How to Build Capital Part 1 - Money - Savings - Capital cover image

How to Build Capital Part 1 - Money - Savings - Capital

By Gavin Marsh

finance

Part 1

Money - Savings - Capital:

Introduction

“Why do the rich keep getting richer?” “Why do I not have any free money to invest in the new stock or fad everyone is talking about?” “Why am I always broke? goddamnit?”

The fact of the matter is that wealthy individuals — excluding “old money” and trust fund babies — think differently than the rest of us. Their beliefs about money are completely different from yours. But we’ll get to that in a second.

I see a lot of articles about the next big stock or crypto to invest in — but rarely any information on how investors should gather enough capital to invest in something in the first place. The following articles will explain all of that and more.

So if you are:

A novice investor Looking to build your capital base the correct way? Interested in making your fortune in the markets? Curious about learning trading strategies used by professionals?

Then these articles are for you.

Look, it’s very simple. If you want to make massive returns in the market, you need enough money to play with. Yes, there are things like leverage and trading on margin that we’ll get to those later. But even with those trading tools on your side, you still won’t be able to make sizeable gains unless you have enough capital to work with in the first place.

My background

I live in Westminster London. I have been a domestic trader in my spare time for over 13 years. Nobody gave me a loan and my mommy and daddy didn’t leave me an estate. I’ve used my own capital since day 1, over those years i've obviously made countless mistakes and lost more money than I could have probably spared at the time. I've blown two sizeable (five figure) trading accounts and felt the real pain of losing real hard earned money but from those early loses and mistakes I have learnt to become a proficient and successful trader/investor. These articles are my best effort to pass those lessons on, not from a pedestal or a position of superiority, but from a humble place, where the scars of my failings still remind me daily to apply my full attention while making trading and investments decisions.

I won't lie and tell you that it was easy from the beginning. I was scared to death to make my first trade back in September 2006. Even though I lost a little money, I was instantly hooked, the gamblers curse i guess.

For the past eleven years, I have been successfully margin trading the GBP/USD Forex currency pair, and some Contract-For-Difference (CFDs) securities thrown in for good measure.

In July 2017, I applied my knowledge of Forex trading to cryptocurrency and have been trading Bitcoin and alt coins ever since. It didn’t take long before I realised that there were a lot of inexperienced - and undercapitalised - investors in the crypto space.

It seems that people got into cryptocurrency trading as part of a fad and have done little to no research on proper trading strategies. With the knowledge I’ve gained over the years, I believe that the articles in this series will help new traders build long and lasting wealth the correct way.

I didn’t take any fancy classes and don’t have a degree in finance. I am 100% self taught — my knowledge came from the greatest teacher of all — experience.

That said, I am a professional domestic investor — not a professional writer. So if you notice a spelling error in here, feel free to drop me an email so I can correct the mistake.

Money, Savings & Capital

The first step in becoming wealthy is to understand the difference between money, savings & capital. If an investor does not have these three terms clearly separated in their mind, then it is virtually impossible to become wealthy.

The average investor may believe these three products are all the same. “It’s all money right?"

No! It’s not. That’s why you are poor — because you don’t know the difference. And until you understand the difference between those three concepts, you’ll be poor for the forseeable future.

Money

“Money is only the accounting of economic energy” - Alan Watts. Even Alan Watts famous quote about money is a little misleading. In layman terms money is just cash that you use for living expenses?

Money can be thought of as a persons cash flow; it’s the object a person uses to exchange for the goods and services that they require. Money on its own has no perpetual benefit to a person, as in once it's spent that is the end of its use. It helps them put petrol in their car, buy daily food, clothes to wear and general household products.

Money should really not excite a person all that much, in fact, we earn money from work that we do and we exchange it for the services and products that we need to live our day-to-day lives in reasonable comfort to continue going to work without too much fuss. That is all.

Savings

Think of savings as an account that you can use to spend on a particular object or experience in the future, such as a new car or a family holiday. Consider your “savings” as a place where you put your money to save up for a large purchase that would improve your current lifestyle or enable you to experience something amazing (a trip to Paris, swimming with dolphins, etc).

Savings are also there for those rainy days. Some people call this an “emergency fund.” An article on personal finance wouldn’t be complete without recommending that you keep enough money on hand in case you need it. This emergency fund provides you with the peace of mind that if something bad unexpectedly happens, you have a financial buffer to deal with those concequencies.

That said, savings are not wealth.... "Why not?" Because savings on their own do not have a particular purpose to increase your net-worth.

