How to Build Wealth in Three Simple Steps | Wealth Strategies for Any Age
Most get rich quick schemes will eventually just make you poorer. However, if you want to know how to build wealth, there are a few simple strategies that are time-tested. Building wealth is not complicated. It is actually very simple. In fact, most wealthy people use these (or similar) strategies to get rich slowly. Although, with a little sacrifice and risk-taking, you can shorten the time frame dramatically.
When I applied to go to college, I had no idea what I wanted to do for a living. I watched my mom and dad struggle financially my whole life. So my goal was to become a millionaire. Not knowing any millionaires at the time, though, I had no clue how to become one. This was a time before Mark Cuban figured out a way to play audio over the internet. It was before Zuckerberg created a social yearbook to remember the names of girls that his friends met on campus. It was also before candy matching games soaked people for millions $1.99 at a time.
Like a lot of young people, I paid my way through college by taking out student loans. When I graduated from school, my first job didn’t pay a whole lot. So, before long, just to get by, I started to charge everyday expenses to credit cards. When I entered the business world, I had a negative net worth.
However, a little over a decade later, I made my first million dollars. It took 12 years to make this first million. Less than six months later, though, I made my second million.
You’ll Never Get Rich Unless You Understand the Difference Between Wealth vs. Income.
Although my income was well over a million dollars every year, I didn’t start building wealth right away, though. There is a big difference between income and wealth. Income is just the amount of money that you make. If your expenses are less than your income, your net will be positive. You will be able to put this excess into a savings account if you like or create an emergency fund. Over time, the savings can grow into wealth. However, this is the process of getting rich slowly. Depending on the current inflation rate, by the time you want to spend these savings, your money will likely not be worth as much as when you socked it away. Income is not wealth. In fact, saving is also not wealth.
You create wealth when you create something (or invest in something) that generates income for you whether you work or not. By the way, you can start building wealth at any age. My son Ben takes after his mom — he’s very good with money. A few years ago, he pulled out his cash box that was stuffed with years of Christmas and birthday money. He had socked away almost $1500 just $20 or $40 at a time.
When the Covid pandemic hit in 2020, the stock market crashed in March and April. In May, Ben bought bargain-priced stock which he sold just a few months later almost tripling his nest egg. We call the money Ben received as gifts income. When he put that money in his cash box without spending it, he created savings. However, when he invested the money he got a return on his investment. This passive income created wealth for him.
How to Get Rich Off of Stocks (Or, Better Yet, Can You Get Rich Off Stocks?)
By the way, I’m not suggesting that investing in stock is a great way to grow wealth. It can be. However, financial advisors who always have great stock tips make money on the sale of the stock whether you ever make money or not. So, you investing in stock to get rich will likely just make your financial advisor rich.
The stock market can be a great way to build wealth, but only in the long run. For instance, Ben took the profit from his investment. As a result, his investment reverted back into saving once he sold his stock.
Back in 2008, my company was roaring. Company income doubled each year. We were experiencing a huge growth trajectory. I hired and trained new team members as fast as we could and invested in company infrastructure. We also had great cash flow as well and no debt. Then, a downturn in the economy in late 2008 caused cash flow to almost stop overnight. All the overhead caused cash reserves to drop exponentially.
At the same time, the stock market crashed. I had an opportunity to buy blue-chip stock at bargain prices (just like Ben did over a decade later.) That year I had made millions, but I missed the opportunity to build wealth because I was flat broke. I swore that I wouldn’t miss the next opportunity. So when Covid hit… well… I fared significantly better than Ben did.
By the way, I have a retirement savings account where I invest in mutual funds regularly. However, I created the account AFTER I became wealthy. Bottom line, if you want to know how to build wealth, yes, you can get there by investing in stocks. However, if you follow the wealth-building process I list below, you will likely fare much better.
The First Step in Building Wealth is to Create a Wealth Mindset.
Wealthy people think differently. They create a wealth mindset. Most people spend their entire careers trading their time and effort for dollars. They work for an hourly fee or an annual salary. As a result, their income is limited by both time (you only have so much of it) and what you can get someone to pay you for your time. I had a mentor once that called this way of thinking “broke mentality.” He used to say this because people who think this way are often financially “broke.”
