Seven Tips to Start Building Wealth
There are many people who invest their money and generate tremendous wealth. There are also a lot of people who lose their capital.
Investing can be a dangerous game. You need a strategy that is going to allow you to win. Without that, you’ll suffer from lackluster performance, trail the market, and you won’t reach your financial goals.
But what does it take to actually start building wealth? You’re about to find out. In this post, we take a look at some of the strategies that people have used throughout history. You’ll learn what works and what doesn’t, as well as the risks of each.
Work To Accelerate Your Returns
Most people are in a “profit and loss” mindset. They think “I will earn X dollars this month, so I have X dollars to spend.”
When you adopt this mindset, you limit the amount of money you have to what you can earn through your income. You are always chasing paychecks.
However, when you adopt an “asset and liability” mindset, you totally change the game. Now you are thinking about how you can acquire assets that earn money on your behalf.
In Japan, there is the principle of “kaizen.” The idea is to increase your wealth creation by a percentage each month – say 3 percent.
In month 1, you would start with $6,000. In month 2, that would grow to $6,060 and so on.
If you continue this process over two years, you will eventually have $12,315 – a substantial increase in a relatively short space of time.
Research As Much As You Can, Then Commit
When you look at the great investors throughout history, all of them had a strategy. What’s interesting, though, is that they all went about it in different ways. Some focused on finding value stocks while others identified issues with the market that they could exploit.
When investing, you want to research to the point where you believe your strategy will work. Then you should commit. Sticking with a feasible strategy over the long-term can generate tremendous gains.
However, you must be sure that your approach is going to work. Naturally, there is no guarantee that it will.
If you are not sure that your strategy is going to generate wealth for you, then you should seek the help of advisors. Don’t jump into the market without genuine confidence in your abilities.
Make Money When You Buy
Whether you are buying a property or a share, look to make money when you buy, not when you sell.
The market is full of examples of underpriced assets. In some cases, assets are cheap because the market is in a panic. Other times, they are cheap because nobody has understood their income-generating potential yet.
As an investor, it is your job to look past the noise and simply calculate what the asset is really worth. If you find a big difference between the “true” value and what the seller is asking, then you should buy.
Don’t assume that the market is going to go up forever. People made that mistake in 2007 and lost a lot of money. Instead, look for real underlying value. The market will eventually reflect that.
Commit More Money During Busts
As mentioned, the market can sometimes go through wild swings. Sometimes it booms, and other times it craters.
Usually, these wild swings don’t reflect changes in the underlying value of assets. Instead, they are more about investor psychology. So if you can keep your head, you often stand to make a lot of money. You can buy more when the market is down and look forward to higher returns in the future.
If you notice that the market is falling substantially – say by more than 20 percent – see that as a buying signal. As we have seen countless times throughout history, the market always bounces back. Modern economies are exceptionally robust to non-financial shocks. So if there is a crash but the financial system is sound, then you’ll want to get in while assets are on sale.
Rent Out Residential Real Estate
Many wealthy people believe that property is the key to long-term wealth. That’s because it works for them. They simply buy a property using capital they already have and then rent it out to tenants for a return.
Doing this across many properties allows them to build incredible wealth. They generate cash flows that enable them to purchase yet more properties and so on.
Renting out residential real estate is easier than you might think. In many cases, you can simply use a property management firm to take care of maintenance and tenant payments for you.
When purchasing properties, look for those with the highest yield. Don’t look at absolute figures (such as the numerical value of the rent you can charge). Instead, look at how much rent the property can generate relative to the price.
Which is a better deal? A $50,000 property that can generate $10,000 per year, or a $200,000 that generates $20,000 per year?
The answer is the $50,000 because it has a return of 20 percent, while the $200,000 property only has a return of 10 percent. You could buy four $50,000 properties at 20 percent return and make $40,000 per year.
Decide On Your “Why”
Investing can be a lot of fun in itself. But most investors need a “why.” In other words, if they are going to stay the course, they require a compelling reason to do so.
For some, investing is important for retirement planning. For others, it is a lifestyle.
Before you get into investing, think about why you want to build tremendous wealth. How will the short term pain help you in the long-term?
It’s not actually an easy question to answer. When you invest, you are forgoing income in the present to build your wealth in the future. Unfortunately, your time isn’t infinite. The average person can expect to live around 80 years. So using the prime of your life to build wealth can sometimes feel like a raw deal. You’d much rather use your time well now.
The trick here is to really think about what the wealth generating process means to you. Many people deal with it by finding ways to enjoy their lives now, even though they are not directly benefiting from their wealth. They find satisfaction in the little things.
You also want to find a way to enjoy the journey, especially if you decide to build wealth by becoming an entrepreneur. You need to get accustomed to failure and the idea that life doesn’t always turn out how you plan. It’s about learning to love the process and the interesting challenges that it throws your way.
Lastly, building fabulous wealth involves creating knowledge that nobody else has. You want to be able to take a unique angle on things, see the world in a different way, and use that to your advantage.
Gathering market-relevant knowledge can take two forms:
- Learning a rare skill that you can sell
- Learning about how investments work and then using insights to beat the market
Learning is powerful because it provides you with a way to see the world differently. You could be one of just a handful of people who have the skill and insight to take advantage of opportunities when they come along.
The great news is that building tremendous wealth is an option available to everyone. However, you need a plan to get there.