Wealth Within's three key principles for wealth creation and why people never get to 2 or 3

Wealth Within’s Dale Gilham has three principles for wealth creation which have stood the test of time
First principle is considered ‘holy grail’ of wealth creation
Third principle of power of compounding Albert Einstein reputedly described as “eighth wonder of the world”

Wealth Within chief analyst Dale Gillham reckons there are three laws of wealth creation that have worked for hundreds of years and will for hundreds more as they enable people to stop losing and start making money consistently along with providing greater control and freedom.

In How To Beat The Managed Funds By 20% back in 2004, he introduced readers to the three laws to successful wealth creation and told Stockhead he never imagined how nearly two decades later he would till be talking about them.

“In fact, when chatting to those wishing to be authors I advise them to never write about something you are not passionate about as you will be talking about it forever like I have,” he said.

“That said, I know with absolute certainty that many only give these principles a fleeting glance as they mistakenly believe they already understood them.”

Gilham said its important to ask yourself, do you follow any of these rules and do so on a consistent basis?

“In my experience the majority do not get past the first principle,” he said.

So what are Gilham’s three laws to wealth creation?

1. Spend less than you earn

“This rule is the ‘holy grail’ of creating wealth as it will make you millions. However, fail to do this then it will cost you millions in lost opportunities,” he said.

“We know that 90% fail to budget and most treat budgeting as a negative or restrictive thing and it is absolutely the opposite which is why the successful do it.

“The idea is to plan your spending, so your money goes exactly where you want it to go and avoid impulse spending.”

He said for example reduce or eliminate your credit card usage and/or the pay later schemes.

“If you do this right, most can save 20 to 30% of their income and still maintain a good lifestyle.”

2. Invest your surplus wisely (at least 10 per cent of your income)

Gilham said all too often people do what is simple or easy rather than what is wise when it comes to investing. Or they avoid it saying it is either too hard or too much like gambling, especially with equity markets.

“The best way to invest is so that you generate both income and capital growth by directly investing in property and shares,” he said.

Gilham said your investment strategy should satisfy the following criteria in that you must have a well-researched entry and exit strategy.

Risk only comes when you don’t know what you are doing so it pays to do the work. He said as an example if you buy a blue chip share that is rising in an uptrend, then you can be confident that the stock will most likely rise.

“Put some good buy and sell rules around that and you are very likely to profit,” he said.

“We know that BHP (ASX:BHP) for example has over a 60% chance on any year that it will rise from 0 to 30%.”

2. Leave it alone so it can grow

Albert Einstein is reputed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”

Gilham’s third principle to wealth creation is compound interest.

“When you invest for dividends and capital gains and reinvest all dividends and capital gains back into more stocks magic will happen,” he said.

“If it is gains and income from property, then you can do exactly the same.

“That said I suggest the best investment strategy is to invest in both property and shares.

He said in following principle three you will start to gain growth on your growth because of the compounding effect.

“We need to remember the greatest gains come near the end and not the start, which is why we must let our investments compound,” he said.

Whilst spending less than you earn is the holy grail, this last rule is the real key to anyone wanting to create real wealth.

By following these three principles you gain more choice and more freedom, as eventually you will have accumulated enough so that at the appropriate point in time, you can start to use some of your growth to fund your lifestyle and eventually fund your retirement.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.