Rich people (people who understand these wealth strategies) though, see a salary or a wage as a temporary means. The old saying, “The rich get richer and the poor get poorer” is pretty true. It is true because the rich have a wealth mindset and the poor have a broke mentality.
So, the first thing you have to do to build wealth is to change your mindset. Below are a few actionable steps that can help.
Broke People Trade Time for Dollars. People Who Use Wealth Strategies Focus on the Return on Their Investments.
When I was 16, I bought a beat-up old car for $900. I needed to pay for gas and upkeep, so I did just what my friends did. I got a job that paid me about five dollars per hour. With school and activities, though, I didn’t have a lot of hours to trade each week.
My income was limited by the low unskilled pay rate and the small number of hours that I could exchange each week. To make matters worse, my expenses exceed the income. I had just joined the workforce and already I had generated negative wealth. My only saving grace was that in summer, I had more time. So, I worked all summer each year to store up enough savings to cover my expenses for the rest of the school year.
A decade and a half later, I repeated the same mistake but at a much higher pay level. I took the risk to start my own company, but I was my only employee. So, when I taught a class, no one was manning the phones, answering emails, sending invoices, updating the website. Potential customers had to wait until I had time to respond. I often worked 60 to 80 hours a week. My income was great, but my lifestyle stunk.
Eventually, I brought on an apprentice. It took me two years and probably about $50,000 to fully train him. However, over the next decade, he generated over a quarter of a million dollars in billable hours each year. Once he was trained, he generated significant income for himself and he also generated wealth for me.
I leveraged my time by training another teacher. I spent time and money to do so, but I got a return on that investment. To build wealth, leverage your time.
Build Wealth by Building Your Risk Tolerance.
For over two years prior, I thought about hiring someone but resisted the urge. I was worried that the company didn’t have enough capital to support employees. Bringing on staff was a huge risk. I spent — I invested — a lot of time and money to train my team. Within a couple of years, I had a half-dozen team members at different stages of the training process.
The risk paid off. In the third year, we doubled our revenue from the second year. And in the fourth year, we doubled revenue again. Just before Christmas that year, without much money in the bank, I decided to give the whole team a bonus. However, my accounting system was still an Excel spreadsheet, and I miscalculated. As those bonus checks started to clear the various banks, the extra money in my account got lower.
Back then, customers sent checks to our post office box. Every day at 1:00 PM, I’d rush to the mailbox to see if any payments had arrived. On day one, there were no checks. The next day, I slowly opened the box and… there were still no checks. On day three, I prayed twice before inserting the box key. However, the box was still empty.
That same day, two of the bonus checks cleared my bank. I wouldn’t have enough money to cover the next one. The next day, though, three big checks arrived. I rushed to the bank to deposit them before the daily cutoff. Then, a few days later three more checks arrived. The next week almost a dozen more were there. By the start of the new year, the company bank account had grown to over $100,000 and continues to grow.
It was risky starting a new company. However, eventually, the reward was worth it.
A Wealthy Mindset Also Means that You Have a Belief in Yourself and Your Abilities.
Although there are a few exceptions, most people pretty much good paid what they are worth. Specifically, we all get paid for the problems that we solve for others. For instance, hungry people are willing to pay a restaurant for food. On a special occasion, people will pay a higher fee for this food just for a better experience. All commerce is an exchange of money for a solution to a problem. If you work for a company or boss who pays you to do a certain task, your value is based on the solutions that you provide.
A few years after college, I got hired to sell satellite dishes door-to-door. It was not a glamorous job, but I learned a lot about selling and business very quickly. During the interview, I remember thinking, “This guy interviewing me is not really sharp. If he can make a living doing this, surely I can.” I was right. In my first few weeks at the company, I broke all the sales records.
A few weeks later, the manager quit. The owner of the company told us that he was sending in a manager from a different location. When the meeting ended, I went to the boss and asked if I could have the job. He was floored. I had only been with the company a few weeks. While he didn’t promote me right away, I made an impression on him.
