There are only 3 ways to get RICH – Master the 3 Levers to Wealth Creation

Okay, I’ll admit the title is a little misleading in that there are hundreds, likely even thousands of ways to ‘get rich.’ What I am talking about is a 1000-mile-high view – step way back and you will see there are 3 ways to increase wealth. I want to help you unlock Financial Freedom and the best way is to help you understand and master the 3 Levers to Increasing Net Worth*. This is the only way to become wealthy and reach financial independence – you have to play with these 3 levers. I think focusing on just 1 lever is inefficient and ineffective and it is the reason why most people don’t reach financial independence and retire early. SPOILER ALERT – the 3 Levers are: Spend LESS (but LIVE WELL), EARN MORE, and MAXIMIZE Returns.   

Okay, so in my last post, I’ve convinced you of the benefits related financial freedom. Great. You’re on board with the lifestyle philosophy and can’t wait to get your ticket to freedom, but wait, how do you actually get to that magic retirement number? That threshold where your assets now generate enough income to cover your expenses entirely.

The place to start is to level set on a few terms, the first being “Net Worth” which basically refers to what you are worth (financially speaking). You derive your net worth by adding up all of your assets (anything of value that you own) from all sources and then subtract from that the sum your liabilities from all sources (everything you owe to others, such as credit card debt, student loans, and mortgages etc.).  Let me illustrate with an example: Joe has a car worth $10, 000, a house worth $250, 000 and $5, 000 in a savings account, as well as a car loan for $2000, a mortgage for $200, 000 and a student loan for $4, 000. Joe then has $265, 000 in assets and $206, 000 in liabilities, therefore his net worth is $59, 000. While I have the example of Joe fresh in your mind I’m going to also discuss the difference between a good asset/liability and a bad asset/liability, using Joe as a guinea pig.  When you are accumulating assets you want to prioritize the purchase of good assets over bad assets, and when paying off liabilities you want to obviously prioritize bad liabilities or debts first. A good asset is something of value that appreciates over time, or provides strong cash flow and holds its value, for instance Joe’s house is likely a good asset, which both may increase at 2-4% per year in appreciation and has the ability generate cash flow by renting parts of it out  (which lets assume Joe is doing). Now a bad asset is something like a car, which depreciates in value and drains your cash flow (needing maintenance, gas etc.). If you need to get a loan I recommend taking it out on a good asset, such as a home, and not on a bad asset such as a car. Good loans are attached to a good asset, whereas a bad loan is attached to a bad asset (something that depreciates or has little value) like a credit card purchase or the car loan in Joe’s case. Contrary to popular belief, liabilities or loans can also be a great thing and should not be avoided entirely. I’ll explain this with the concept of leverage. Leverage takes a good deal and makes it great. For instance, if I invest a $1000 to buy a tree that produces 500$ of fruit per year, then I have a 50% annual return (500/1000= 50%), but, lets suppose I use leverage to buy trees, but with a 10% down payment, or a 100$ investment on my part and a $900 loan for the remaining amount. With leverage I can purchase 10 trees with the same $1000 (10 x 100) and have loans for $9000 (900 x 10). Wow, now I have 10 trees producing me $5000 in fruit income annually for the same $1000 investment. Even after paying back the 10% annual interest on the loans, I have $4100 profit ($5000- $900 interest), or a 410% return on investment ($4100/1000).  Leverage has turned the fruit tree business from a 50% return on investment to a 410% return. The same can be done with any good asset, but remember that leverage also increases your risk if things go sour (you are on the hook to pay it back). Bad loans/liabilities should be avoided like the plague, and if you have them, pay them off! Later on I’ll go into detail on which asset classes I prefer and how to prioritize paying off your liabilities, but this article is intended to be a term-setting, high level understanding of how to accumulate wealth.

