Photo by Maurits Bausenhart
I’m at a certain age that I’ve developed a pretty keen understanding over the years of how to build wealth. I’m also of a certain age that there weren’t many books on the subject and the early “Gurus” in personal finance that are fixtures today, such as Suze Orman and Dave Ramsey, were just getting started in their public careers back then. The result was that I had to come to the lessons that I learned the hard way…by making my own mistakes and significant trial and error.
The other obstacle that kept me from learning these lessons when I was in my 20’s and 30’s was that there was no way to quickly dissipate information other than books, as the Internet would not be available for public use still for some time, and quite frankly, there were very few people who would openly talk about how to build wealth lest they were some Sunday morning huckster selling some get rich quick scheme on cable TV.
A real life tested system for building wealth
To have found a real life tested and numerically sound system of building wealth back then would have been incredibly valuable to so many of us. And rare. As I’ve spent so many years researching the subject of building wealth, I now see that there were certain books written that had many of these wealth building ideas in them but unfortunately not many of these, if any at all, were claimed as being a wealth building system.
The closest to this and probably one of the first, if not the first, would be “Your Money or Your Life” written by Vicki Robins and her partner Joe Dominguez back in 1981. A true classic and a book that deserves a serious shout out due to it being a ground breaking idea of building wealth through frugal living.
Over the past 30 years, I have cataloged a variety of wealth building concepts and ideas. I’ve easily read close to 100 books on the subject and I’ve gone to dozens of seminars on the subject. I became obsessed…a healthy obsession … with the concept of wealth building but nonetheless an obsession.
In truth, I have either put many of these concepts to the test personally or have run them through the appropriate financial models to see if they make any sense. I have also reached out to others who I believed knew a lot more than me on the subject to get their opinion.
By and large, over the years I have developed my own wealth building approach on principles that have been proven to work for me and that match my mindset around money. As importantly, perhaps, is that these same principles that I have followed for many years are also the principles that are now being touted by a new generation of financial strategists.
The 10 irrefutable principles of building wealth that I have followed for the past two decades are as follows:
1. Pay yourself First
Although each of the following laws of wealth building are extremely important, perhaps the most important law is “Pay yourself First”. If you were able to abide JUST by this law alone, you would become a wealthy individual. If you were to pay yourself at a rate of 50% of your income or more, you’d become a VERY wealthy individual.
The key to this law is that BEFORE you pay your bills and spend your paycheck on useless gadgets and services you really don’t need, determine how much you should be paid first from each paycheck. Think of it this way…if you just spent everything that you made on bills and other expenses, you literally aren’t paying yourself anything for the work that you’ve done…just everybody else instead.
2. Don’t own non-income generating assets
The truth of the matter is that if you were to never own a non-income generating asset, such as a single-family house, car, boat, jewelry, etc. you would become wealthy very quickly because a large percentage of your income could then be available to be invested in income producing assets such as stocks, bonds, rental properties, businesses, etc.
Owning income generating assets put money in your pocket, non-income generating assets (or in reality, “liabilities”) take money out of your pocket. It’s that simple. Now clearly, there are those of us that will argue but “I need a house and a car” to live.
True, but if you were to own a duplex or a multi-unit rental property and had renters pay your mortgage and taxes and you owned a substantially older car that you weren’t making payments on, you’d not only have positive cash flow being created for your enjoyment but you’d also have lowered your costs to the absolute minimum.
3. Don’t use debt to pay for items that don’t generate income
To build wealth you simply cannot be in the position of borrowing money and paying interest on things that don’t generate income. More specifically, you NEVER want to be in a position where you have taken a loan out where you are paying interest on things like cars, boats, motorcycles, jewelry and other items. This is called “bad debt” because it doesn’t add to your wealth, it only subtracts from it, and it is the single-handed destroyer of building wealth.
The reason is that the interest payments over time end up making the price of the item when you initially bought it SIGNIFICANTLY more expensive. Interest works both ways…for you but also against you.