The new manager was horrible. Our office lost a ton of money very quickly. Eventually, the owner let him go. This time, he gave me a chance. I got the location back on the right path and my entire team began breaking sales records. I made more in my bonus check that month than I did in salary at my last job.
Step #2 to Build Wealth is to Increase Your Income and Household Profit.
Earlier, I mentioned that employers pay most people exactly what they are worth. When I say this, sometimes people will argue with me. “My boss doesn’t pay me enough!” or “I deserve way more salary than what I’m being paid.” My answer is always the same. If your services were worth more to the marketplace, you’d automatically be making more money. The good news is that you can immediately increase your income just by making your value to the marketplace higher.
In this section, I’m going to show you the easiest ways to add additional income to your household and create good financial habits to increase wealth.
The Best Way to Get a Raise in Wages or Salary.
Obviously, the best (and easiest) way to increase your income is to get a raise in wages or salary. Remember that your boss will pay you based on the problems that you can solve for customers. So, if you show your boss that you can solve more problems for more customers, you increase your value to the company that you work for.
In the mid-1980s, Richard Montañez worked for $4/hour as a janitor in a California Frito Lay plant. The CEO sent a companywide initiative where he encouraged employees to “think like the owner.” Montañez set an appointment with the CEO and suggested a few ideas to better target the Hispanic market. This conversation led to the Flamin’ Hot Cheetos product. Montañez retired in 2019 as the Director of Marketing and is currently worth over $20 million.
You don’t have to invent a multimillion-dollar product, though. A couple of years ago, I highed a manager for my company who had a lot of success in a totally different industry. We were both excited about the opportunity. However, within a month or so, it was clear that the expertise he had in his previous industry didn’t transfer over to ours. Eventually, we parted ways, but I had put myself in a bind. Business was booming, and I needed to fill the position very quickly.
My administrative assistant came to me and offered to add the manager’s responsibilities to her role. She was already fully trained so it worked perfectly. We eliminated an entire manager’s salary from our annual expenses, and she was efficient enough that the extra work didn’t take up a lot of additional time. A few weeks later, she came to me to ask me for a raise. I gave her the extra salary without even questioning it.
Work in a Position that Offers Extra Income for Extra Service
Another easy way to increase income is to work in a position that pays commission or tips.
Years ago, when I traveled to Houston, I stayed at an Embassy Suites near my client’s office. The hotel offered a complimentary cook-to-order breakfast. So, the first time I stayed there, the chef asked me how I liked my omelet. I answered and the breakfast came out perfectly. I left a little money for him as a tip. The next morning, he remembered my previous order and asked if I wanted the same thing. I did. This time, I left a bigger tip.
Three months later, I returned to the hotel and was shocked when he remembered my order and had it on the plate for me before I even asked. He had seen me in line and started my order from memory. This time, I left a very generous tip. Looking into his tip basket, I realized that I wasn’t the only one impressed with this fantastic chef. He probably doubled or even tripled his income just by serving his customers a little better than most people.
Of course, one of the best ways to make a lot of money is by working a job that pays a commission. Keep in mind that the more risk you take, the more reward you will receive in a commission sales job. For instance, if you have a commission-only sales position, your company will likely be pretty generous with the percentage of the revenue that you receive. However, if you receive a base salary, the higher the base, the less of the revenue you’d be able to keep as a commission.
So if you want to have huge upside potential for income, commission only is the way to go.
You Can Always Increase Your Income with a Side Hustle.
No matter what your financial situation, if you aren’t being paid what you think you are worth, you can always take on a side gig. When I first left my secure nine-to-five job to go into commission sales — well, I wasn’t that skilled yet. I did okay. But I certainly wasn’t in a position to build a lot of wealth. So, while I learned the ropes and perfected my skill, I bartender at night. This side hustle helped me eliminate credit card debt and pay off student loan debt. After a little time, my income increased and the side hustle was no longer necessary.
