Building wealth, establishing security, and reitiring early and comfortably… believe it or not… will depend more on how wisely you grow your money, than it does on how much you make.
You’ll hear me talking A LOT on Young Retiree about diversifying your income flow. And you’ll hear me talking a lot about the value of residual income.
Essentially, you will want to take the assets you already have – money, time, skills, even a spare bedroom – and invest them to become both active and passive cash flows. I’ll explain some of the best ways to do this.
There’s a saying “it takes money to make money”. There’s some truth to it, of course. The more money you make, the easier it is to grow. That’s why I talk so much about starting up a “side hustle” here. But you can grow wealth even if you are starting with a very small pool of resources! Don’t forget that!
The Discipline of Saving
Ok, this might seem obvious. If you want your money to grow you’re going to need to set aside (a.k.a. budget) money to both put into a savings account, and invest.
You’ll need to discipline yourself to do this, no matter where you are in life. My wife once worked a year for Americorp getting paid under $13,000 FOR THE ENTIRE YEAR, while living in inner-city Buffulo and still walked away with $3,000 in savings. It just takes strategy and discipline.
Does this mean you need to live like a miser? No! But you’ll need to follow these steps:
1. Cut costs wherever you can. I save an extra $1,200 a year just by reducing my living expenses through free apps and a rewards program or 2. That’s not a joke.
Sometimes this will also mean trimming things down. Until you’re in a really good financial position try to limit the amount that you eat out (unless you’re a dangerously bad cook; medical expenses tend to be worse), or the amount of needless expenses you indulge in (i.e. costly entertainment things).
There will be a time of more flexibility, and it will rock! But generally you have to have one (saving), before the other (wanton spending).
2. Avoid debt like the plague.
There is some debt that’s pretty unavoidable. My wife and I graduated college with a combined $42,000 in debt (it could be a lot worse, I know). If you’re going the college route, some debt may be unavoidable.
But most of it ISN’T!
I have never been late or overdue on a credit card payment in my life, and that all boils down to discipline. Spend within your means, not outside of it. Once in debt, you will not only have a hard time GROWING your money, but your money will actually be moving backward.
3. Learn the difference between a good investment, and a bad investment. See below:
A car? Bad investment.
A house? Good investment.
Now hang on, let me explain that. Obviously, most people genuinely need A car. A car has a lot of utility. If you’re bringing in a lot of your cash as a driver for Uber, Lyft, or Amazon Flex, then your car is literally your livelihood. So what do I mean?
It always baffles me to see young friends of mine, in their early 20’s like me, working for $12/hour, living with their parents, and buying an Audi. Here’s why: a car is a depreciating asset. You will almost NEVER sell it for the amount you paid, because the longer they’ve been owned and used, the less valuable they are. A car will generally decrease by 1% to 5% the minute you drive it off the lot.
So you like cars a lot and you want a Maserati? Cool. I can understand. But a high end, new vehicle is a luxury to get when you’ve got the capital to back it.
Houses are on the opposite end of the spectrum. I have an aquaintence who bought a house for $42,000 and sold it 9 years later for $150,000. He made back every penny he spent on the house and then some. Real estate tends to hold its value, or even increase in value.
Paying rent? That money never comes back to you. Every check that goes to your landlord never comes back to your pocket. That doesn’t mean you should enter into home ownership lightly, but if you’re ready to look into buying a house, or majorly upgrading your car, get the house first.
Buying a house is usually a GOOD investment.
4. Open a savings account separate from your checking account… and consistently put money in it. Even if it’s small.
Now I’ll be honest, I’m not really a big fan of banks. The average savings account pays around 0.5% interest. That’s not adequate growth no matter HOW much money you’re contributing.
But if you can narrow down the best, high-yield savings accounts, they’re definitely a much better place to start accumulating cash than a checking account.
3 of the best high yield savings accounts are:
- Synchrony at 1.55%
- American Express at 1.55%
- Marcus by Goldman Sachs at 1.6%
Make sure you read more of the details from a great blog called Nerd Wallet before picking one.
Safe Investments + High Interest.
If you want to make massive gains on your money you’re going to need to make at least SOME investments that have some risk involved. But your savings and investments should never be a jenga tower.
The truth is, there are some investments you can make with guaranteed no risk, that still make enormous gains beyond what you could reach through a savings account. You should always have at least 75% of your investing funds in these.
Traditional IRA’s and Roth’s may be the first that come to your mind, though I wouldn’t say either of these are fully ideal. If you are an employee, instead of a business owner, and your company offers to match your 401K contributions, try to contribute as much as your employer will match you for. That’s called doubling your money for free!
But most of these still come with risk of loss.
