If you have your health and your wits about you, and the freedom to pursue your dreams, building wealth from scratch can be one of the most satisfying endeavors you can undertake. Warren Buffett is said to have picked up a penny in an elevator and said, "This is the start of the next million" - or was that a billion? The pleasure in making money comes from its value generating facet. If you are able to generate sufficient value for someone else, they will be willing to exchange it with you for something that you in turn value - say, cash. Of course, there will always be competition that is trying to provide the same goods and services, but you can offer differentiation along multiple dimensions such as superior service, novel solutions, new products and so forth.

Income is King
Financial Freedom
Income Investing

Providing value is central to any productive activity, whether it be employment at a corporation or running your own business, or working for the government - your ultimate compensation is a direct reflection of the value that society places on your services. In a perfect society, each piece of work will be valued correctly in the hierarchy of activities - but in a non-ideal society, different activities will find higher value depending on a variety of factors, including public perception, urgency of work and a variety of other short-term factors. To increase the value of your work, you have to either continue to provide services that are of value at that point in time, or offer some fundamental break-through services that have a long shelf life.

In whichever form you provide your service, the value you get in exchange dictates your quality of life, as well as what you have left over for saving and investing. This value you get in exchange is commonly called INCOME. Income is the single biggest arrow that you have in your quiver for wealth building. It is the most tangible as well as the most immediate form of valuation, and the really serious wealth builders place a high value on income. Income allows you to recover your initial investment into any assets, keeps you independent of fluctuations in your investment value, and of course pays your bills. Established personal finance writers like Robert Kiyosaki (author of "Rich Dad, Poor Dad") and Dave Ramsey (author of "Total Money Makeover") really understand this concept and stress the importance of income.

Corporations truly understand this, as do savvy stock investors - who all focus on the cash flow statement like a hawk, and only secondarily on net profits. It is much harder to manipulate cash flow than it is to manipulate net worth or net profits. A cash flow simply shows money that is coming in minus money that is leaving. An Income/Expense statement is a reflection of the same in your life. Never underestimate its central importance to savvy investing.

Financial Freedom

In fact, only when your assets are finally throwing off income that exceeds the money you make from your job or small business (where you are fully engaged anyway) - can you really call yourself as financially independent. It is the ticket out of any rat race you may find yourself in.

You have to find yourself some form of productive activity that gives you sufficient income to cover your expenses, and then to give you enough money to save and invest. Assuming you find this through either a small business of your own or through employment at a good company, your primary financial considerations should be around controlling your expenses. A good way to start in that pathway is to cut down credit card based expenses until you have paid off all credit card debt. Then the automobile debt, student loans and finally perhaps the mortgage can be taken care off in that sequence. These steps will free up your income and raise your savings rate into the 20-30% of gross every year. Some of that money should find its way into retirement investing, but at least half of it should go towards income investment.

Income Investing

Income investment gets a bad rap in most investment guides since most equate it to bond market investing, returning 4-5% less than the stock market. However, even the stock market returns are bolstered by dividends- which are a form of income as well. Real-estate rentals are a form of income investment, as are private placements with businesses that give you some form of income (either as dividends or by other ways of returning capital without having you on their payroll). Taxes are the second reason income-investing is looked down upon. You will have to pay taxes on most of your income whether it be generated by active employment or from passive sources.

We are opposed to tax considerations in fundamental matters - it is far more important that you have income that flows into your pockets that exceeds your needs than to worry about the taxes that you have to pay on that income. Never let the tail wag the dog, and in this case, taxes are a definite tail. Moreover, dividends on stocks held longer than a year are not taxed at the usual income-tax rates; municipal bonds offer you freedom from some federal/state taxes; and other techniques can be developed that can lower your tax burden.

Begin building serious wealth from scratch by saving and investing your money in income generating assets. You may want to ladder your way up by first investing in CDs and short-term bonds (two-year maturity) - where the principal will largely remain stable. Then expand into tax-free municipal bonds with longer maturities for getting a higher return. Add specialized funds such as dividend stock funds, debt strategies, real-estate trusts to get a significantly higher return. If you understand real-estate, it is a good idea to diversify into some income producing rentals. It is a great skill to develop, and a good source of income. A private placement with businesses you understand and believe in is another possible source of income, apart from its capital appreciation potential.

The income generated from these sources should be reinvested along with fresh investments until they rise to a level where the income being generated exceeds your needs and your income from other sources - such as your job. This is the surest sign that you have achieved financial freedom, and are fundamentally free to pursue other activities. However, we would only hope that you have spent your time building and working on skills and at jobs where you love to be anyway - there is no other way to live!

As Earl Nightingale put it "The secret to happiness is freedom, and the secret to freedom is courage". Do not let that freedom slip away, either by external threats, or by internal subtler threats such as debt and absence of income. Instead, make income your friend and march towards total financial freedom.