3 Ways to Build Wealth

Over 47% of Americans aren’t investing any money into any type of asset. There are many reasons for this — for some, it’s the fear of losing their money. For others, it’s feeling like they don’t know how or where to start. For many, it boils down to thinking they don’t have enough money. All of these reasons are understandable; however, in order to build and maintain real wealth, you have to invest your money.

*Warning! The following calculations are oversimplified to illustrate a point and do not account for all variables.

Let’s say you make $100,000 per year and you’re an awesome saver. You have a healthy savings rate of 20% (well above the U.S. average of 7.6%) and your goal is to retire (i.e. make work optional) in 35 years.

$100,000 x 20% = $20,000 x 35 = $700,000

In this scenario, you would have saved $700,000, which is a good chunk of change! Unfortunately, even after your great savings efforts, that simply won’t be enough to fund a full retirement or make work completely optional. With life expectancy rising about one year per decade, it’s logical that retirement length will increase as well. Depending on your spending level and how much Social Security you qualify for, you can try to stretch your nest egg. But if your money isn’t growing, the funds will be depleted pretty quickly. The above calculation also doesn’t account for inflation, which significantly diminishes the value of your money over time.

In contrast, let’s say instead of just stashing your savings under your mattress or in a savings account, you chose to invest it in the stock market. Let’s assume a conservative 5% annual return over the 35 years.

$100,000 x 20% = $20,000 invested every year at a 5% annual return rate = $1,806,406

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That’s a million-dollar difference! Investing in income-producing assets will allow you to turn your healthy savings rate into meaningful wealth.

But investing isn’t limited to only buying stocks. Wealth can also be built through the ownership of income-producing assets such as a business or real estate. You can grow your money through any one of these three asset classes or you can utilize a combination; there isn’t a singular path to wealth.

Below is a brief pros vs. cons list to illustrate how each type of investment differs:

Business

Pros:

• High upside/return

• Regular source of income

• Strong link between effort/energy and success

• Sense of control

• Turns your skills into an asset

• Creates a sense of purpose and fulfillment

• Tax benefits

Cons:

• High failure rate

• Significant consequences if you fail

• High stress

• Large time commitment

• Not liquid

Real Estate

Pros:

• Ability to create passive income over time

• Uses leverage (banks) to build wealth

• Offers the ability to increase property value through improvements

• Physical asset

• Tax benefits

Cons:

• Large time commitment

• Requires dealing with tenants

• Maintenance/repair costs

• Generally requires a lot of capital upfront

• Not liquid

• Subject to local real estate market conditions

Stock Market

Pros:

• Historically higher returns

• Liquid

• Easy to spread your risk

• Transparent and real-time pricing

• Low barrier to entry (can start small)

• Low maintenance

• Tax benefits

Cons:

• Transparent and real-time pricing

• Less control

• Volatile

• Emotional rollercoaster

• Difficult to stay disciplined

Each type of asset comes with its own level of risk, reward, and time commitment. There is no “perfect” investment. Everyone has different talents, risk preferences, and priorities that will determine which type of investment best suits them. It’s not required that everyone become a real estate mogul or an entrepreneur to become wealthy; the stock market also provides a way to own these assets indirectly. Pick a wealth-building strategy you can stick with and that fits your lifestyle.

If, for whatever reason, you’re one of the 47% who isn’t investing it’s never too late to start. Start small and build good habits. Just start where you’re at and you might be surprised where you end up.

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“The best time to plant a tree is twenty years ago. The second best time is now.”

― Chinese Proverb

Thanks for reading!