You might believe that becoming rich and building wealth happens by pure luck. But for the vast majority of millionaires and even billionaires, it wasn’t luck. In fact, there’s something that they do that seems so simple that you can start doing as well that would lead you to great wealth. And I promise you, it’s not just saving and investing.
Hello. Hey, Georgia. Hey, Rick. This is Rick Callero. He’s the head of banking and lending for BNY Melon Wealth Management, a subsidiary of BNY Melon, the world’s largest custodian bank with 2.4 trillion in assets under management and 46.7 trillion in assets under custody. In other words, they know a lot about money.
And I had the unique opportunity of meeting with Rick and asking him a few burning questions. So you work with a lot of rich people like millionaires, billionaires. What exactly is it that they do that’s so different from everybody else aside from the obvious things like saving and investing, you know? So billionaires and millionaires uh actually manage their personal financial affairs the way they would run a business really. Um you know by utilizing a balance sheet, they also use a lot of leverage to fund their spending and investing. And so let’s break down what he said in a way that we can all understand. Starting with this part here.
You see, if you’re rich, then you’re likely managing your finances the same exact way that a business would. When a business earns revenue by selling a product or service, they don’t just take that money and start spending it all willy-nilly. No. No. That money has to go through a process. There’s a plan for how exactly to use the money. And that’s how the business is able to stay profitable long-term and continue growing. And if you’re rich, you’re doing the same exact thing. When you get paid, your money goes through a process. You understand how important this process is to maintaining and growing your wealth. And that process always involves something called a personal financial statement. You see, everybody else uses budgets to manage their money. And for the most part, the rich don’t really use budgets at all. They use personal financial statements. A personal financial statement is a spreadsheet that details your assets, liabilities, income, and expenses. Typically, the spreadsheet is organized into two different parts, the balance sheet and the income statement. And this right here is a huge part of building your wealth. The next thing that Rick said about the wealthy, which is critical, is this right here. They use leverage to fund their spending and investing. What exactly does this mean, though?
Leverage is a very powerful tool used to build your wealth. Leverage is when you borrow money to buy investments with the expectation that the profits from your investments will be many times more than the cost of borrowing the money. A common example of this is when you invest in real estate. You see, if you’re rich, then you’re likely using real estate as a way to continue building your wealth without actually having to use a lot of your own money. And you do this by leveraging or using somebody else’s money, such as the bank. Take for example this $100,000 single family rental property. If you wanted to buy this home, you wouldn’t actually need $100,000 to buy it. No, instead you would leverage the bank’s money to buy the home through the use of a mortgage. The bank gives you a 100k mortgage to buy the home, and all you’re having to pay is between 10 and 20% as a down payment for the mortgage. And so now you’re getting a 100k investment property, but for only 10 to $20,000. And so the reason leverage is so powerful is because it doesn’t tie up all of your capital, all of your money. Just imagine a scenario where you have $100,000 cash to invest. You could either use that $100,000 to pay for the entire 100k rental property just to buy it outright, or you could leverage money from the bank and buy a total of five different properties by taking out five separate mortgages and putting down 20% or $20,000 on each of those mortgages. And so now, instead of just having one rental property with one tenant paying you rent each month, you now have five rental properties with five tenants all paying you and contributing to your growing wealth every single month. Now, obviously this is a very oversimplified example, but the principle of it remains true. And the principle is that leverage is a very powerful way to use debt to build your wealth, which actually brings us to the biggest reason why you’ll be broke forever, unless you change this.
I recently came across some research conducted by economists from Princeton, Harvard, and the University of Chicago. In this research, they studied factors that determine why the rich get richer and why everybody else essentially lives paycheck to paycheck. Their concept is that the rich can’t possibly spend everything that they earn and so they just end up saving a lot of their money. However, they’re not just saving it in the bank. Instead, the money that they save is being invested into performing assets, things that will continue to grow and preserve their money, things like stocks, bonds, and real estate. But where it starts to get really interesting is here. The research claims that a substantial amount of borrowing by households in the bottom 90% of income earners was financed through the accumulation of assets by the top 1%. In other words, a lot of the money that the rich are investing are actually financing borrowing by people further down the income ladder. For example, if you’re a rich person and you buy many shares of stock issued by a company, the company then puts that money that you invested into a bank. The bank then turns around and turns that money into a loan given to a non-rich person to buy a house or a car or something else. And so in a very indirect way, the non-rich are actually borrowing from the rich. You see, if you’re a non-rich person, you don’t have a lot of money to begin with. This is the reason why you have to borrow money to make larger purchases in the first place. However, because you’re borrowing money, not only are you having to pay back the money that you borrowed, but you’re also having to pay even more money to borrow that money in the first place because of interest. And so now the money that you earn from your job can’t go toward buying performing assets like how the rich do because it has to instead go toward paying off the debt plus the interest from the debt. And so the non-rich don’t have a lot of money to begin with. And so on top of paying for life’s expenses, things like rent, groceries, electricity, things that most people need to survive, you’re also having to pay off your debt, which is only feeding the cycle even more by putting more money into the pockets of the rich. Now, you may be thinking to yourself, “Yeah, but Joshua, how do I get out of this? Because not only do I not want to be broke anymore, but I also want to start becoming wealthy.” And ironically, the solution will require that you move closer to debt, not further away from it.