Years later, a leadership development coach offered to allow me to be her apprentice. Basically, she showed me how to build a consulting business from scratch. This allowed for huge upside potential, but in the beginning, I had zero income. So, I spent the entire business day (and a lot of late nights) building the consulting practice. And from 5 PM to 9 PM, I worked in a call center. By the way, this job stunk. It was not fun, and I did not enjoy it. But, it allowed me to spend the best part of my day building my clientele.
In some cases, your side hustle may be the road to financial security. Sara Blakely created her company Spanks in her apartment while selling office machines for Danka during the day. The company hit the big time when Oprah Winfrey featured Blakely on her TV show. Blakely kept her job at Danka even after the appearance and didn’t quit her day job until Neiman Markus and Saks Fifth Avenue picked up her line.
Step #3 to Build Wealth Is to Create Multiple Streams of Income. (Get Your Money to Work for You.)
Broke people work for money. Wealthy people get their money to work for them. The old adage is “You need to have money to make money.” That is misleading. For instance, in the modern world, you can create a business without any real capital investment. For instance, when my daughter was in High School, she created a t-shirt company. She designed the t-shirt styles (images) on Canva. Without ever creating a store (and only adding a website later,) she took orders through social media and Etsy. Her customers paid her upfront for the shirts. When she got enough orders, she’d send the design (Canva image) to a local screen printer. Only then did she send out shirts to her customers.
This company was a stream of income that she created without any money being spent until she had collected revenue from customers. Granted, it took a lot of time and the income wasn’t significant. However, she built up a client list that loved her style and her products. So, anytime she had a new idea, she had a list of potential customers. As time went on, the customer list grew and grew. Each new t-shirt style became more lucrative.
In the beginning, she worked very hard to make a single sale. Back then, if she added up her time, she was likely making much less than minimum wage per hour. However, as her client list grew, the number of work hours per sale dropped significantly.
Basically, if you have more income than expenses, you can invest that money to generate additional streams of income. If you don’t have more income than expenses, you need to invest some of your time to generate the additional streams of income.
Interest that You Pay to Other People Is a Negative Stream of Income.
Along those lines, if you spend more money than you make, you will always be poor. However, if you make more money than you spend, you can easily generate wealth from day one. Interest for debtors is your biggest obstacle to wealth. However, interest to creditors is the biggest source of wealth.
Let’s say that your take-home pay is about $4,000 per month (about $50,000/year.) If you spend just $4,100 per month, after year one, you will owe at least $1400 in debt. That is basically picking up a single dinner or bar tab for a small group of friends in a month. Or it could be splurging on that $5 latte on your way to work each day. It doesn’t take a lot to go over your budget just $100.
If the interest rate on that debt is just 16.4% (the average credit card interest, right now,) the interest gets added onto that $100. So, you actually owe $101 dollars at the end of month one. Doesn’t sound too bad, does it?
However, by the end of the first year, you’d owe about $1431. You got $1200 worth of value. You bought $1200 worth of food, gas, clothes, etc. But you paid $1431 for it. You paid almost 20% more for everything that you bought. So each of those $5 lattes actually cost you $6. By the end of the second year, the actual cost of each $5 latte is $7. Two years later, you will be paying almost $10 for a latte that everyone else pays $5. In fact, from that point on, everything that you buy over monthly income will eventually cost you double.
The opposite is true though too.
Invest in Yourself to Create New Income Streams.
If instead of spending the $100 each month, you invested it, you’d have developed an additional income stream. Let’s go back to the stock market example. You invest your $100 each month into a general mutual fund. At the end of the first year, you that $1200 of stock you purchased throughout the year will have a value (on average) of about $1,257. So you gain a measly $57 in profit. Just as before, nothing very exciting yet.
However, shortly after the second year, the value of the stock (on average) should add up to about $25 per month. Since you are investing $100 each month, you are getting about 25% interest on every NEW dollar spent. You put in $100 and generate $125 in value. At the end of year seven, every $100 investment generates $200 in value.
