For a variety of different reasons, we all want to increase our net worth. Increasing our net worth and accumulating wealth can be used synonymously for the purpose of this post. Achieving financial independence requires the accumulation of wealth. In order to be successful in the game of wealth accumulation we need a couple different teams. The first team will run our offense. The second team will run our defense. Our job as the coach is to manage both of these teams. One without the other is ineffective at best.
Offensive Team
Offensive teams in the sports world focus on scoring goals, points or touchdowns. In the game of wealth accumulation offense is a little bit different.
The offense in the game of wealth accumulation is responsible for receiving income. The offensive team is made up of earned income, passive income and capital gains. The team may include, full-time or part-time job players, rental property players, interest players, investment account players and more.
Defensive Team
Defensive teams in the sports world do just the opposite of the offensive team, prevent goals, points or touchdowns from being scored against them.
In the game of wealth accumulation, the defensive team has a very important job. Their job is to safeguard the income that the offensive team earns. The defensive team may include budget players, saving players, investing players and more.
Scenario One: Strong Offense – Weak Defense
In this scenario you have a strong offense but a weak defense. Your offensive team is bringing in a large amount of income for you. Great, right? Sure, except your defense isn’t keeping your money for you. They’re allowing you to spend wastefully on things you don’t need or find value in. Your wealth accumulation is net zero because you are spending all the money that you are earning. This scenario is often seen with lifestyle inflation: earn more, spend more.
Scenario Two: Strong Defense – Weak Offense
In this scenario your offense isn’t the greatest but they’re doing enough to keep you afloat. The lack of offense creates a need for a strong defense. Budgeting and limiting wasteful spending are the key players on this defensive team. Your wealth accumulation in this scenario is also net zero. What this scenario provides is the opportunity to start accumulating wealth slowly as the offensive team becomes more efficient.
Scenario Three: Strong Offense – Strong Defense
This is the ideal scenario. Your offensive players, full-time job, rental income and capital gains are bringing in a large amount of income. Meanwhile, your defensive players, budget, saving and investing are safeguarding a large percentage of that income. Your wealth accumulation is net positive in this scenario.
Coaching
The coach of a wealth accumulation team is no easy task. It takes a lot of planning and maintenance. Making each player work together within your team will be crucial to your team’s success.
Building a strong offensive team can be a large hurdle for those who are later in life. Drafting a new full-time job player is difficult. It often makes more sense to recruit passive income and capital gains players to your team.
A strong defensive team is a must for success. This is possible for coaches at all levels and ages. Recruiting budget players, savings players and investing players can be done almost instantaneously. These players often require more planning and maintenance than offensive players do. A strong defensive team has the ability to create more opportunity even when working alongside a weak offensive team. Defense wins championships right?
Putting The Game Aside
Let’s put the game aside for a moment. Accumulating wealth can be very simple. We need to earn income and then save some of that income. The more that we save the more wealth we will accumulate. Earning a large income on its own is not enough.
Earning a large income is nice and may provide you with many of the creature comforts in life. A big house, luxury imported car, frequent vacations and trips to fancy restaurants, etc. All of these things do little for wealth accumulation. True wealth accumulation comes from saving and investing.
Earning $200,000 per year and spending all of your income will not help you accumulate wealth. Earning $50,000 per year and investing 20% of your income will rapidly increase your ability to accumulate wealth. Learning to manage the money you make will have a greater impact on your wealth than how much you earn.
