We've all heard the infomercials touting various “get rich” schemes and strategies.
Some focus on a particular form of investing, ranging from real estate to new product development. Some advertisers promise a huge income that you can earn without ever having to leave your house. There are also seemingly endless streams of revenue and income generating ideas in newspaper classified sections and on the Internet, of both the website and email variety.
Some of these opportunities are legitimate and some are not. The ones that are legitimate, however, all have something in common. There are really only two ways to build personal wealth and every legitimate wealth building opportunity includes one or both of these ways.
Before I divulge these two ways, let me first put a few qualifiers in place. The operative word in the preceding paragraph is “build.” I am not counting inheritance, gambling or lottery winnings, or any other gain that is representative of either luck or a one-time occurrence. Secondly, the type of wealth I am referring to is purely the monetary type. The secret of building a life full of the type of wealth that really matters will need to be covered in another forum.
With that said, the only two ways to legitimately build wealth are through ownership and the development of passive income.
Let that sink in for just a moment. Are you stunned at how simple the formula is?
In many cases, the concepts and events that appear to be the most complex for us to understand are actually very simple when appreciated for what they really are. The concept of wealth development is no different.
While the ideas of ownership and developing passive income are simple, they still are rooted in a concerted effort and hard work. Perhaps the best things to remember about the core avenues to wealth is that they are available to everyone and you do not need any so-called “experts” or “financial gurus” to show you the way.
Ownership is a key to building wealth because of the equity it typically represents and the value that you can achieve through the rights afforded to you as an owner. It can be accomplished in a variety of ways with only one requirement. It must be ownership in something of appreciable value. Owning your own toothbrush or even your own car does not count.
Of course, the most common form of ownership is home ownership, the importance of which should never be under-estimated. Home ownership is the most tangible, direct step that most of us will ever take toward developing personal wealth. Your home is typically your most valuable asset and becoming a homeowner is symbolic of a commitment to achieve and cultivate your stake in the economy and your community.
Another common form of ownership can be achieved in the business world. For every business that exists, there is obviously an owner or owners to go along with it. There are hundreds of thousands of businesses currently in operation and almost as many sizes, types and varieties. Some began with a simple idea, some are multi-national conglomerates, but ownership in a business is something that is available to anyone regardless of one’s financial position.
One example of business ownership is your membership in a credit union. Credit Unions are financial cooperatives owned entirely by their members. What constitutes membership varies slightly for each credit union, but you can often become a member (owner) with an investment of $50 or less. As an owner, you are then entitled to dividend payments on your investment. Becoming a member of your credit union is one of the quickest and most surefire ways to business ownership so if you don’t already belong to a credit union, make it a point to sign up today.
The main point to derive from these ownership examples is that there are no barriers to entry. Ownership is not exclusive to the privileged few. Virtually anyone with the desire and plan to be an owner can be one, so there are no excuses for not immediately setting a course toward owning something worthwhile if you have not done so already, whether it be a home, a business, or a piece of your credit union.
Making an ownership commitment will not unilaterally make you wealthy, but it will put you on the right path to greater financial freedom and it will help you to develop the mindset that you will need on that path.
The need to develop passive income is another way of saying the need to make your money work for you. Active income is the type of income that you earn as a direct result of your labor. The salary that you earn from your job(s) is an example of active income. Dividends, interest payments, capital gains, and other forms of investment returns are all examples of passive income. The importance of passive income is simply that it is not reliant on you being at a specific place at a specific time. You will earn it regardless of where you are devoting your efforts. It is an exponential expansion of your earning power and again, it is something that is available to virtually everyone.
The easiest and quickest way to develop passive income is to begin contributing to an employer sponsored pre-tax contribution program, such as a 401(k) plan or a variation thereof. It is easy because you can set up your contributions directly through your employer and the money is taken directly out of your gross earnings before you receive your paycheck. It is quick because many programs include employer contributions that directly increase your return so it is one of, if not the best investments (in terms of a return) that you can possibly make.
Participating in a qualified plan is just one example of a step you can take to begin to develop passive income. Other common examples include establishing a savings account, purchasing a certificate of deposit, setting up an Individual Retirement Account (commonly known as an IRA), and investing in stock or mutual funds.
Clearly, this two-step process of building wealth is not complicated. In fact, you may be thinking it is too simple. While the two steps are simple, the difficulty comes with the time, level of commitment, and skill you will need to continually follow those two steps successfully. This plan will not lead you to riches overnight. In order for it to be successful, you will need to commit to making good decisions over a prolonged period of time and maintaining your self-discipline in order to stay on course.
Making good decisions and maintaining your self-discipline will also help you to steer clear of the schemes and strategies most likely to detract from your wealth instead of helping you to build more of it. You’ve certainly heard the old adage…if something seems too easy or too good to be true, it probably is. That is never truer than when it applies to your financial choices.
Stick with the old-fashioned approach and build your wealth through ownership and passive income. It will cost you some time and energy, but if you follow your plan, you are guaranteed to gain financial wealth.
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.