Opinions expressed by entrepreneur Contributors are their own.
A 1970 article published in the Journal of Personality and Social Psychology detailed a learn in which children were offered the option of being given a treat right away or waiting 15 minutes and being given two treats. The results, which were replicated in further studies, resulted in a summary in science Magazine that those children “… who delayed gratification longer… developed into more cognitively and socially competent adolescents, perform better in school, and are better able to cope with frustration and stress.”
In business (including investing), a similar type of delayed gratification—known in the business world as “poor time preference”—can also be a unique route to profitability.
Even those with an excellent salary or a healthy company can become poor if they have a “high time preference”, i.e. focus mainly on the present. On the other hand, someone from a poor background with little time preference and the right education can become rich. People who fail in property or business often prefer the former and therefore give up before they succeed, or they succeed and then spend the money they earn instead of reinvesting it.
I didn’t start out with much in life but a low time preference allowed me to build a multi-million pound net worth through property in the UK. Of course, skills are essential to doing almost anything well, but regardless of your expertise, a high time preference will keep you from true success.
“Fast Pound” versus “Slow Pound”
These common phrases (if you don’t live in the UK, replace them with your currency of choice) refer to two business and investment strategies: one that makes money now and one that builds your wealth. Ideally, your fast pound should be used to invest in your slow pound structure. This way you’ll get richer and richer over time instead of spending money as you make it.
An example of this in the real estate investing world is becoming a deal sourcer (fast pound) – that is, finding real estate deals and selling them on to other investors and using the money earned to invest in your own properties (slow pound) .
Essentially, the need is to find an income-generating asset that you can buy with your earned income, including reinvesting it to grow a business. I find it most helpful to develop a slow pound strategy even before you make any money, but when you do, put it aside and prepare to invest.
Related: 3 Lessons I Learned From Helping My Coworker Become Financially Free
Buy luxury items with passive income
When you’re starting out, you’ll probably need to buy all the essentials with quick pound income, but it’s important to pay for any luxuries with passive income generated by your slow pound strategy. This is what businessman and author Robert Kiyosaki teaches in his 2017 book: Rich Dad Poor Dad: What the Rich Teach Their Kids About Money What the Poor and Middle Class Don’t!. Learning this lesson helped me grow my real estate portfolio to the size it is today. It allows you to free up earned income for investment by reducing your time preference towards luxury goods.
An example of this principle is my house: my wife and I bought our house for £3,000,000 on passive income (we previously rented for years) because I consider a house a luxury – paid for with capital you would have in income can invest. produce wealth. I always advise that people only buy a house if it is a luxury for them Yes, really want to spend and only if you have the slow pound income to do so.
So, if you want a luxury item, whether it’s a car, an expensive vacation, or a house, wait until you can afford it with your passive income (i.e., your slow pound). This is a key to building wealth that is all too often overlooked in education systems. In school they usually describe making money as the product of a job rather than a business, but afterwards they don’t instruct the students what to do with that money; The answer is kept as a secret that the rich teach their own children but never reaches the masses. One of the things I decided early in my career was that once I made it, I would talk about how I did it, and that’s still an important part of what I do to this day.
Related: 5 steps to buying your first investment property in the UK
hold wealth over the long term
Everyone knows that you are destined to buy low and sell high, but most end up buying high and selling low. When the market sentiment is that everything is going up forever, everyone wants to buy. As soon as it looks like prices could go down forever, everyone wants to sell. The trick then is to buy something that makes a good income regardless of market prices. By doing this, you can hold the asset through a downturn without worrying about its price.
In real estate, this means buying a property that generates reliable rental income. Rents are typically less affected by real estate market downturns than house prices, and if you have a property with good cash flows, you can hold it through long periods of market turbulence. Once the market recovers, you can refinance or sell the property and use that money to reinvest. (Refinancing usually makes more sense since you retain the cash flow from the original property and often avoid having to pay taxes on the sale.)
Lowering your time preference is a crucial step to success at any endeavor in life. If you can do this, you stand on a solid foundation to create generational wealth for you and your loved ones.