You see, debt is a lot like fire. When contained, fire is one of the most useful tools in all of history. It’s what allowed humans not only to survive, but thrive through the centuries. But when fire is not contained, it’s one of the most destructive and deadly forces in nature. It shows no mercy and will spread and destroy everything in its path until it’s contained. And debt is the exact same way. Debt comes in two different forms. There’s good debt and then there’s bad debt. Good debt is debt that grows your net worth. It makes you more wealthy. For example, if you were to take out a mortgage at the bank for a rental property, this is considered good debt because that rental property will host a tenant who will then pay you monthly rent, which is directly increasing your net worth. However, bad debt is debt that decreases your net worth. An example of this would be buying a car versus using that same money to instead buy a rental property or buy more stocks in a company or something else that’s going to make you money. Okay, so increase your good debt and decrease your bad debt. That’s easy enough advice, right? But how do you actually go and approach this on a practical level? In other words, how can you actually go from being broke to being rich? We’re going to take a few pages directly out of the book of the wealthy and do something that they do.
If you recall my fake call with Rick earlier, um something that he said was that rich people run their finances the same exact way that a business would. Every successful business has healthy, regularly updated financial statements. It’s the only way they’re able to know exactly how money is moving around and being used within the company. Likewise, if you’re rich, then you’re also using personal financial statements. It’s how you’re able to manage your money and continue building your wealth. And so, here’s exactly how you can start doing that as well.
This is a personal financial statement. It’s just an example and I’m going to include a download link below for you to download this and use it for yourself, but essentially what you’re looking at here are two separate statements. Now, this entire thing is your personal financial statement, but it’s broken down into two separate parts. The first statement is your personal balance sheet. This is an itemized list of your assets or the things that you own, your liabilities or what you owe, and your net worth. Now, the purpose of a personal balance sheet is to measure and evaluate your personal financial standing. Just like with a business, you need to know exactly where you stand with your money so that you know exactly what adjustments need to be made, if any. So, let’s dive into this. On the right here is your personal income statement. This is an itemized list of your monthly income and your monthly expenses. Now, I already know what you’re thinking. But Joshua, isn’t that just a budget? And no, it’s not. Budgets have information about your estimated income and your estimated expenses based on that estimated income. However, an income statement does not use estimates. It literally shows exactly what’s happening within your financial situation typically on a monthly, quarterly or yearly basis. Okay? And so the purpose of an income statement is to show your financial performance over any given period. And so what I like to do personally or what I just started doing recently is preparing an income statement and a balance sheet every single month at the end of the month. And so let’s go ahead and walk through this really quick and I’m going to show you exactly how you can start using one. And so we’ll start with the personal balance sheet. Starting from the top, we’ve got the income section. And in this section, to no surprise, you’re going to put in your income. Again, you’re not making estimations as to what you think your income is going to be because remember, you’re filling this out at the end of the month or at the end of the quarter. And so, you already know what your income was for the previous period. And so, that’s what you’re going to enter in this section. And so, you’ll put down exactly how much you were paid from all the different sources in which you were paid. And so, for example, if you work a W2 job and you get paid every single week, theoretically, you should have four different paychecks listed on here. And I want you to actually list out each of those paychecks separately as a different item. Also, if you have a side hustle or a side business bringing in some extra income, then you should also put that in this section as well. Okay? And then once you’ve got that all listed here, if you’re using one of my Excel or Google Sheets templates, then it’s already been programmed to do the math for you. And so, here’s the total. Now, the next section is one that I added personally to this income statement. You wouldn’t really typically see this on any other income statements, but I personally just like seeing my investment income separate from my other income just because I don’t know, I just like seeing it like that. But anyways, any income like capital gains from investments that you earn, like dividends from stocks, uh rental income from rental real estate, interest from savings accounts or bonds, anything like that that’s considered a capital gain can go into this section here. And then the next section are the expenses. Once again, list out all of the expenses here. Mortgage payments, car insurance, health insurance, your internet bill, phone bill, electricity, restaurants. I want you to list out everything here. Now, if you’re like me and you use a credit card for literally everything because you want to get the rewards, but you also remember to pay off your balances in full each month, then I don’t