4. Take advantage of employer-sponsored retirement plans
It is usually in your best interest to take advantage of an employer-sponsored retirement plan such as a 401(k) or a 403(b) even when there is no match but it is a no-brainer when there is an employer match. As for the former matter, contributing in the program helps you build tax-deferred wealth AND lowers your taxable income. A two for one. In the latter case, to not take advantage of matching your employer contribution is literally turning down free money.
5. Create a ‘gap’ between what you make and what you spend, invest the difference
One of the most basic principles of building wealth is to simply spend less money than you make and invest what remains. Pretty simple! However, as for a little spin on this concept from the “pay yourself first” school, set aside your investment funds FIRST and then dedicate the remaining funds to your reduced expenses. What you are able to invest, in this case upfront, IS the gap that you need to create.
6. “Under buy” your house, transportation and other items
When my wife and I bought our house, the banker told us that we were “way under mortgaged”. More specifically, that with our combined income we could buy a much more expensive house. That one decision to begin with, to buy a house way below what we otherwise could afford, was one of the foundational elements for us becoming financial fit at an early age. In fact, we used to say all the time “Little house, BIG Life!”.
If you can extend this same approach to cars and other ‘must haves’ you might not be able to eliminate these expenses but you’ll sure be able to minimize them as much as possible.
7. Develop a “No Budget, Budget”
Yup. A “No Budget, Budget”. Instead of creating the old school budget where you have a hard figure for each of your family’s individual expenses that you track daily, weekly and monthly a “No Budget, Budget” is intentionally set up for you to save and invest more of your money and worry less about routine expenses.
Here’s how it works; You identify upfront how much of your paycheck that you want to save and invest. Put this amount in investment or saving vehicles. The remaining amount is what you have left over for your expenses. More details on this form of budgeting is available at http://www.elitelifewarrior.com/the-no-budget-budget/
8. Put investments on automation
The only way to be absolutely certain that you will create wealth is to put your investments on automatic deposit. The easiest way to do this is to set up automatic deductions from either your paycheck, in the case of employer sponsored or allowed programs such as a 401(k), or directly from your banking account to a taxable account to invest in a total stock index fund or the S&P 500 Index Fund.
The obvious reason for doing this is so that your money will be invested immediately and not make it’ s way into your hands to be spent.
9. Strive to not trade time for money
The bottom line is that if you trade time for money, your earning power is linear. The amount that you are able to make is limited by the time you work and the amount of money earned is a one-for-one relationship; one hour worked times a set hourly wage. There’s no leverage or residual value for that time worked.
However, if you were a business owner with employees or a real estate investor you would have the benefit of leveraging other people’s time, money and knowledge. The goal is to own assets that can generate income when you are not having to spend your time earning it.
10. Entrepreneurship creates leverage and passive income
As previously identified, if you can operate and manage a system that has other people working on your behalf you have the ability of generating passive income; income that’s generated without you tending to it. This is the highest level of leverage of one’s time.
Entrepreneurship allows individuals to maximize their time in a way where they simply cannot be an employee. Much of this is that time spent as an entrepreneur has the potential for ‘residual value’ for each unit of time spent.
More specifically, should an information entrepreneur create an online course that provides value to the market there is a possibility of someone purchasing that product years after the initial investment of time.
Conclusion
If any of us could successfully execute ALL ten of these wealth building laws, we’d undoubtedly become wealthy. If we could only commit to a couple of these laws, we would also have an incredible shot at becoming wealthy and if we didn’t meet that mark, we would undeniably be in much better financial shape.
I believe if you could only commit to ONE of these laws, over time you stand an unbelievable chance to become financially fit. Even for many of us who may be ‘vocationally challenged’ and may not make a lot of money in our careers, committing to even just ONE of these laws has the potential of changing our financial lives.
I know it has made ALL the difference for me.
