There is, what I believe to be, a common misconception in the world of personal finance. For years, there has existed a notion that ‘a person’s income is their greatest wealth-building tool’. To this notion, I must humbly disagree. I feel that this statement is a half truth, much like saying that the engine is responsible for the operation of a sports car. Certainly a car could not run without an engine. But there is much more to a car, than the engine alone (i.e. brakes, transmission, suspension, etc).
It is easy to dispel this misconception. One could simply look at a selection of people who have substantially high incomes. In theory, they should all be substantially wealthy. Right? But you don’t have to look far before you find high-income individuals who are not wealthy. In fact you could easily find a high-income individual who is flat broke. How could this be? They make tons of money!
There must be more to the equation, than income.
In its most simplistic form, why did these high-income individuals end up broke? They also had high-outgo’s. They spent to excess. They gave to excess – to friends & to family. They disposed of money at a greater rate than they earned it. Thus, the outgo is as fundamental as the income.
So what then, is the single greatest wealth-building tool? We have established that it isn’t income. And common sense would tell you that outgo alone isn’t the key. So what could it be?
I would suggest the single most important wealth-building tool is ‘the margin’. The what?! The Margin – the difference between the income and the outgo.
Income - Outgo = The Margin
It might be fair to call The Margin a personal net profit. For some people, their margin is a negative number. Those people are in trouble. For almost everyone else, the margin is a positive number, but statistics say it is a quite small number.
Why is it important to make the distinction between the income and the margin? Because if you believe that your income is your greatest wealth-building tool, then the answer to too many of your financial problems is, “make more money”. If your outgo is being neglected, “make more money” becomes a unicorn. It is unobtainable. You make more and inherently spend more, never truly addressing the financial issue at hand. You can work harder & harder, making more & more money, with no positive result.
The fact is, our greatest opportunity for building wealth lies within the margin. Subsequently, the key to maximizing wealth-building is maximizing the margin. As we raise our income and keep the reigns on our outgo (i.e. get out of debt & save money), we expose our greatest wealth-building tool.
When it comes to building wealth, the ‘Magic is in the Margin’.