How to Build Capital Part 3 - Capital Maintenance cover image

How to Build Capital Part 3 - Capital Maintenance

By Gavin Marsh


Part 3

Capital Maintenance:


If you have read parts 1 &; 2 of this series then you already understand capital /link/and know how to build it /link/.

In this article we will discuss and cover the techniques used to maintain capital wealth and how to start making your capital work for you on a passive level.

Maintaining your wealth

The Consumer-Trap

Ask yourself what separates a shrewd investor and wealth builder from the average consumer and spender? We all should know and have heard of Warren Buffett? The Oracle of Omaha, so lets use him as a case study for how to avoid the consumer trap.

The media rarely reports about the reductions in outgoings Buffett has achieved, only his clickbait gains?…

Let's face it, investment success makes for good news headlines, when Warren doubles or triples his money on an asset the business papers love to shout about it.

Over the last 40 years we've heard events such as when he invested £8 million into American Express and tripled his investment in 48 months, or when he made £94 million from reduced RJR Nabisco bonds or from all of the millions he has accumulated from his insurance companies and his business empire Berkshire Hathaway building it from £12 million to a whopping £90 billion in value.

We've heard about the huge gains but what about the "shrewd careful savings?"... Mmmm "shrewd careful savings"... doesn't really sound exciting and it certainly doesn’t entice a click. Well, Warren Buffett is surely the most famous investor of our time but he is also by far the most prolific in-famous saver.

Let's take a look at a few facts about the care and attention that Buffett meticulously applies to his outgoings that you may not be aware of but can now take advantage of:

At the age of 13, Warren Buffett submitted his first income tax form, deducting his bicycle as a business expense for his paper rounds. The following year Buffett had accumulated enough money from paper rounds to buy 40 acres of farmland.

His modest home in Nebraska is worth just 0.001% of his total wealth, a humble five bedroom home that he bought in 1956 for £25,500. On the flip side he also never spends more than $3.17 on his daily breakfast.

"Price is what you pay, value is what you get," Buffett informed his Berkshire Hathaway shareholders.

As a teenager, Buffett partnered with a friend and began a pinball machine business. They started with one machine and an £18 investment. Instead of spending all their profits on teenage stuff, instead they was frugal and used the money to purchase additional pinball machines until they had eight machines in multiple locations.

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," - Warren Buffett

By keeping to his strategies of limiting his outgoings and increasing his income Buffett has achieved a staggering 22.2% compound growth rate spanning over 40 years.

Worth an estimated £96 Billion but he may well also be the most frugal man on the planet. To this day he continues to live on a £30,000 yearly salary and continues to work from the same office and live the exact same lifestyle that he had before his wealth.

It becomes quite clear when you look at how Buffett controls his outgoings that his wealth has been built not only from increasing his income but by also paying a great amount of meticulous attention on his outgoings and controlling his consumer spending.

The more you spend, the longer it will take to earn your first £1 million. If you live simply and minimise expenses, there are more opportunities to save, invest and earn from compounding interest. Follow Buffett’s way of life, and you will certainly have a higher net worth than people who keep up with the Kardashians.

**The trick to controlling your finances and building wealth is to not be influenced by external advertisement to mentally escape the consumer trap.**

You need to have a clear resolution and be definite of mind that your one desire above all else is to build capital wealth. You need to be mindful that all day long and everywhere that you look you are most likely being bombarded by advertising (one way or another), you need to be aware of this fact and keep it at the forefront of your mind at all times, be resolute off keeping your money in your pocket. As the rappers say, "Got my mind on my money, and my money on my mind".

Raising your income

Raise the amount of income coming into the house; now that you have a firm grasp on you income and expenses //link// your primary goal from this moment forth is raising your net income. It is absolutely essential that you continually push towards this.

Reviewing your Budget

You have your budget so now you can really start to grow your net-wealth. Your sole aim from here on in is to try and reduce your outgoings and increase your incomings each and every month. Most people budget on a weekly or monthly basis but everyday and as much as possible use your Wealth building budget as a financial tool to change your current mindset and belief structure of the way you perceive money.