Conversely, if you currently have some money set aside that you were thinking of putting into the market, then that is actually not savings - it’s capital.

Capital

Capital is king!

When you think about capital, you should get excited.

Capital has the power to free you from your boss, your dead-end job, and to allow you to spend more time doing what you enjoy. If that's spending it on charitable causes or wasting it on drink and fast cars it's up to you. Capital gives you the freedom to make that choice.

When people proclaim “money is power,” they’re actually talking about capital.

So what is capital? Simply put, capital is cash used specifically for creating and increasing wealth.

Without capital, you will never be able to create financial security for yourself. Have you heard people say, “It takes money to make money?” again they’re talking about capital.

Furthermore, the only time you should EVER spend capital is when you are using it to create an income stream. Gucci bags, a new laptop and a trip to Hawaii should not be purchased with capital.

Using all three tools to increase your net-worth

Now that we’ve established that money, savings and capital are three different things, the next thing you need to do is set up a separate account for each of them.

One of them should be used for day-to-day expenses (money), the other should be used for things that improve your quality of day-to-day life (savings), and the third is for using to create and nourish streams of income (capital).

As tempting as it may be, do not mix these funds together. Take a few hours of your life and set up three different accounts. This one thing will do wonders for improving your financial situation.

Net-Worth

The “financial” meaning of net-worth is the amount by which your assets exceed your liabilities. If you have £100 in assets and £90 in liabilities, your net worth is £10.

A consistent increase in net-worth indicates good financial health; conversely, net-worth may be reduced by annual operating losses or a substantial decrease in asset values relative to liabilities.

The concept of net worth is also the way that professional investors and traders keep track of their overall financial performance.

What is your net worth?

So what is your current net worth? Do you even know? Have you ever added it up and clearly marked it down? You should know, especially if you are an investor and aiming towards financial freedom.

Is your net worth positive or is it negative? Firstly, you cannot be wealthy by any measurement if your net-worth is negative.

To put it another way, you cannot start to become wealthy until you are completely debt free. Until you’re completely debt free, your only focus should be to eliminate your personal debt.

Even if your bank account is showing four or five figures, you may be quite surprised to find that your net worth is actually zero if you don't stop and take a look once in a while. This is how millionaires go bust, they get complacent and stop monitoring. Maybe you’re too scared to check your bank account because the small numbers make you feel bad.

You may have thought you were wealthy because you owned a property or two, but a sudden dip in the housing market or a gradual rise in interest rates could quickly put you in the red.

Smart people say, “What gets measured, matters.” So do yourself a favour and find out what your net worth is. I'll give you exact instructions on how this is done later on.

Be your own business

If you owned a business, do you think you would be tracking expenses? Of course you would! So why should your personal expenses be any different?

Just like a business, It is essential that you track all of the money coming in and out of your household.

How can you measure your success if you don’t even measure your own net worth? I track mine using the old-fashioned system of Microsoft Excel using a cash-book ledger, which is something my accountant taught me when I owned my own audio & visual company. I even still use my old company cash-book templates to track my personal incomings and outgoings each month.

By doing this on a monthly basis, I have reduced my expenditures to a great degree. When you start doing this, be sure to update it every day.

Keep track of all income and outgoings

You MUST do this if you are currently in debt and your net worth is negative.

You need to know what percentage of your wages is being spent on your commute to work. Or what percentage of your income goes towards food. What percentage goes towards your monthly energy bills, your Netflix account and your World of Warcraft subscription? What percentage of your income goes on debt or goes towards the interest of that debt?

All this can be tracked by keeping a simple net worth balance sheet and a net worth accumulator (budget spreadsheet). Both these tools will help you to determine the exact amount of funds that are going towards paying down debt until it is eliminated.

If you really want to kickstart your wealth building, then there are loads of budget tracking apps available for most smartphones. At the very least you should use one of these, but even these tend to export the data to Comma Separated Format (CSV) - so you might as well just use Excel.

These programs and apps help you to get more detailed information about your net worth and show you which areas you can improve in real time. Take some time out to enforce this daily habit. This will probably be the best money saving task you will ever do for yourself.This is 100% going to make you wealthier — that I can guarantee.

Tracking your expenses this doesn’t change as you become wealthier, either. It actually becomes more important, so get in the habit of it by starting now, make it a habit and continue to do it.