At this point, if you stop putting in the $100 per month, your money would grow at the same rate it did the first year anyway. But if you do this, you are missing out on the great advantage of the additional investment. Because by the end of the 13th year, you will have doubled your investment.
Keep in mind, though, that this is an extremely low-risk way to generate wealth. So it takes much longer. Yes, there will be times during that 13-year mark where your investment goes down. But, on average, the stock market typically generates about 10% growth each year.
The Higher the Risk, the Bigger the Reward When You Build Wealth.
Instead of investing in stock, what would happen if you put a down payment on a small house? Instead of setting aside $100 each month, we eat peanut butter sandwiches for dinner and bring our lunch to work. We put aside $500 each month for a whole year. At the end of the first year, we have $6,000 in cash. If we use that as the down payment, we can probably buy a house listed at around $85,000. (Don’t laugh. I just looked at Zillow and found one. It ain’t pretty, but it is a single-family home in a big city.)
We plant some grass in the front yard, paint the place, and clean it up. As a result, we charge $800 in rent each month. Because we put such a low down payment down, the mortgage is about $500. If it costs us $1000 a year for maintenance, we’d still pocket $2,600 in profit.
With the same spending habits, by the end of the second year, we’d have $8,600 in cash. Now, we tire of being a landlord in the ghetto. So we sell the house for $90,000. When we do, we keep about $11,000 — the original $6,000 down payment that we now get back plus the $5,000 increase in home value. At the end of the second year, we have almost $20,000 in cash to invest into the next project.
This new down payment allows us to purchase property in the $250,000 range. If we invest well, we will net about $8,500 per year in profit from rent. We keep this one for two years, then, we sell it for $270,000. All total we generate $17,000 in rent and make $20,000 from the increase in price. We also get our down payment of almost $20,000 back.
These Are Just Examples of Wealth Building Strategies. Here Is What I Did.
Just to tie up that last example, that’s $57,000 in wealth that we generated in four years.
We do it one more time, and we can buy a half-million-dollar or greater home. Or maybe, we invest the $57,000 to purchase equity in a small business. Or maybe, we get five other people with similar wealth to invest in a one-and-a-half-million dollar commercial real estate project. Once you start to generate wealth, the opportunities are endless.
Here is what I did. For the first six or seven years, I invested in my business and my house. These first few years were very sad financially. We ate at home and watched every penny. We bought used cars and tried to pay cash for them when we were able. Because we were living miserly, my wife and I paid off our house in full in that time. By this time, my business generated profit as well.
We had no mortgage or car payments, and we were able to pay off the credit card debt that we accumulated in those first few years.
Because our family expenses were so low, we were able to put over $3000 every month into mutual funds. After just a year, the fund was worth over $50,000. We later sold the stock and used it as a down payment on a rent house. We bought in 2008 when the housing market was in a slump and got a fantastic house for a bargain. Now, we had no rent or car payment and $1200 of rental income coming in every month. (This was much higher than the 10% a year increase in stock market value.)
Once We Had a Positive Cash Flow, New Investments Came Easily.
Since we had just had our second baby, Ben, we decided a bigger house (with a pool) would be nice. We took some of the savings that we had generated and put a big down payment on the new house. Then, we rented out our old house and netted about $14,000 per year from the rent there. Within a couple of years, we owned both rent houses free and clear and had no debt except for the small mortgage that remained on our family house.
In those first few years, we lived like paupers so that we could live comfortably later. Yes, when I started my business, we had little income. However, we did whatever we could to cut our family costs. At the worst point, we owed over $40,000 in short-term debt. Then the tide turned. I used the techniques that I mentioned earlier to increase my income. It was very difficult to be bringing in close to $100,000 in income but spending only $35,000 or $40,000 of it and investing the rest.
But once we hit the spot where the secondary revenue streams were able to replace our expenses, the wealth grew quickly. In the last ten years, I’ve invested in real estate, oil wells, refineries, and tons of small businesses for equity. All of these investments were risky. (Some were costly mistakes as well.) However, I wouldn’t trade any of these investments. In each of them, I either made money or learned what not to do next time.
You can do the same if you follow the steps above!