want you just to list an item on here called credit card expenses, right? I want you to actually go into your credit card statements and see exactly what you’re spending money on. And so anyways, I think it’s pretty self-explanatory. Just list all of your expenses down to the exact penny and then you’ll be good to go. And then after you filled everything out, my template will automatically calculate the net income. And so you may be thinking, okay, so once I get the net income, what happens after that? Well, if this is your very first month doing one of these, then honestly, not much can happen after the first month. It’s going to take about 3 to four to 5 months of you consistently doing this before you can actually start to see trends that you can then make adjustments to. But after 3 4 5 months of consistently doing this and actually putting in accurate information, then what will happen is you’ll start to see trends. For example, if you’re constantly either breaking even on your net income or even worse, maybe you’re in the red each month, as in you’re getting into debt, and you’re seeing this trend happening every single month for about 5 months, then you know that something has to change. And fortunately, since you’ve been recording the information faithfully and keeping up with your income and your expenses, you can easily go back through previous month’s income statements to see exactly why you’re getting into the red or why you’re breaking even each month. And then you can make the proper adjustments to fix that. Maybe you’re spending too much money on your Tic Tac subscription. You know, those things can get pretty expensive. Or maybe you’re eating too many Big Macs from McDonald’s and you need to cut back on your fast food purchases. Listen, there is no secret formula or some magic cheat code to doing this. It’s all about just filling out the income statements, being consistent and doing it every single month. And if you start to see a negative trend creep up, figure out why it’s happening and then make the adjustments to fix it. If you ever want to break out of the bottom 90% cycle, then this number here, your net income needs to be in the green each month. And the higher in the green it is, the better. And if that number is not in the green each month, maybe you’re breaking even or you’re in the red each month. If that’s the case, then you need to start making adjustments. Start cutting expenses or try to find ways to increase your income. Or even better, do both at the same time. Cut your expenses and increase your income. Perhaps you need to take up a side hustle. Or maybe it’s time to start that business that you’ve been talking about for so long and you need to actually start it and take it serious so that you can start increasing your income. Or maybe just keep things simple and in addition to your full-time job, just get a part-time job. But you need to start doing anything that you can do to get this number right here as high into the green as possible. Because then all of the money from your net income will then be used to buy performing assets which will be added to your balance sheet which actually brings us to the next step of filling out your personal financial statement which is your balance sheet. So on the balance sheet you’re going to start off here at the top and you’re going to add all of your assets. Okay? And so all of your bank accounts such as your checking, savings, money market accounts, etc. Any taxable investment accounts that you have such as an individual investment account. If you have any type of employee sponsored retirement plan such as a 401k or 403b, add them to the list. Any alternative assets like artwork, precious metals, anything like that that has value that’s considered an asset, add it to this list. Next, you’ll move down and add your liabilities. Your liabilities are the money that you owe. And so if you have a mortgage, a car loan, student loans, credit card debt, any debt or money that you owe should be listed here under liabilities. And then once both of these have been completed, my template will automatically calculate your net worth. And the goal here with the balance sheet is to continue increasing your net worth. If your net worth is close to zero or if it’s even in the negative, because it is possible to have a negative net worth, you need to really examine what’s happening here on your balance sheet so that you can make the proper adjustments. Maybe you have too much credit card debt and that obviously needs to be paid off. Perhaps you have two family cars with two different loans and that’s making the liability section of your balance sheet very heavy. In that case, you would know, well, what would happen if we got rid of one car? How would my net worth look then? But the goal here should really be to continue increasing the amount of assets in the asset column and decreasing or limiting the liabilities in the liability column. And this is what the balance sheet of a rich person would look like. A very heavy asset column. and a very light liability column. And so now the very last thing that you want to look at on your personal financial statement is how everything correlates together. If you want to break the cycle that the bottom 90% of people are in, then your financial statement should emulate this to some degree. The asset column on your balance sheet generates income that then goes into your income column on your income statement. And then that income is used to cover your expenses with the net income then being reinvested back into buying even more assets. As a result, the asset column continues to grow and therefore it produces even more income which is then reinvested back into buying even more assets. And this cycle just continues on and