Understanding the Process of Wealth Creation

One of the most common misconceptions about wealth is that the only way to create it is by earning a lot of money. A big salary does not guarantee wealth. The process of wealth creation requires more than just having a big income. You have to find a way to retain majority of that income, or to make it work for you.

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The hardest part of this process is retaining your wealth. There are many ways to make your money work for you, but you?d be surprised to know that there are even more ways you can lose your savings with just a few bad decisions. So many people have spent years saving only to lose all of it in a single, poorly planned transaction.

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Preserve your wealth by avoiding situations that can severely compromise your financial status.

Here are some ways that you can avoid a financial collapse:

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1. Get some financial advice.

The most common cause of a severe financial collapse is a lack of financial literacy. Just because you were able to save some money doesn?t automatically make you a financial savant. The skills and characteristics you need to save money are different from those that you might need for the wealth creation process. There are complexities and subtleties in the financial world that some people have been studying for years. It may require a minor investment on your part, but getting financial advice from a person with an advanced degree in financial management is not a bad investment to start your financial journey with.

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2. Don?t pay old debts with new debts.

Debts are the bane of your financial efforts.

There is no way you can begin the process of wealth creation with old debts weighing you down. However, there is no quick way to get rid of debt. You either have to find ways to earn more or find ways to spend less and slowly chip away at those debts. The worst thing you can do is to get a loan to pay off a loan. When you?re in debt, the last thing you need is more debt. Just the interest fees from the debts you incur are debilitating enough to eventually cause a complete financial collapse. Debt is really hard to overcome. This is one of those situations where the best cure can only be prevention: don?t get into debt in the first place.

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3. Make a business plan before you start a business.

A business plan is probably the most important aspect of a start-up business that is most often ignored. It?s amazing how many first-time business owners don?t even make a plan before they start. There are several reasons why a plan is good for a business: it determines the feasibility of a business, identifies the target market, organizes financial requirements, and provides several contingency plans just in case things don?t work out the way they should. If you want to avoid a financial collapse, you have to embrace the idea of planning. The process of wealth creation requires a lot of preparation. If you don?t have the patience for planning, you don?t have what it takes to be successful.

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4. Pay your loans on time.

With regard to mortgages, debts and loans, there is one term that you should always be wary of: compound interest. If left unchecked, the compound interest, penalty fees, and annual fees of your debts can snowball and increase exponentially over a short period of time. A principal loan of $100 with an annual addition of $10 at 10% interest can balloon up to $434 in 10 years. In other words, you?re paying 4 times the amount you borrowed. Now add a few zeros to that equation and you?ll soon realize how compound interest can easily cause a financial collapse. In the process of wealth creation, you have to make compound interest work for you and not against you. The only way to leverage compound interest to your advantage is to pay your loans on time and to keep your bank savings intact.

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5. Know exactly how much you?re spending.

Can you honestly say that you know exactly how much you?ve spent last month? Most people can?t. Unfortunately, most people spend a lot more than they think they do; they have a tendency to grossly underestimate how much money they spend. They forget to include the small expenses. However, it?s the small expenses that usually break the bank. $7 spent daily on cigarettes over a week amounts to $42. That?s $2226 spent over a year and $22,260 spent over a period of 10 years. That?s the price of a brand new car. What if you?re sustaining more than just a smoking habit? You can avoid a financial collapse by knowing exactly how much you spend. Wealth creation is about money management. You can?t manage your money unless you know exactly how much you?re managing. Spend a week with a notebook and take note of every penny you spend to get a real number on how much you?re really spending.

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In the process of wealth creation, a few calculated risks have to be taken. Some risks don?t go as well as others do. But it?s all part of the game. Your path to wealth is not going to be easy. There are going to be some failures involved. Don?t let these failures discourage you. Some of the wealthiest people in the world have gone through a complete financial collapse or two. The key is to be resilient. Don?t give up and make smart decisions. No one becomes a financial genius overnight. Learn from your mistakes; sooner or later you?ll stop making mistakes and find a path towards great success.

Source: http://business.ezinemark.com/understanding-the-process-of-wealth-creation-7d33f521e17e.html

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