The 5 levels of wealth – Michael Yardney

Many Australians have chosen to invest in property to develop financial freedom and get themselves out of the rat race. Michael Yardney believes that as they take their investment journey, they fit into one of five levels of wealth. Find out where you fit.
Kevin:  My good friend Michael Yardney has developed a wealth pyramid, a pyramid of financial independence. There are four steps to that, and we’re going to look at those steps today as we talk to Michael.
Good morning, Michael, and thanks again for joining us.
Michael:  Thanks, Kevin.
Kevin:  Many Australian have chosen – haven’t they – to invest in property, develop their financial freedom and get themselves out of the rat race. I know you’ve analyzed this with a number of people you work with and you come up with these different levels.
What’s the first level, Michael?
Michael:  Let’s talk about this pyramid first, and then – you’re right – we’ll talk about the four steps and how to work your way up.
I think it’s interesting for us to consider where are we sitting at this? Level zero is really what I call financial instability. Since most Australians still today live from paycheck to paycheck, they really are at this level, Kevin. They’re financially unstable. I’m not saying they’re poor, but if they lose their job, if they have an emergency, if they have an illness or their car breaks down, they have no money reserves, they have nothing to cope.
How can they handle these unexpected burdens that life dishes out? Often, the only way they can is to borrow more, get further into debt, and this only creates more financial hardship. The bottom level is financial instability.
Kevin:  It’s a bit like lurching, isn’t it? You lurch from one disaster to another, really.
Michael:  Yes. Interestingly, when they earn more, it doesn’t help them any. They end up spending more, and somehow or another, they make sure that the money just lasts out the month or, in general, it’s the other way around; it actually cuts out a few days before the end of the month.
Kevin:  How do you achieve the first level? How do you start to become independent, Michael?
Michael:  The next step is to go up a level in this pyramid that I call financial stability. To achieve this most basic level, you have to be at the level where you’ve accumulated enough liquid assets – it could be savings, it could be money in a line of credit, or something like that – to cover your current expenses for a minimum of six months, so you’re financially stable if things go wrong. You have your private health insurance, you have some life insurance to protect you and your family’s lifestyle if something goes wrong.
You attain this financial stability and then you suddenly get a bit of a comfort. You feel a little bit of the pressure off. You’re not as much on the treadmill, knowing that if anything unexpected comes along, your family’s lifestyle won’t be unduly compromised. You’re going to have adequate time to look for new sources of income to put you back on track again, Kevin.
Kevin:  This is the foundation, Michael. From here, do you start to build?
Michael:  Yes, you do. We’ll talk about how you get there next, but as we work up the levels of the pyramid, level two is what I call financial security. Where you started at instability, stability, and financial security – which is where many people want to get – is they’ve now accumulated enough assets – maybe it’s a sufficiently large property portfolio – to generate enough passive income to cover their most basic expenses. This would be things like your mortgage and your tax payments, your car expenses, and your grocery bills.
When you reach this level of financial security, you could stop working and maintain – I guess – a very simple, a very basic lifestyle. But smart property investors want to go further than that, Kevin…
Kevin:  What is the next level?
Michael:  …To get to what I call financial freedom. Level three is financial freedom. You’re financially free when you’ve accumulated sufficient assets to generate enough passive income not to only maintain the lifestyle you desire – not your current lifestyle but the lifestyle you desire – but it’s also going to help pay all of your expenses without ever having to work again. That, in my mind, is by building a substantial asset base that you then eventually lower your loan-to-value ratio and get a cash machine.
When you’re a successful investor, you don’t have to work again, but interestingly, we find that a lot of people still do, don’t they?
Kevin:  Because they enjoy it, Michael. They enjoy what they’re doing.
Michael:  That is right.
The next and the last level in my mind is financial abundance, level four. A small group of sophisticated property investors achieve what I call financial abundance. That’s when their portfolio works overtime. They’re free of all of the financial pressures, and they have enough surplus income that it not only pays for their lifestyle and all their expenses but then they start contributing back to the community, often through charitable work, sometimes through donations. But despite that, their asset base keeps growing. It’s sort of working overtime compounding. That’s the real cash machine in my mind, Kevin.
Kevin:  How do you move on, Michael? How do you climb up to becoming the top?
Michael:  In my mind, there are four steps to it, Kevin. The first one is to decide to become wealthy. I know that sounds basic, and most people say, “Yes, I’ve already decided,” but most Australians actually never make a firm commitment.
Life gets in the way, they’re busy, they’re having their children, they’re building their homes, they’re enjoying their life, they’re traveling, and so what they are not doing is putting a firm plan into place. You have to truly commit to getting yourself financially independent to become wealthy, step one.
Then step two is invest in your financial education. If you’re a beginning investor, you have to focus on increasing your financial education to fast track your success. There are all these great resources like Real Estate Talk with all of the experts you have on your show, going to seminars, watching DVDs, great podcasts like this.
If you’re a more experienced investor, your priority is to grow your asset base sufficiently to become financially free. But you have to keep learning even when you get to that level, so you learn more about finance and tax and asset protection.
The third step is don’t wait until you know it all to get started because if you do, you’re never going to take the first step. One of the things I’ve learned early in the piece was the paradox of knowledge: the more you learn, the more you realize you don’t know.
Many people say, “If I knew it all, I’d be safe; once I get all this right and know exactly where the market is, I’ll start doing things.” How do you know when to invest? Kevin, in my mind, you have to have the courage and conviction to take action knowing that you’ll never know it all but you’re going to learn along the way, educating yourself as you move up the ladder.
The last of the four steps is surround yourself with like-minded people. There is no such thing in my mind as a self-made millionaire. Every financially independent investor I know has surrounded themselves with a smart team of advisors and professionals and like-minded individuals. They get a mentor, they join other people who have similar journeys planned, and that way, they can get there a lot faster and safer, and it makes the journey much more pleasant.
Kevin:  The wonderful thing about money and wealth – I’ve read this in one of your books, too, Michael – is that it doesn’t discriminate. It doesn’t care who you are, who you think you are or even what your parents thought or did or even said to you. It doesn’t discriminate at all, does it?
Michael:  No. Each day starts with a clean slate, which means you have the same rights and the same opportunities as everyone else, so my suggestion is start making your way up that investment ladder to financial freedom today.
Kevin:  Great words. Thank you, Michael. Lovely talking to you.
Michael:  My pleasure, Kevin.

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