It will seem tedious at first. If you’re in a significant amount of debt, it might even cause you pain. But without doing this, there is literally no way you can ever achieve unshakeable wealth.

It will get easier over time. When your net worth is large enough, you will even enjoy it.

Be ruthless with your budgeting

Everyone knows how much they are going to be paid at the end of the month — but do you know how much you are going to spend in a month?

I do. I also know that I could ask any person in my office and they could probably tell me their monthly outgoings down to the penny.

If you don't have this information, then this is a clear indication that you are leaving money on the table that could be going towards your investment capital.

You need to become your very own accountant to the point where you are confident that you have maximised the amount of capital you have at any given time. Being a meticulous bean-counter is something you should be proud of. Just do the counting, you don't need to tell everyone.

Look, the sad truth is that nobody is going to make you wealthy other than you. Nobody cares about your well-being or your financial freedom more than you do. Nobody will make you rich before they make themselves rich. This is what being financially responsible is all about.

Monitor your own wealth like your life depended on it — because quite simply it does, well a life of comfort and freedom at least.

Calculating your assets

A few years ago, I was just starting to get into cryptocurrency mining. I couldn’t stop looking at the Bitmain “Antminer” on eBay. I had built up some capital and was looking to make an investment to build more capital... get it.

Although the previous owner had used it for a few years, it still looked like it was in perfect condition. I was willing to pay around £1,500. However, the seller wanted a minimum of £1,800 and wouldn’t budge an inch.

When he emailed the next week telling me he’d accept £1,500, I nearly snapped his hand off. I immediately paid via PayPal and was looking at it in my garage three days later like a kid on Christmas Eve, I immediately started playing with my new toy. The whirring of its industrial-grade cooling fan was music to my ears.

I took a couple of pictures and shared them on a mining WhatsApp group, immediately receiving an offer of £2,000 in cash from, Greg, a friend and fellow miner.

I politely but smugly declined.

It wasn’t until the next day I realised how stupid it was to have said no to Gregs offer. Not a day before I had considered the mining rig worth only £1,500, but now that it was in my possession, what reason did I have to suddenly value it at more than £2,000?

If I was thinking rationally, I would have sold the Bitcoin-miner to Greg immediately. I learnt a valuable lesson that day to always be mindful when valuing your own possessions.

It is a common human error that we consider things to be more valuable the moment we own them. In other words, if we are selling something, we charge more for it than what we ourselves would be willing to pay.

The reason I bring this up is to tell you that you should take 10-20% off your estimated asset values. This will give you a true reflection of where you stand in terms of your existing assets. It is always better to undervalue (rather than overvalue) when calculating your net-worth.

As they say: Better to be looking at money than looking for it.

Do this for all assets, your home, your car, your grandmother’s diamond necklace — Everything.

Keep it real

Finally, do not lie to yourself about your financial standing. This sounds obvious, but most people feel threatened when asked about their financial status so they have a tendency to bend the truth.

You know the type of people I am referring to — the kind who own a shiny four-by-four Range Rover, park it outside of a tower block, and then walk up seven flights of stairs to their mum’s two bedroom flat where they live in the back bedroom.

It’s easy to inflate your net worth and not include all of your debts. “Oh I’ll pay this off, this is almost paid off so I won’t include that.” You gain nothing by lying to yourself.

It's easier than it sounds

When you know your net worth, increasing it will become an obsession. And unlike some things out there, this is a healthy obsession.

Monitoring your net worth is the first step in becoming wealthy. If you want to say that about yourself someday, then you must do this. There are no exceptions and no excuses.

So what’s it gonna be?

Summary

Know the difference between all three money classes and their use cases, be aware of each and every outgoing that comes out of your account and know the true net value of your assets and your debts at all times.

I know this was a long article, so I’ve condensed the lessons in here to an easily digestible list.

To do

  1. Open three separate bank accounts: one for money, one for savings and one for capital
  2. Calculate your net worth and be aware of its amount on a daily basis. Is it going up/down each day/week/month?
  3. Keep track of your income and expenses. Download a budgeting app today and get in the habit of recording each transaction for a period of at least 2 months.
  4. Remember to deduct 10-20% from each asset to provide a realistic real-time valuation.
  5. Read the next blog post in this series.

Final Thoughts Check out the next post in this series where we will look at how to gain a monthly 10% capital increase, consumer traps and the sure fire proven methods to raise your monthly income.

If you found this article to be a little too long then subscribe to my email list to receive similar content broken up by paragraph.

Published on February 7, 2018.

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