3 Strategies to Build Real Wealth
Most people want to be rich but few actually understand what it takes to build wealth. People generally believe that the way to become rich is to work hard at their W-2 job and slowly climb the ladder through raises and bonuses. Unfortunately, this is a slow process that is typically outpaced by cost of living.
Over time our necessary expenses increase due a growing family, lifestyle inflation, market inflation, and those pesky emergency expenses that randomly interrupt our lives. As Robert Kiyosaki says, in his seminal finance book Rich Dad Poor Dad, trading your time for money vastly limits your income potential.
We only have a finite amount of time and energy throughout the day and for most there is a cap on how much we can earn for our time. Even when there is growth potential within a job, rarely does your pay increase as quickly as you need it to. Many people become frustrated and discouraged when they find that their hard work has resulted in very little, if any, momentum toward financial freedom.
We also cannot count on increased pay from the place of our employment, as there is no guarantee that we will be given a raise or bonus. Before the 2008 market crash, people felt very secure in their jobs. They relied on the fact that they had a steady job and a retirement account waiting for them when they turned 65. Some even had a pension. However, the market crash resulted in massive layoffs and business closures. Many people lost their job and their retirement.
We need to learn from their mistake and realize we can’t rely on our current W-2 job as a secure future. Building wealth through one income stream means that you are completely reliant on that job and you are in a dangerous position if that job falls through. Job loss can occur from things outside of your control such as market crashes or poor business management.
Our longer lifespan means that we are far more likely to experience some form of disability throughout our lifetime. We could develop a life threatening illness, serious injury, or have to care for a family member, making it impossible to work fulltime.
So relying on one income stream is not only slow, it is also risky.
Reducing living expenses and maintaining a responsible lifestyle is essential, however, is it only one half of the solution to this problem. There is a limit to how much you can reduce your expenses and there will be times in life where unexpected expenses pop up.
In order to build real wealth, we need to have multiple streams of passive income in addition to living within our means. It is not enough to spend equal to what we earn. We need to spend significantly less than we earn and we need to make our money work for us with minimal time and effort on our part.
The most effective way to achieve this is through the following three strategies:
1. Stock investing:
Investing in the stock market is probably the most common way that people build wealth. It takes the least amount of time and effort compared to the following two strategies. However, it also offers the least amount of control.
Everyone should have some form of retirement investment account such as an IRA or 401k. The type of account will depend on a variety of factors such as your income, age, and retirement plan. You can also have regular investment accounts in addition to your retirement account.
While there are several different strategies involved in stock market investing, the one that is most commonly recommended for the average person is investing in index funds or exchange-traded funds (ETFs) using a robo-advisor. This is because your money is distributed across more funds, thus mitigating your risk exposure and giving you the best chance of growing your money.
Robo-advisors tend to match the market, yielding the same or in some cases, better results than an actively managed fund. The fees associated with robo-advisors are lower as well, which means more money in your account. Check out Betterment or Vanguard.
2. Real estate investing:
This strategy involves buying income-producing property. This should not be confused with thinking that your personal residence is an investment because chances are that is not the case. People often believe that owning a house is a great way to build wealth. However, simply buying a house to live in is rarely a good investment.
Real estate investing involves buying a property that you rent out or buying a property for equity. Rental income should not only cover the mortgage but also the maintenance expenses and money left over for profit. Equity, on the other hand, is selling a property for more than you bought it for.
You should not be using the same criteria for buying an investment property that you use for a personal residence. While real estate investing could pay off big time, it also carries a hefty price if done carelessly. In order to mitigate risk, make sure to educate yourself extensively before committing to a property. Our favorite resource for learning about real estate investing is through the website and podcast Bigger Pockets.
3. Own a business:
The most time intensive strategy is creating your own business. There is typically a greater upfront cost and effort required but the payoff potential is unlimited if done correctly. This option also allows for the most personal control.
A business could entail selling a product, a service, or knowledge. It could be a brick and mortar store or an online business. There are limitless options for creating a business and it has become for more achievable since the advent of the Internet. There is a plethora of free information online to help you come up with ideas and learn to start your own business.
Before creating a business, decide on your end goal. Do you want to create something that can be sold so that you don’t have to continue maintaining it? Do you want to have a business that is mostly self-sustaining so it requires very little of your time while generating continual income? Once you know your desired outcome, it is far easier to narrow your options and make sound decisions.
Ideally, you should capitalize on all these strategies to create multiple income streams and grow your wealth far beyond what you could make at your job. All these options require you to educate yourself, commit time and money, and take some risks. However, the long-term payoff far outweighs any possible downsides.
You need only to look to real self-made millionaires to see these three strategies used. Almost every one has used some or all of these wealth-building vehicles. The power of these strategies is in their ability to create exponential growth.
This means that, although they are time consuming initially, once they are well established their ability to produce income multiplies over time with less time and effort on your part. This is the very definition of making your money work for you.
To learn more about creating assets and gaining wealth through passive income, we recommend reading Rich Dad Poor Dad, it is the most inspiring and influential business book out there!