If you look at most monthly budget templates it is quite clear why most people are unable to accumulate capital and wealth...

They have so many damn expense types and columns it’s no wonder the individual using the budget is broke. Give a dog a bone and they'll chew it, give someone an expense box and they'll fill... Okay that was a poor example but you get the drift.

You will find that someone who is accumulating great wealth will actually have very few and limited expenditures.

Start to review your budget monthly, start by reviewing your ‘Essential’ expenditures first then your desires then look and consider how to increase your monthly income. You can reduce your expenses by looking at all of your existing direct debits and Standing orders that are coming out of your cash bank account.

Look at each one separately and ask yourself the following question “Do I really need this expenditure now, or can it wait?” the chances are that it can wait. The aim of this exercise is to gradually delete your monthly expenditures one by one.

Now the reason you won’t be able to just cancel them all immediately is because you will experience internal resistance such as thoughts that you will be somehow pained if you remove certain luxury’s from your life but you may also receive resistance from your immediate family or friends dependant on the expenditure if that expenditure benefits them in some way.

Tackle all expenditure in its own right one by one, week by week, until you have reduced them to as minimal amount as possible. Some may even take you a whole month to figure out a way to get rid of the expense or to even set something else up in its place a cheaper version or cheaper substitute to the expenditure. Get rich by getting creative.

I’ll give you an example, I used to have my own personal top of the range mobile phone, I took it out on a 24-month business plan contract from O2 costing me £70 per month. Now during one of my monthly budget reviews I noticed that my mobile phone contract was one of the last major outgoings that I had not reduced mainly because over the years I had become so reliant on my phone.

I called O2 and asked them to reduce my contract to the lowest amount that I was allowed to reduce it to. O2 said that I could only reduce my contract plan one stage at a time per month so on the first review I reduced my plan to £45 per month and then on the second review I reduced my plan to £35 per month.

Because I had a whole month to prepare myself for the lower inclusive minutes and lower data allowance it was easier for me to monitor my usage and find other creative ways to communicate. I learnt to start using Skype, ‘WhatsApp’ and 'Line' for calling family members and to chat with friends when I had Wi-Fi.

Then I had an opportunity to reduce this expenditure even more I got a new job and the company provided me with a company phone. The company mobile was not a top of the range smart phone about three years old but it was adequate enough to make and receive a call as well as email and text.

Now my personal phone was much newer and high spec but it was a current monthly expenditure of £35 on average. I had managed to reduce my expenditure on this from £70 to £35 but that was still £35 coming out of my account each month. Because my personal phone was of much better quality I was having trouble internally accepting the fact that from a financial point of view it did not make sense to keep both phones.

I knew I should get rid of my personal phone and I spent a whole month contemplating this and trying to get my head around the idea, the savings were staring me in the face. On the next monthly budget review I decided to attempt to do without my personal phone, keep the contract but just attempt not to use the phone.

I recorded a voice mail giving my out of work number and I placed my personal phone in a draw in my bedroom. I went the whole month just using my work phone to make personal calls and did not miss my personal phone one bit. So on the following monthly review I gave O2 notice to cancel my contract and requested my PAC code.

The following month I moved my personal number onto a Pay and go SIM. Job-done.

The whole process took me around six months to complete but that has saved me £70 per month which is the equivalent of a net-worth yearly gain of £840. You may think that six months is a long time to get rid of a phone contract but you have to appreciate that I am an absolute Technology junkie I love all tech and getting rid of my shiny mobile device felt like I was removing a limb.

Everyone will have different emotionally attached expenditures that they feel they cannot do without and it may take a few months to reprogram your mind to believe that you can actually survive without this expense and you will be absolutely fine, life will go on.

I gained an extra £70 each month to invest with. I ended up turning that £70 a month into a grand total of £20,000 by pyramiding into a short GBP/USD position in 2009 during the credit-crunch, which I then used as a deposit on my second property which I purchased after the market slowed... but that's another blog post.

