledge when they grow up gives them the early beginner advantage as they start making money. That will help them to achieve their financial goals faster in their lives. Not just that, they would also have the accumulative advantage to expand on that knowledge in their life time.

Accumulative Advantage

This enlightening article by James Clear (the author of Atomic Habits) explains the accumulative advantage of certain species of plants of the Amazon forest. Out of the 16,000 species of plants and trees in Amazon, only 225 (1.5% of the entire population) species occupy 50% of the total forest. How did that 1.5% manage to get that giant share? Those had a small advantage over the other species – growing just a little bit faster than them. That little bit helped them get more sunlight and grow bigger. That in turn helped them to reach farther underground to get better access to water and nutrients. Over time, the advantageous one was able to take over the space and snuff out the other species there.

And that is why it is important to give that accumulative advantage to our kids by making sure that financial knowledge is passed on across generations. That knowledge gets stronger as it gets passed on from generation to generation. In my opinion, passing on this knowledge across generation has more value than the wealth itself.

So develop your financial knowledge not just for you, but for the generations to come. Today we have plenty of opportunities to develop our financial knowledge. There are many YouTube channels that you can follow, including my channel, Investment Insights. There are many online forums as well that discuss many financial matters. Subscribe to them. You don’t even have to actively participate in the conversation. Just following the questions asked and the answers to those questions will help us to develop our financial knowledge. A while ago, we used to have Fatwallet Finance forum. Most of the financial knowledge that I have today is from following the threads in that forum. Spending 30 minutes everyday to browse through the topics in those forums will help us immensely. Before we know it, we will have enough knowledge to provide financial guidance to others. 

Following are some good forums/blogs that you can start follow:

USA:

1. Mr Money Mustache
2. Bogleheads (Index Investing)
3. Mad Fientist
4. White Coat Investor
5. Physician on FIRE
6. Reddit FatFIRE

India:

1. Asan Ideas of Wealth (FB Group)
2. Reddit India Investments

The next topic in this series of Building Wealth is “Delayed Gratification“.

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