There’s an old saying – ‘the higher you go, the harder you fall’. If you are following a strategy to build your wealth quickly, you have a much higher risk of things going wrong and potentially of losing everything. Risk and return go together, so unless you are prepared to take a chance or two your wealth will grow only slowly.
Safe and secure works for some people, but others are impatient and have big plans. Neither approach is wrong; it’s what is right for you that counts and everybody has a different view about what is right for them. True entrepreneurs often go through cycles of making and losing money. Take Donald Trump and Robert Kyosaki for example. Both have been bankrupt at least once in their lives.
What distinguishes entrepreneurs from the average person is their ability to start creating wealth quickly again even though they have lost everything. It is a skill developed from confidence in their own ability and an optimistic belief that opportunities are unlimited in number and just waiting to be found. The number of truly successful entrepreneurs is a small but highly visible percentage of the total population.
They are great role models for the rest of us, however there is a danger in that the ‘wannabe’ entrepreneurs who have the desire to create wealth but not necessarily the skills sometimes find themselves in trouble. It’s a bit like watching stunt performers on television with the message ‘don’t try this at home’. Sometimes people take risks that can lead to great success if you have the right skill set and dismal failure if you don’t. Having the insight to know your own limitations and when you need to call on expert help is a key ingredient for successful entrepreneurship.
Being able to successfully manage high levels of debt is one of the areas that sorts out the true entrepreneurs from the ‘wannabes’. One of the quickest ways to grow wealth is to use Other People’s Money; that is to borrow from a financial institution or personal contact for the purpose of investing in property and business ventures. This is a strategy that works well if the returns on the investment are greater than the cost of borrowing.
The problem is that sometimes the returns are only apparent in the long term, whereas loan repayments must be made on a regular basis in the short term. If the amount of cash coming in from the investments is less than the cash going out to cover loan repayments and other expenses then, unless the investor has other funds available (either savings or other income), the outcome is failure. The higher the level of debt, the more cash you need coming in, and the more vulnerable you are to unexpected changes such as economic recession, loss of tenants or customers, ill health and redundancy.
Sometimes the best strategy is to clear the decks and start over again. That means selling off assets such as property and businesses and using the proceeds to pay off debt. Stabilising your financial situation gives you the opportunity to start growing again with the wisdom from lessons learned that will help you succeed.