I recently listened to a financial planning podcast – XY Adviser talking to Paridhi Jain the founder of SkilledSmart about money and education.
The discussion moved to common misconceptions and what people think is most important. When people initially learn about money, they default to “budgeting is the most important thing”, Paridhi commented that it’s not the most important thing. The interviewer asked what the most important thing about money is.
To be frank I was muttering under my breath about the question ‘how could you possibly answer that?’.
The answer though was fantastic – the most important thing is understanding the difference between money and wealth – understanding the process by which money gets converted into wealth.
Over the years I’ve had clients who have earned significant incomes (north of $400k) – but have nothing to show for it – unless you count jetskis or cars (cue dad wisdom about what happens to the value after driving a new car off the showroom floor).
This inability to convert money to wealth has consequences.
Explaining the consequences from my side of the desk is tough, but watching the long term impacts sink in on the other side of the desk is tougher.
Budgeting is the process of working through what you actually spend, finding the balance between money for today and converting some of it into wealth so there is money for tomorrow.
With this new perspective, you can begin to make choices about how you want things to work, how to build wealth and perhaps with advice how to build wealth more quickly, more tax efficiently and with more peace of mind.
This is the first of a series of posts about the foundation of budgeting and cashflow.