Key Takeaways:
According to a study by Credit Loan, three in four Americans feel they are living paycheck to paycheck. While their sentiment may be attributed to several factors, many individuals lack the income to support their regular lives. The solution to this problem can be found through a combination of financial education and wealth building assets. Individuals who opt for the right planning and investments can supplement their primary income and work towards financial success.
The reason wealth assets are instrumental in achieving financial freedom is that they offer a chance to generate income from multiple, high-yielding sources. Read our guide to wealth building to learn about the right options for you.
What Is “Wealth-Building?”
Wealth building is the process of generating long-term income through multiple sources. This refers to more than job-based income and instead includes savings, investments, and any income-generating assets. The wealth building definition relies on proper financial planning and insight into one’s future financial goals. Many individuals will turn to wealth building as a way to secure a strong financial future.
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The 3 Steps To Wealth-Building
To build wealth over time, you must follow three simple steps: make money, save money, and invest money. Before investing, it is essential to have a reliable income source that spans your long-term financial future. After a reliable source of income is assured, it is recommended to set a concrete savings plan. Finally, it is time to invest.
1. Making Money
This step may seem obvious, but it is essential to state that a constant source of reliable income over time is fundamental to wealth-building. A small amount of regular savings from this source of income can compound into a substantial amount. An important question to ask yourself is whether or not your current job can provide you with a regular amount of savings for 40 to 50 years. If not, it may be time to look for ways to increase your income.
The two basic types of income are earned and passive. Earned income comes from your regular occupation, while passive income comes from investments. To increase your earned income, you may first have to make changes in your occupation. If you’re considering a career change, ask yourself some questions to help you decide on your new job. For starters, what do you enjoy doing, and what skills are you naturally good at? Finding a job that aligns with areas in which you excel and duties that you enjoy will naturally allow you to perform better and start improving your income. Of course, you’ll also want to make sure that your chosen career will pay well. Consider investing in your education and other forms of training to help you become a stronger candidate for your desired job.
Once you find the proper financial stability, you can start saving and investing.
2. Saving Money
Many people live comfortably after finding financial stability, yet they still don’t save their money well. The second key to wealth-building is setting aside a portion of your earned income regularly. Once you have saved enough, you can start investing to grow passive income. Here are a few ways to to start saving money:
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Keep track of your spending each month, and then crowd out the items, services, and experiences that you don’t actually need.
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Adjust your budget as your experiment to the point in which you’re saving every month, but also aren’t depriving yourself to the point that life isn’t enjoyable.
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Always have about 6 months’ worth of expenses saved in case of emergencies. Having a cushion will help prevent you from derailing your finances every time something unexpected happens.
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Contribute to your retirement plan. If your employer offers a matching plan, definitely take advantage of it. Don’t leave free money on the table.
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Set up automatic transfers in accordance with your pay days, setting aside an amount you usually plan to save. This will help you build the amount you can invest without even thinking about it.
3. Investing Money
Finally, once you have a stable foundation, you can start investing your money. However, to build a diverse investment portfolio, you will have to take a few risks. It is important to research how much asset allocation is appropriate for you. While you can do this research yourself, using a financial advisor is also recommended for new investors. They can help you gain clarity on your investment goals, time horizon, and how much risk you can stomach. Based on these insights, they can help you build a diversified portfolio that is risk-averse, moderate, or aggressive, based on your preferences.
Note that there are several robo-advisors and investing applications that are beginner-friendly as well.
Paying Off Debt Vs. Investment
The key to deciding whether to pay off debt or invest is by looking at your interest rates. Is the debt growing faster than your investment would? If yes, it makes sense to pay it down before investing. This is typically the case with credit card debt, which often charges well above the average interest rate for unpaid balances. After you’ve paid down these high-interest charges, then focus on how to grow your money through investments.
What Are The Best Wealth-Building Assets?
Traditionally, the best wealth building assets are real estate, private notes secured by real estate, stocks, and certain retirement accounts. This is because each of these assets has the potential to generate continuous cash flow. While other wealth building assets can provide returns for savvy investors, these are thought to be the most high-performing.
Other wealth building assets include bonds, CDs, mutual funds, annuities, and more. Timothy Woods, owner, director, and editor of Carnivore Style suggests that “the best wealth-building assets investors should own are stocks/equities as they have high historic returns. They are easy to own and trade are low in maintenance. Another best is Bonds as they have lower volatility. They are good for rebalancing and have safety in principle”. While certain wealth building assets are considered more high-yielding than others, each opportunity will come with some tradeoffs. Keep reading to learn more about the best wealth building assets as well as each strategy’s pros and cons.
