The best ways to build wealth are through active and passive income sources, a budget, and investment returns.
Real estate is a well-known wealth-building asset and has historically provided high returns on accumulated wealth. Another popular wealth-building asset is publicly traded stocks.
1. Invest in Real Estate
One of the best ways to accumulate wealth is through real estate. It offers several benefits, including the potential for monthly cash flow from rental income and significant tax advantages. This type of investment can also provide long-term wealth growth through property appreciation.
In fact, real estate is the most popular wealth-building strategy across all generations, according to a recent survey. The baby boomers surveyed were the most likely to name real estate as their top wealth-building strategy, followed by Gen X and millennials.
Real estate investments can take a lot of time and research, so you’ll want to ensure that you make the right decisions. For example, it’s important to understand the local market and know what type of returns to expect. You’ll also need to be prepared for unforeseen expenses and maintenance issues.
Another option is to invest in exchange-traded funds (ETFs) that focus on real estate, such as REITs or syndications. These are similar to mutual funds but are traded on public exchanges and typically have lower fees than traditional mutual fund shares.
Finally, you can also build wealth through private notes, which are promissory notes that promise to pay back a debt and are secured by real estate. This type of investment can be more risky than other types of real estate investments, but it can offer high returns and the ability to diversify your portfolio.
2. Invest in Yourself
Investing is placing money into something that will yield a greater return than it costs. People often invest in paper assets like stocks and bonds, real estate, or businesses, but investing in yourself is the single most important thing you can do to build wealth.
Whether it’s spending time working on your personal growth, developing positive new habits (while breaking negative ones), or becoming more financially savvy, every investment you make in yourself has the potential to yield returns that will improve your quality of life exponentially. While it may be hard to justify spending your cash on yourself when inflation is at a 40-year high, the investments you make in yourself will pay off tremendously in the long run.
When it comes to investing in yourself, the best way to start is by creating a plan for the future. This can be as simple as writing down your goals and a plan for how you will achieve them. Then, make sure you keep track of your progress and make adjustments as needed. Having a clear vision of what you want to accomplish will give you a strong sense of purpose and help motivate you. This will also keep you from getting distracted by other things or giving up on your goals altogether. Creating this plan is one of the most effective ways to invest in yourself and get ahead.
3. Set Up Multiple Streams of Income
Building multiple streams of income is a key strategy that many millionaires use to build wealth. This is because it helps you diversify your sources of income so that if one of them fails, you still have other income coming in to support you.
However, creating multiple income streams isn’t easy. It takes time, money, and a lot of energy to manage multiple businesses or investments. In addition, most people don’t have the negotiating skills or business expertise to run several different income streams simultaneously. Plus, each new stream of income adds more complexity to your life.
One of the easiest ways to start a stream of passive income is to invest in a laddered bond portfolio, which will throw off more interest than you spend and offset inflation. Another option is to start a side hustle, such as writing, consulting, or delivering online content. Or you could invest in rental properties, but that typically requires a large upfront capital investment and requires you to be able to deal with the ups and downs of real estate investing.
Before you pursue a new income stream, decide what your goals are and how this income stream will help you achieve them. Also, remember that happiness and true wealth have more to do with living for fulfillment than making lots of money. Shiny object syndrome is a common trap that can distract you from your goals.
4. Eliminate Debt
One of the biggest reasons people struggle to build wealth is spending too much of what they earn. If you want to build wealth, you need to be able to save and invest.
That means reducing your expenses and living below your means. It’s also important to pay off debt, especially credit card debt. It’s a good idea to start by tracking your spending for a month or so using a financial software package or even a small notebook. You’ll be amazed at how much money you’re throwing away on things like swiping your credit cards or buying coffee on the go.
It’s not necessarily bad to have some debt, but in general, it’s important to focus on paying off the high-interest debt first, like credit card debt and personal loans. It’s a good idea to prioritize paying off that type of debt because it will help you save more and ultimately grow your net worth.
Some types of debt can actually be helpful, such as mortgages and student loans, and they can often be used to leverage your investment returns. However, most other types of debt can impede your ability to build wealth. For example, personal loan debt, credit card debt, and car loans can all add up and significantly increase your interest payments. It’s important to find the right balance between efficient and inefficient debt so that you can build wealth over time.
5. Be Frugal
A common belief is that the fastest way to accumulate wealth is to save every penny and live a frugal lifestyle. But according to MJ DeMarco, this mindset holds you back from acquiring real wealth.
Frugality can be a powerful money lever, but it’s important to understand its limitations. Saving more can only get you so far, and it’s important to ensure that your income is growing faster than your expenses.
To accomplish this, it’s critical to develop a budget and prioritize spending less. This includes avoiding unnecessary spending, using coupons, negotiating prices, and buying used goods instead of new ones. It also means learning to differentiate between needs and wants and determining whether a purchase is worth the price tag.
DeMarco also recommends investing in yourself by getting a degree or certification that will lead to a higher salary. Lastly, he suggests that you max out your 401(k) and IRA. These investments are pre-tax dollars that will help you save even more.
Finally, he advises that you avoid making money decisions out of fear. This can include being too conservative with your investments, being afraid to take on debt, or putting off career opportunities that will help you earn more. This type of behavior is a recipe for financial disaster. It’s important to remember that the number one way to accumulate wealth isn’t by living a frugal life but by increasing your income and building a business.
6. Create a Positive Cash Flow
When you’re looking to build wealth, it’s not just about how much money you have in the bank or your investment returns. You also need to ensure that you’re spending less than you’re making. This means creating a positive cash flow by cutting costs, improving productivity, and eliminating unnecessary processes.
For most people, the best way to achieve a positive cash flow is through entrepreneurship in some capacity. Many of the world’s richest people weren’t employees but rather business founders, and this type of venture can often deliver very high rates of return over time.
In contrast, traditional assets like stocks and retirement accounts tend to have lower rates of return but do offer a steady income stream. Other wealth-building assets include private notes secured by real estate and physical commodities such as gold and silver.
The key to building wealth is a long-term strategy that includes setting realistic goals, saving regularly, investing wisely, and paying off debt as quickly as possible. It’s also important to avoid depreciating assets like cars and boats, which typically lose value over time. Finally, it’s essential to set up a proper budget to track your monthly income and expenses so you can see where you stand month-by-month. Effective cash flow budgeting is all about abundance and focuses on wealth creation, while traditional budgets operate out of scarcity and focus on paying off debt and getting ahead.