When all the fat has gone

Eventually you will reach a point where you are absolutely unable to reduce your expenditure any further at least not by the major cutback that you received in the early monthly reviews. At this point it is now time to seriously think about how you can increase your income.

Obviously you can do this at the same time as when you review your expenditures but as highlighted above you will be surprised as to how long this process will actually take you before you can honestly tell yourself that you have achieved the best you can. Becoming wealthy is all about mental reprogramming.

Putting your capital to work

Congratulations, if you've made it this far you should have a reasonable amount of savings in the bank to be used as a buffer and increasing your quality of life but most importantly you should now have some amazing and truly beautiful Capital.

Spending your capital and putting it to work requires as the name suggests that it is only to be used to invest in smart financial investments that you are sure to return a positive healthy return on investment (R.O.I). The return on investment should be at least 115% ROI, your initial investment amount plus an additional minimum amount of 15% at the time of sale.

The Investment portfolio split

Your total capital investment/portfolio split should be considered at great length and is a subject that really does warrant its own in-depth blog post, but to provide you with a general starting point guideline ("not investment advice"):

Robert Merton a winner of the Nobel Prize for economics, derived the basic formula to weigh risk and return back in 1969. He stated that the proportion of wealth you put into a risky asset should depend upon just three things, and nothing else matters:

  1. The volatility of that asset.
  2. The difference between likely returns on a risky asset against a safe asset.
  3. Your personal attitude to risk.

So consider and ponder this, take some time and ask yourself the following questions...

What is your attitude to risk?

Are you the kind of person who is happy to take risks? Do you prefer to swing for the fences, focusing on the big returns (and trying to be a hero) rather than being content with slow and steady (boring but reliable) small gains over time? Do you hate losing money or are you content with your previous investment decisions even when they are a loss but where well thought out?

These are the types of questions you need to ask yourself to build up your own risk portfolio and to gain a good solid understanding of the amount of risk you are comfortable with taking onboard.

What is a safe asset?

Well, a safe asset could be described as one that has low volatility over time but has a positive expectancy of return, such asset classes as property and government bonds are generally considered to be low risk assets.

However it really depends on what your goals are? For instance if you are looking to pay for your child's further education and they are already in there teens, then property may not be the best short term investment choice as the property market may be in a downturn when it becomes time to sell in a few years. A forced sale is generally not the most profitable sale.

You see what constitutes a safe or risky asset is subjective depending on your personal goals and requirements...

There are many factors that constitute a safe asset and a lot of that has to do with not only volatility or the age of the asset class and how much it is backed by your local government but also and more importantly your goals and time expectancies for that assets profit maturity.

What are risky assets?

Risky assets can be generalised as any asset that has high volatility compared to time, so the more volatile the swings over the shorter period of time the more risky that asset is said to be. To summarise the more that your investment value fluctuates, the more risky that asset is considered to be.

Stocks and shares are the obvious example and Crypto would be the extreme.

What are the likely returns on risky assets?

Due to the high volatility of risky assets there are usually great potential gains to be made but these gains will always come at a cost, not including losses the cost could simply be the mental effort and pain that it takes to hold onto such risk.

Other considerations also need to be considered, due to there risk the asset may be difficult to sell and have prolonged periods of low liquidity, or extended times of poor performance.

When purchasing risky assets, depending on the asset one should always ask themselves "why is this person selling to me? Rather than accumulating it for themselves?".

As a rule to be on the safe side, do not expect any asset whatsoever to deliver returns of more than 4-5% a year after inflation. This may seem very low but it will put you in a safe expectancy zone, it's always better to be pleasantly surprised at your returns than shockingly disappointed.

Choose a portfolio split between safe and risky assets that will match your future goals and internal risk levels. To give you an idea here is my total capital investment split. I consider myself to be fairly risk averse but as detailed above risk is a purely subjective term:

  • 50% in UK property.
  • 20% Precious metals (Gold, Silver & Platinum) diversified safe deposits nationally AND globally.
  • 10% US stocks and shares (S&P index fund with VFAIX).
  • 10% Alternative assets (mainly Crypto).
  • 10% ISA's & savings (liquid cash, forced selling prevention).