Real Estate Investing
Real estate is perhaps one of the most well-known wealth-creating assets. Historically, real estate has proven to be a high-yielding investment for those who know what they are doing. According to a 2017 study, the average rate of return for real estate over a roughly 150 year period was around eight percent. The next closest performing asset was stocks, with an average rate of return around seven percent. Other wealth building assets, like bonds and CDs, averaged below three percent.
Real estate’s high performance results from several factors, ranging from the potential for monthly cash flow through rental income to the significant number of tax breaks available to investors. For those interested in getting started, generating wealth through real estate will require choosing the right exit strategy and property type.
Start by researching your desired market and determine which areas have the most opportunity. Some options include residential real estate, commercial properties, and vacant land. While residential real estate involves strategies like renting out vacation homes or reinvesting returns, be sure to read this article.
Private Notes Secured By Real Estate
Real estate notes refer to promissory notes that guarantee to repay a mortgage or loan. They are an alternative to investing directly in real estate and instead award investors the chance to act as a lender. Private notes are an attractive vehicle for building wealth through real estate because they allow investors to take on a more passive role. This strategy does require a bit of background knowledge to be successful. Therefore investors should be sure to do their research before getting started.
There are a few basic private notes to be aware of, including loans for investors who rehab properties, seller-financed notes, and loans for homeowners. Loans for fix-and-flip properties typically pay high interest rates and are short-term, ranging from six to 12 months on average. Notes for seller-financed properties can be profitable if lenders know what to expect. Before looking into this opportunity, be sure to familiarize yourself with seller financing. Finally, investors can act as a lender for regular homeowners. This setup is relatively straightforward and involves acting as a lender for aspiring homeowners.
When working with private notes, investors must have a screening system for borrowers. Be sure to look at the loan-to-value (LTV) ratio and a borrower’s debt-to-income ratio. Private notes can be a strong investment when managed correctly; however, it is good for investors to understand the system before getting involved fully. If you are interested in learning more about private money lending, check out this article.
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Stocks Of Publicly Traded Companies
Publicly traded stocks are another well-known example of wealth assets. Stocks award investors the opportunity to buy shares in companies and earn profits. Stocks have proven to be a strong wealth building asset over time. As previously mentioned, according to a 2017 study, stocks were found to be a highly successful investment with the rate of return averaging around seven percent. Many investors find stocks to be a successful investment over time, though they can be unpredictable in the short term.
Compared to other wealth-building assets, many investors will find that publicly traded stocks can represent an opportunity to diversify. Entrepreneurs who find success with other investment strategies can use stocks as a way to grow their profit margins. If you are interested in a direct comparison of stocks vs real estate, be sure to read this article.
Retirement Accounts
Retirement accounts, particularly 401(k) and Roth IRA accounts, can be excellent wealth-building assets. But, there is a catch involved: you cannot access the funds until you reach retirement age. While these options will not boost your regular income now, they can provide you with a financially stable future.
A 401(k) is a contributory retirement account offered through workplaces to employees. Some employers will even match contributions up to a certain amount, essentially providing employees with free money for the future. Contributions are tax-deferred until you withdraw, and can build up substantially over time.
A Roth IRA is another retirement option, but you can set one up independently from an employer. The contribution limit is currently $6,000 for filers under 50, or $7,000 for filers 50 and above. Again, the funds cannot be accessed until retirement age but this is a great way to build your wealth over time. Retirement accounts may not be as interesting compared to real estate or stocks, but these are crucial assets in terms of planning for the future.
Assets To Avoid For Wealth Building
There are numerous investment types available that can build wealth. While no one can tell you exactly how to craft your portfolio, some general guidelines can help you learn what to avoid.
Depreciation
The worst assets for wealth building include anything that loses value over time, called depreciation. For example, buying cars and boats may seem like a fun or interesting opportunity as you grow your wealth. However, when you factor in maintenance and general usage costs, you will likely lose money when selling these assets. There are a few exceptions for vintage or rare cars — but for the most part, these are not recommended for wealth building.
Liquidity
Another important factor to look out for when selecting assets for your portfolio is liquidity. This refers to how quickly an investment can be sold. When it comes to collectible assets, such as wine or stamps, it can be hard to identify a buyer when you are ready to sell. This can result in lower than expected offers or longer investment timelines than you were hoping for. That being said, some investors will get heavily involved in these industries, which can help them turn quite a profit on these assets. Consider depreciation and liquidity as you craft your ideal wealth building portfolio to avoid losing any potential profits.
Summary
The answer to “what is wealth building” is important for anyone looking to supplement their existing income. By creating a wealth building system, entrepreneurs can establish a successful investment portfolio and achieve financial freedom. Choosing the right wealth building assets comes down to which opportunities best suit your financial goals. With the right planning, aspiring investors can be well on their way to generating wealth through real estate and other assets.
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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.