The most lucrative option I’ve encountered, believe it or not, is a special kind of life insurance policy. One company I’m associated with, called National Life Group, has what are called Indexed Universal Life policies. The insurance company invests the cash value of the policy in several market indices. They use this to give you interest rates up to 13%.
The beauty of the IUL is that you are fully protected from loss even in a down market. Even if we experience the most bearish markets in decades, or even a complete crash, the insurance company will guarantee a minimum of at least 3%. Typically, you’ll make between 9% and 12.5% return annually on your money, with your gains locking in at the end of each year.
And every withdrawal you make from it is 100% tax free.
Real Estate and the Art of Residual Income
Remember earlier when I mentioned the value of owning property? Well buying a house in the right place can also set you up for bringing in multiple extra flows of income, and growing your money exponentially.
The first and probably most obvious option is to buy a house cheap in a good area, usually as a foreclosure or a “fixer upper”, fixing it up, renovating it a bit, and then renting it out.
2008 was a rough year for a lot of people in the United States. It left a lot of people forced to abandon their homes, which then came under the ownership of banks. Since these foreclosures are largely a drain on the banks, you can now obtain some houses in good areas, for far below their normal market value.
An easier and potentially even more lucrative way to make money with a house (that generally doesn’t even require you buy a house separate from your own) is to join AirBnB. This allows you to use spare rooms in your house to rent out for 1 week, or even a couple days at a time, like a motel room.
The AirBnB app makes the whole process of booking guests super easy. Hosting can be a very cheap, easy, and almost entirely passive except for cleaning and neatening the space before and after having guests.
This can almost cancel out your monthly housing/mortage expense, and will often provide profits far beyond! This can be especially lucrative for someone who has paid off their mortgage, bought their house in cash, or recently had children move out of the home.
The money you can make, or can charge, will vary depending on where you live and the time of year, but you could add thousands to your monthly income without doing much more than washing some bedsheets.
For more in-depth information I recommend this blog post that addresses some natural concerns.
And if you’re going to sign up, make sure you join the free coupon/cash back website Inbox Dollars before you join AirBnB. Inbox Dollars will give you $100 just for booking your first guest.
The Truth About The Market
One thing you’re going to need to kill off if you want to grow your money to a massive degree is what I call “ticker phobia”. Yes, investing money in the stock market inherently comes with some risk of loss on your investments, but it also gives you the potential to turn small investments into multi-million dollar funds to withdraw straight into your bank.
Starting off, you just need to discipline yourself to stick to these trading rules:
1. Never invest more than 25% of your investing funds into a riskier investment, like the stock market. Frankly, the biggest gains you can make are off of penny stocks, but because of their volatility you should never use more money than you could afford to lose in a worst case scenario.
2. Cut losses quickly. One trap that a lot of traders fall into is being determined they’ve found the next Amazon, or the next Netflix. While some stocks are definitely worth trying to hold on to, if you can see that a stock is rotten, bail on it quickly.
3. Possibly the best way to grow your money in the market is to make quick trades, sometimes even within one day. Ultimately, it doesn’t matter whether or not the stock is rotten, if it gets hyped up enough it will probably spike for a while. Ride the upward wave, making fast gains, then sell it and move on to the next penny stock.
4. Always buy shares using some kind of limit order, NOT a market order. If you’re trading volatile penny stocks, a market order can leave you paying more than you actually wanted to. Limit orders give you control. You should also almost always use a trailing stop loss sell order. That means that you can set your account to automatically sell all your shares if the value goes down by… say… 5%. And it follows your gains. So if you make a 70% gain, you’re protected from it going down more than 5%, and you keep the vast majority of your gains. Contrary to popular belief, there’s no reason why you should ever “lose all your money” in the market.
My first stock account was through a 100% free to use trading app called Robinhood. I made a 65% gain on my money in less than 3 weeks. A $1,000 investment would have made me $650 just like that. $10,000 would have added $6,500…. and so on.
Of course, there’s always a time and a place for some long term speculation. There is no growth opportunity on the planet with higher potential than a well-chosen penny stock or cryptocurrency.
BitCoin cost around $0.80 per coin in 2011. A couple days after Christmas of 2017 you could sell 1 coin of BitCoin for $20,000. A $100 bill would have made you well north of $2,000,000. Think about that…. landing the right penny stocks/cryptos has a lot of potential.
And no, it’s not like betting on the lottery. While there are no guarantees, you can do a lot of research and make very calculated trades. Especially in the early days of an industry, your chances can be very good.
These are just a few of the best ways to make your money work FOR you. With a few options like these, you can not only erase debt, but achieve abundance.
As always, even passive money takes some initiative to get moving. The rest is up to you.