Lifetime learner

Putting your capital to work requires that you become a life long learner. At this stage you are in a very powerful position. You are financially secure (even if it's only on paper) and you have disposable capital (or you will have if you follow the guidelines in the previous posts //link//).

To make use of that capital requires that you learn new skills of Investing and trading or business and enterprise. To learn these new skills requires good old fashioned hard work.

Personal education is the highest yielding and lowest risk Investment vehicle that you can possibly invest in. Provided that you are educating yourself on a subject that you feel passionate about, enjoy doing and will endeavour to pursue, this is one investment you literally cannot lose on.

Think about it, what other investment can you make that has 100% no risk?...

Education is by far the safest investment and often the most rewarding. Once you have built capital do not be afraid to invest a portion of that capital in the form of good education each year, as this is probably one of the quickest ways to increase your current income.

For example if you are currently employed and are hoping for a promotion the chances are that the promotion will be performing duties that you currently have little or no experience in so why not purchase reading material or attend a private course in this field and learn as much as possible about that higher job position.

Start to demonstrate that you have learnt the skills necessary to perform the tasks required in this higher paid role. This is the quickest way for your manager or boss to see that you are competent in the position you are looking to move into.

Not only that, but when you pay for personal education you will gain much more value from it than when you received it free from school or college, this is because you will not want to waste your capital so you will literally squeeze every bit of knowledge out of that education that is possible.

Above all, you have to take control of your ongoing financial future and not rely on the hope that something better will just turn up...

Education is so important for increasing your net-worth that I should have just wrote three articles on that. I would say I currently invest at least 5% of my capital each year on my personal education, currently thats learning Python, Statistics with the Open University and Data-Science.

This helps you to exceed your wealth building limitations each year and prevents you from hitting a net-worth Plato where your monthly net-worth gain ceases to increase but just stays the same amount each month.

Finally if you don’t believe Education is a sound investment then just read any biography written by any successful entrepreneur and somewhere within that autobiography they will state quite proudly that they are always open to learning.

"I just sit in my office and read all day," - Warren Buffett

Education and learning is the only way to prevent stagnation. It promotes growth and arms you with the tools required to keep building and increasing your income. It turns you into a valuable and reliable asset.


Accepting financial freedom. If you have completed all of the tasks explained so far //link//, 1. you have kept track of all your expenditures for two months 2. have created and developed a budget 3. You have used your wealth-building budget and reduced your outgoings and increased your income. 4. You have achieved a stage where you are now adding to your net-worth each month.

Well-done, you are done… you can consider yourself financially free…. Whaaaat?...

You may not believe me but trust me you are. Just having a financial plan in place that includes all of the time proven details we have covered //link// to increase your wealth is enough for you to finally stop worrying and stressing about your financial future.

Why... Because now it is just a matter of time. As long as you keep to the guidelines suggested in this series your net-worth will increase month on month.

This time you are not lying to yourself, if you have come from debt, or was chasing fads and ICO's without knowing the project team personally, all you need to do is stick to your budget, focus on increasing your net income and your capital will start to grow.

You're only task now is to find an investment vehicle or business that you are interested in to invest in. To do this you need to learn to either trade professionally or invest in slower vehicles such as business.

To do list

  1. Have a firm grasp on your income and expenses?
  2. Become frugal and make it as a habit.
  3. Ovoid the customer trap, Trim the fat until there is nothing left.
  4. Invest wisely according to your risk and diversify correctly.
  5. Become a life long learner and read daily.
  6. Live by your financial plan and let go of the stress.

Final Thoughts

The foundational work for building wealth is not easy, it usually requires a great amount of real life changes and emotional compromises until you have successfully put aside a reasonable amount of capital. With this in mind my final recommendation would be to make sure once your capital account is increasing month on month that you build your savings account at the same time to improve your quality of life in line with your capital growth and financial freedom.

Published on February 7, 2018.

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