Here’s my 3rd and final episode for my Mindset Mastery mini series of videos – this one focusing on how to create a mindset that allows you to build wealth sustainably.
Last week I talked about the importance of remaining focused on your own goals, and how you can learn to genuinely not care what people think.
This one ties into that lesson a little, in terms of a need to understand the system we work within (and naturally that includes our interaction with others).
However, this lesson is more focused on the actual system, capitalism.
And how you can understand and work with this system to ensure that any wealth you create, is also sustainable wealth.
The system works against you, not for you
Taxes, inflation, and the simple fact that everything costs money, mean it’s extremely difficult to earn a high income, hold on to a good portion of that income, and invest it in something where the gains aren’t going to be completely offset in years to come by the effect of inflation.
Understanding, appreciating, and then successfully navigating these realities when building wealth sustainably, are essential to your success.
So, let’s start with taxes
To get rich, you need to earn more – right?
Well, the more you earn, the more you pay (assuming you’re just a highly-paid employee and not the director of your own business, where you have a little more manoeuvrability here).
And not just in respect of paying more as a result of taxation %age being relative to the amount you earn.
No, the UK Government likes to punish success – so it’s not good enough that you’re paying 20% of £100,000 instead of 20% of £20,000 like the next person (£20,000 instead of £4,000, in real figures).
As you will probably already be aware, once you pass the threshold into the ‘higher earner’ tax bracket, they actually increase the %age of taxation on any amount earned beyond that threshold.
This, for me, just epitomises the fact that the system doesn’t want you to get rich.
It’s not even well-hidden. They are ultimately saying ‘if you work hard and earn more money, we’re going to make it even harder for you to hold onto that extra money’.
The system is constantly trying to level the playing field – they don’t want you to break beyond this and get rich. The system wouldn’t work if everyone got rich – that’s why it’s so damned hard to get rich!
And it’s not just income tax, you’re also having NIC (National Insurance Contributions) shaved off your wage constantly (even worse if you’re a small company director, because you have to shell-out for employer’s NIC contributions alongside your own employee contributions).
Yes, you are able to benefit from these in the future from drawing a state pension. But heck, if I could keep that money right now I could earn way more money from investing it, than letting the government manage it for me, and then drip-feed it back to me if I manage to reach the age they specify for eligibility for state pension.
Again, like I mention in my video, I’m not averse to taxation – it’s absolutely necessary to provide a welfare state and to address market failures (instances where it’s hard to attribute costs directly to individuals, such as the Country’s entire infrastructure and other such things).
But you have to be wise to the types and levels of taxation you are incurring, and ensure that you are set-up in the most tax efficient manner possible.
Otherwise, you’re giving away more money than you should be. Money that could be used to help build your own wealth.
The Effect of Inflation When Trying to Build Wealth Sustainably
This one was a real eye opener for me when I looked into it.
The Bank Of England provide a really useful calculator on their website that allows you to view the average rate of inflation over a set period of time in history.
The Chancellor sets targets for the Governor of the Bank of England re inflation each year (normally around 2%).
But I’d rather look at more realistic, historical inflation performance than ‘estimated’ figures, and over the past 30 years the average rate of inflation has been 3.3% (goes above 5% when you stretch this over the last 50 years).
So, what actually is inflation?
Basically, it’s the average cost rise of all goods and services. From a loaf of bread, to high end goods.
It’s a reflection of the increase in the cost of living each year. And conversely, represents the rate of degradation to your capital each year.
To make money on your capital, you therefore have to be investing in something that delivers more than 3.3% annual return.
This throws out even some of the best ISAs out there, as a potential investment option.
It’s pointless.
You are effectively losing money each year, if your savings are not earning more than 3.3%. Fact.
So, after you’ve been paid for the month, you’ve paid your taxes and NICs on your wage, bought all your essentials (on which, you will often be paying a 20% government surcharge in the form of VAT), and put away that little bit of cash you have left into your low rate savings account, you’re going to be moving backwards thanks to the rate of inflation exceeding your rate of return on savings, or at best, you’ll be standing still.
Everything is engineered against you becoming rich or enabling you to build wealth sustainably.
So what can we do to build wealth sustainably?
I’m no financial advisor, but at the very least you should be doing the following:
- Ensuring you only pay the minimum amount of tax you owe, by structuring your tax affairs properly
- Cutting back on spending where possible (do you realise how much of your big mortgage payment is going towards pure interest, or on a much more basic level, how much all those morning coffees amount to over the month? – team this with the opportunity cost of investing this money into something that achieves compounding interest, and the loss becomes quite scary)
- Ensuring that any capital (cash) is invested in something that delivers an annual return (preferably well) above 3.3%, so that you’re actually accumulating real wealth, not just keeping up with the effect of inflation. Just because you have more capital in your account the following year, doesn’t necessarily mean you’ve made any progress.
And those are my basic ground rules for how to build wealth sustainably.
Without an understanding of these ground rules, and the way the system is engineered, you will no doubt fail to achieve any real growth in your wealth.