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There are 2 ideas that are fairly basic when it comes to personal finance - but they're also really powerful. And chances are, you weren't taught these ideas in school or at home. So let's catch up:
Idea #1 — Think in Terms of Assets
Think in terms of assets... what does that mean? Let's look at a model where we think of money as being in different states. Kind of like water can be frozen, liquid or vapor, money or wealth can be in these different states.
The first 2 states are bad for wealth building. In these states, money is going away from you:
State 1: Debt
State 2: Expense
Debt and expenses aren't always and unequivocally bad. Debt can be used responsibly. And expenses are a normal part of your financial life - it's not like spending money on food is a bad thing to be avoided at all costs.
However, if debt and expenses make up all the money in your financial life, that's a real problem. Ideally, debt is kept at a minimum and expenses are in a good balance with the other 2 states of money:
State 3: Asset
State 4: Productive Asset
One of My First Aha! Moments...
...was when I realized this key difference between how to stay poor and how to build wealth.
How to Stay Poor
How to Build Wealth
Idea #2 — Incorporate
For anything that you do as an entrepreneur or creator, it's usually a good idea to incorporate.
This means that there is you and there is your business: 'The Company' — a separate legal entity.
You own 'The Company'.
It is generally advantageous to have a Limited Liability Corporation (LLC) that you do business through.
It's advantageous in terms of:
- Your personal liability (a corporation protects your personal wealth).
This protection allows you to take more risks than you normally would. Nobody can come in and seize your personal assets to pay the debts of your company.
Quick Note on Personal vs. Business Finance
Keep your Personal Accounting separate.
Personal finance can be imperfect. But every single cent has to be accounted for in your business.
Bonus Idea — A Business is a Productive Asset.
When you start a business, you're doing most of the work.
The goal is to turn your business into a productive asset that you own. Building a business is one of the greatest and most accessible ways in which anyone can end up owning a highly valuable, highly productive asset.
But to do this, it's important not to get stuck in "employee mode". Don't just build a business that's a job for you. Build a business that is an asset that you own and don't need to be involved in the day-to-day operations of (unless you want to).
Please Note: Personal Wealth Building Sheet
This sheet is mentioned here but is introduced in the next lesson.