The 5 Types of Wealth: A Transformative Guide to Design Your Dream Life

by Sahil Bloom

Financial Wealth is built on three pillars: Income generation: Create stable, growing income through primary employment, secondary employment, and passive streams Expense management: Manage expenses so that they are reliably below your income level and grow at a slower rate Long-term investment: Invest the difference between your income and expenses in long-term, efficient, low-cost assets that compound effectively This simple model is universally effective because it converts short-term net cash flow into long-term wealth.

The gap between your income and your expenses is the most important tool in your financial independence tool kit—and it’s a tool that you get to create.

Building a robust income engine composed of strong, stable, growing income streams should be the primary focus on your journey to generate this gap. The reason is simple: You can cut your expenses only so much, but you can increase your income forever.

A basic model to establish a robust income engine: Build skills: Marketable skills (sales, design, copywriting, software engineering, and so on) are assets that you can create and compound. Every new skill is built on top of existing skills to create a unique portfolio. Leverage skills: Strategically deploy the marketable skills to convert them into income. The means of deployment exists on a risk spectrum from stable, lower-risk, time-for-money primary employment to volatile, higher-risk self-employment and entrepreneurship.

As you build that engine, manage expenses to live well within your means. This does not mean that you should give up on everything fun and live a spartan lifestyle, but you should implement the basic tenets of expense management: Create (and stick to) a budget: Plan your monthly expenses and track your performance against them. Automate the savings and ensure you have a rainy-day fund that will cover about six months of expenses to cushion against any unexpected turbulence. Manage expectations: The greatest risk on your journey to financial independence is expectation inflation, often referred to as lifestyle creep. Never allow your expectations to grow faster than your income.

The first rule of compounding: Never interrupt it unnecessarily. —Charlie Munger

“Money makes money. And the money that money makes, makes money.”

Time, not average annual returns, is the most important factor. Morgan Housel, the bestselling author of The Psychology of Money and Same as Ever, adds clarity to this point: “All compounding is, is returns to the power of time, but time is the exponent. So that’s to me what you want to maximize.”[9]

If a twenty-two-year-old invested $10,000 in the S&P 500 index in January 1980, she would have a retirement nest egg of well over $1 million today (assuming reinvestment of dividends along the way). If that same person invested just $100 per month after the initial investment, she would have a portfolio of well over $2 million today. If she ratcheted up her monthly investment to $1,000, she would have a portfolio of over $10 million today.

Get out of the way and let the magic of compounding work on your behalf.

There are five clear and distinct levels to the Financial Wealth journey: Level 1: Baseline needs are met, including food and shelter. Level 2: All baseline needs are exceeded, and modest pleasures become accessible. This includes meals at restaurants, simple vacations, and spending on education. Level 3: Baseline needs are no longer top of mind, and the focus is on saving, investing, and compounding wealth. More significant pleasures, such as multiple vacations, are readily available. More aggressive asset compounding generally begins at this level. Level 4: Most reasonable pleasures are readily available. Asset accumulation accelerates, and assets begin to generate passive income to cover some lifestyle expenses. This is the level of moderate financial independence, as you can reduce your active income and continue to live the same lifestyle. Level 5: All pleasures are available. Asset accumulation reaches escape velocity, and assets generate passive income in excess of all lifestyle expenses. This is the level of complete financial independence, as you can remove all active income and continue to live the same lifestyle.

Money solves money problems, but it will not, in a vacuum, solve anything else. The point is this: Financial Wealth does not solve your problems; it simply changes the types of problems you face. The most important and fundamental questions about your life will remain, irrespective of the level you achieve. It is entirely up to you to determine how you can leverage the Financial Wealth you have built to create and increase other types of wealth—Time, Social, Mental, and Physical—as you seek to build a comprehensively wealthy life.

I have a clear definition of what it means to have enough financially. I have income that is steadily growing alongside my skills and expertise. I manage my monthly expenses so that they are reliably below my income. I have a clear process for investing excess monthly income for long-term compounding. I use my financial wealth as a tool to build other types of wealth.

Here are the prompts I used to define my Enough Life: Where do you live? Are you living in a house, apartment, or something else? What specific characteristics do you love about the place where you live? Do you spend all your time in one place or live in different places? Whom do you live with? Are you close to family or far away? What are you doing on an average Tuesday? What are you spending your time on? What are you working on? What are you thinking about? What material things do you have? What are the objects or possessions that truly bring joy to your life? What do you have the flexibility to spend money on freely? What does your financial profile look like? What amount of money enables that life? How much cushion do you have in your finances? What are you earning, saving, and investing each month? How much of a safety net do you have?

What is the gap from your present reality to that future reality? What are the key steps and actions necessary to bridge that gap?

No amount will change the way you feel about money. To feel good about money, you need to (a) know your numbers and (b) improve your money psychology by spending unapologetically on things you care about (and paying as little as possible for things you don’t).

The best advice, then, provides the general principles, ideas, and frameworks that you can take, mold, and leverage in your own way.

Financial success is a by-product of the amount of value you create for those around you. The richest people in the world have billions of dollars, but they have each created tens or hundreds of billions of dollars of value and simply captured a small portion of that value they created. If you want to make a lot of money, stop focusing on your investments, stop focusing on your plan, stop focusing on your strategy, and start focusing on how you can create immense value for everyone around you. If you do that, the money will follow.

Hard now, smart later. Earn your leverage.

Data in, story out. If you can build that storytelling skill, you’ll always be valuable.

There’s nothing more valuable than someone who can just figure it out. Ask the key questions, do some work, get it done. If you do that, people will fight over you.

He told me to make it a rule to never think twice about investments in yourself: Books, courses, and education Fitness Networking events Quality food Mental health Personal development Sleep These may look like expenses, but they can all be considered investments that pay dividends in your life for a long time.

The bias is to underestimate the value that these investments have. The financial cost is easily quantifiable, so we focus on it and ignore the benefits in other areas of our lives. But if you evaluate the benefits through the lens of the other types of wealth—Time, Social, Mental, and Physical—you will more appropriately account for them and make a better long-term decision.

Never think twice about making investments in yourself. Think twice about material purchases instead.

“Do you want to take a leap of faith? Or become an old man, filled with regret, waiting to die alone?”