You may be focused on building wealth – good for you! But are you doing all that you can?
Many people are on the path to financial freedom, but they don’t fully understand how to go about it in the best way.
Investing has always been, and always will be a great part of building wealth. Saving your money and investing it for growth will help you to eventually reach your goal. But are you aware that there are more things you can be investing than just your money?
Money only represents one form of capital – Financial Capital.
In order to optimize your chances of building wealth, and have more control over the outcome, you need to also focus on another form of capital that is often neglected – Human Capital.
THE DIFFERENT COMPONENTS OF HUMAN CAPITAL
So, now you know there is more than one form of capital that you need to invest. But what exactly is Human Capital?
In a previous article titled “One of the best investments you could ever make” I dug into the concept of Human Capital, and how it is just a fancy way of talking about your lifetime earnings potential.
But there are several components that make up human capital.
Component #1 – Time
Whether you’ve thought about it before or not, time is something you invest. Whenever you choose to do one thing over another you are investing your time into that thing.
Where you invest your time is an important thing to consider.
Component #2 – Energy
The amount of energy you put into something will dictate the output you get. You might spend an hour on a specific task, but how much did you accomplish? Someone who is able to put more energy into something will usually accomplish more.
This is important to understand because plenty of people talk about how many hours they work, but those hours aren’t always very productive. You know what I’m talking about…
Component #3 – Skills
The skills you have are a point of leverage. The more highly skilled you are, the more your time and energy are worth.
Take for example two individuals working on a construction site. If one possesses no skills in construction and is only there to do demolition work and carry off debris, their time won’t be worth as much as someone who is capable of building a new home from the ground-up.
A construction company can get anyone off the street to take a sledgehammer to a wall and carry away the pieces. But the skills necessary to do technical work are rarer, and therefore more valuable.
HOW TO OPTIMIZE YOUR WEALTH-BUILDING
The key is to focus on all four components of capital in order to optimize your ability to build wealth: Money, Time, Energy, and Skills.
You can invest your time, energy, and money into ways to increase your skills, which will then increase your value to society and allow you to demand a higher earnings rate for your work.
Through this process, you’ll be able to earn more money, which you can then invest and grow to higher levels of wealth. This investment can be into both traditional investments like real estate or the stock market, or it can be back into increasing your skills even more.
You can, of course, do this at any level of income, but the higher your earnings, the faster you can invest and grow your wealth, helping you to reach financial freedom even sooner.
The easiest example of this is going to college or a trade school where you increase your knowledge and skillset. You will invest your time, energy, and money into increasing your skillset in hopes of demanding a higher level of earnings.
But if you then use your skills to do pro-bono work, you aren’t utilizing those new skills in the most productive manner to build wealth.
This doesn’t mean doing pro-bono work is bad, it just means that you have another level of decision-making to go through – where to deploy your newly acquired skills.
A CASE STUDY
Let’s say you are earning $50,000 per year at your current job. After taxes, your cost-of-living, etc. you have $10,000 left over.
Most people will tell you that you should invest this money in the stock market in order to grow it over time and build wealth. I agree that this is much better than spending that money on useless stuff. But, what if you took a portion of that money and invested it back in yourself in the form of advanced degrees, designations, certifications, or any other credentials?
Maybe you are able to build up your knowledge base so much that you are now able to either get promoted, or at least apply to jobs that will pay you $75,000/year.
Boom! You just drastically increased your ability to build wealth.
If you simply stopped there you would now have another $25,000/year (not factoring in taxes) of income to save, invest, and grow wealth.
Or you could invest some of that additional money into stocks and real estate, and invest another chunk of it back into yourself in order to increase your value even more, and get up to $100k+ in earnings.
Are you seeing a pattern, yet?
BUILDING WEALTH THROUGH BUSINESS
The next step is to stop trading your time, energy and skills to a company in order to receive a salary – Instead, begin building the machines of wealth, yourself.
Two of the historically best ways to build wealth have been through the investment in real estate and business building.
The ultimate way people build wealth is through the creation of businesses, be it a service you provide or a product you sell.
This is because when you grow a business, not only are you using all four of the components of capital you possess (money, time, energy, and skills), but you can hire others and leverage their skills, time, and energy toward building your company.
This process can have a large compounding impact on your ability to build wealth, and it is the reason why the majority of the richest people in the world are business owners.
WORK SMART, NOT JUST HARD
If you have begun your wealth-building journey, kudos to you! Most people never truly begin to take positive steps toward their dreams of financial freedom.
Now you know the additional ways to achieve your goals, outside of traditional investing.
If you are truly serious about attaining them, make sure you are utilizing all of the available components of capital, and do it as efficiently effectively as possible!