Now that we finally understand how you determine what you are worth, we want to know: how do you change it? Change in wealth (or delta wealth) is derived by adding up your income from all sources and subtracting from that the expenses from all sources. For instance, if you earn $2000 a month from your day-job, and 500$/month from your rental property, and $100/month from UBER on the side (a note on that later) then you have $2600 in income from all sources. If you also track spending from all sources, say $700/month for rent, $200/month for food, $100/month for car insurance, $100/month for gas, $20/month for incidentals, $50/month for entertainment, and $50/month for other miscellaneous purchases, you have $1220/month in total expenses. Therefore, your change in wealth every month (if you stick to this exact budget for income and spending) would be $1380. In other words, at current spending levels you have $1380 per month to invest and produce you more cash flows (increasing your income, thus increasing your change in wealth). To summarize, we have 3 main levers we can use to increase our net worth: 1) EARN MORE – we can increase our income through adding additional active or passive streams and deepening current streams, 2) SPEND LESS – we can reduce our expenses, in a number of ways but mainly by adopting a simpler lifestyle of anti-consumerism and frugality (more on this to come in future articles on strategies that I’ve used to reduce my spending to live a middle class lifestyle on below poverty level expenses), 3) Maximize Returns – we can maximize the return on investments (this can be achieved by strategically evaluating how we allocate our wealth, and deciding which assets to buy, how to purchase them, etc.). I do want to mention something very important and that is that the 2nd lever (reducing expenses) has the most impact on your ability to achieve financial freedom.  This is because it has a two fold benefit, whereas increasing your income or return rates only has one. The two benefits of reducing your expenses are: 1) Faster change in wealth (similar to increasing your income) and, 2) Reducing the amount you need to retire on. For instance, if you spend 5000$/month (60k annual), then you need approximately 1.5 million to replace that expense with income from assets and retire. But, if you can live on $1500/month ($18k annual), then you only need $450, 000 to retire on. It is much easier to accumulate 450k than it is 1.5 million. By simply adjusting your lifestyle you have reduced the amount you need to be free by 300%. Cutting your expenses is one of the key focuses of being a Financial Freedom Chaser, as it allows you to save to your target faster, and lower that target substantially. This is a large part of how I am going to retire in my 20s. For those that are new to being a Financial Freedom Chaser, I’d recommend focusing on the first two levers: increasing streams of income and reducing expenses, and the need for the 3rd lever will present itself.

Let me leave you with a few action items to get started with:

*Start tracking your spending (I recommend –they link your bank accounts and credit cards to track your spending for you and they will help you create budgets)

*Create a budget, then try to beat it next month. If you have to take the wife out for your monthly dinner out, I strongly recommend letting Group-on decide your location with a 70% off meal. I often am able to eat out full course meals at many fancy new places in London for only 10$/person.

*Start price matching and coupon clipping (I especially love price matching groceries)

*Conserve resources and use them off-peak (I try to use hydro off peak only as it is 3x cheaper 7pm-7am)

*If you have any loans renegotiate the rates and then if they are bad liabilities pay them off fast. Even at the cost of termination penalties it can be worthwhile to refinance. Whether you are refinancing or buying your first property, I’ve helped many friends see the light on Bank Posted Rates. Please check for current competitive mortgage rates before signing any loans (example rates today: 5-year fixed 1.89%, 5-year variables at 1.79%, 1-year fixed rates at 1.49% etc.).

*Look to increasing your streams of income by pursuing a passion or taking on a new part-time job

More tips to come in future articles, but the majority of articles to come will be in 1 of 3 categories to help you: 1) Increase your income 2) Reduce your expenses (embrace the FFC -financial freedom chaser – lifestyle) and 3) Buy the right assets to maximize your returns both pre- and post- retirement.


Net Worth = All Assets – All Liabilities

Change in Wealth = Income from all Sources – Expenses.

Return on Investment (ROI) = (Gain from investment – Costs of Investment) / Cost of Investment.  ( “/” = Division symbol)

*If you really want to distill it down there are 2 levers (spend less and earn more as net worth increases = EARN – SPEND), but because maximizing returns is technically earning more passively I draw the line between passive and active income (active income being earning more), so, there are 3. I also think earning a good return on your money is so important it deserves a lever of its own. At a certain point (when your wealth starts to really grow) your money can work harder than you can actively.