7 rules for growing slow (but sustainable) wealth

couple doing finances on computer

You can grow — and sustain — wealth if you have nothing right now.

Many will argue that fortunes can be made overnight; while that may hold very true in some cases, the majority of those who have made it will tell you it did indeed take a great deal of time coupled with some correct financial choices. For me, wealth did not come solely from entrepreneurship or financial risk, but rather it came as a result of diversifying my investments all while growing my equity leverage and identifying the right opportunities early on.

I made my first million before the age of 27. It took me close to 14 years of hard work and trial and error to get there. But I did get there nonetheless, and I can tell you that it was quite a learning experience. I not only learned a lot about my capacity and tolerance for risk, but also quite a bit about financial systems and loopholes that exist. I want to share with you today seven rules that you can follow to making sure you also get on the right path to slow, but sustainable, wealth.

Rule 1: Think net instead of gross. Many get consumed with the continuous desire to grow their gross income but often forget to leverage their net income. Increasing your net income by lowering your taxes is no different than raising your gross income. Make sure to reassess your net situation often by leveraging your write-offs early on.

Rule 2: Embrace economic pressure. There will be many times in the next 10 years where you will identify an opportunity to invest or be part of something that requires you to be uncomfortable in your financial position for a set period of time. Just keep in mind that risk equals reward, and without any type of financial risk, you are doomed to stay a prisoner of the lower interest rates set by banks.

Rule 3: Create residual income streams. If you are bound to only receive one form of income, it is most likely you are living paycheck to paycheck and very unlikely that you are actually saving a large chunk of that paycheck. One of the main reasons people struggle with savings is because they are attempting to save money they otherwise count on to live and as a result find themselves in a position that forces them to spend it, even if they were lucky enough to save it for a short while. Most survive of their main income and grow with through residual side income. Examples of side income may include rental income, dividends, affiliate marketing, and side businesses.

Related >> Reader Story: Using Small Income Streams to Fund Big Goals

Rule 4: Turn liabilities into assets. While it is true that most of the spending an ordinary family makes is buying more liabilities, you can differentiate yourself by investing in assets instead. Equity is key when making purchases. Let's use the example of a car since we all know most cars are liabilities. If you buy a new car for $26,000, then it is likely that it will lose the majority of its value in the first three years, but will eventually depreciate to about 20 percent of its original value by the time you actually pay off your loan (assuming a five-year loan). You therefore paid $26,000 and used your car until it was worth close to nothing. Instead of buying a liability, think of how you can turn the same item into an asset. The same $26,000 car is available used and has taken the majority of its depreciation in the first three years, and therefore can be purchased for 50 percent off that price. In many cases, it can be purchased with a similar warranty as a new one, and very low miles. Since you are finding a car with much lower miles than it should have for 50 percent of its original value, you simply can use the car until it reaches a normal mileage point and then sell it within two years at a minimal loss (usually less than 10 percent from your buying price). As many of you may not be familiar with the car market, keep in mind that great low mileage examples of your favorite cars are not hard to come by and can be found on sites like cars.com, autotrader.com and ebaymotors.com. A little patience and due diligence can save you a tremendous amount of money on this necessary but depreciating asset. Here is a link to a book that explains this system in detail.

Rule 5: Save for six months of hardship, invest for a lifetime of prosperity. While savings matter, you only need to save so much. Instead of creating budgets to save as much as possible, create budgets to save some and invest the rest. Invest your leftover capital into long-term sustainable companies and stocks. This by itself is a savings account with minimal risk that leads to much better returns than an FDIC-insured account, especially if considering a long-term approach.

Rule 6: Define your long-term financial strategy early on. Don't wait until you reach a certain amount to define the strategy you should follow in order to accumulate more wealth. You should set financial benchmarks early on and ensure progression and diversification occurs as you reach them. By setting financial goals yearly, you can get much closer to growing rather than having years gone by only surviving. Think of your goals in various ways outside of dollar amounts to reach. For example, I used to set various goals that were financial in nature but not dollar-driven. It would perhaps be being in less than an 8 percent tax bracket one year, but the next year it would be to have six properties for rent instead of two. It's always about understanding the financial picture in your head before painting it.

Rule 7: Scale your financial growth. As I said earlier, diversification is key to ensuring slower but healthier returns while minimizing risks. Scaling is a strategy you can use early on to set forth diversification methods based on the financial picture you want to paint for yourself as mentioned in Rule 6. Scaling is your ability to add different types of investments to your portfolio based on the size of your wealth. Create a guideline as to how to scale matters. For me, it looked something like this.

  • Under $100,000 in cash assets — Goal was to lower tax bracket to 12 percent by leveraging write-offs.
  • Between $100,000 – $250,000 — Add real estate for rental income to portfolio.
  • Between $250,000 – $500,000 — Add high-risk stock portfolio
  • Over $500,000 — Look for investments overseas as well as invest in other businesses or ventures.

Keep in mind that these seven rules are not geared to help you reach fortunes overnight, but rather help you frame your 10-year path for sustainable wealth, as it will take discipline and hard work with a hint of tolerance for financial risk.

Related >> What's the Safest Thing I Can Do with My Money?

More about...Planning, Investing

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
31 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Rory & Robin
Rory & Robin
6 years ago

Good post! Now that my husband and I have paid off our mortgage (41 months) we don’t feel the need to keep more than $100 in an emergency fund. If you have the cashflow and the inclination (we have a 60% savings rate) I feel that emergency funds should be invested instead. But it is not for everyone. I’d also like to hear more about ‘leveraging write offs early one.’ Being debt free and not owing a business, I have few ways to reduce my tax liability other than maxing out 401 and IRA (achieved this year!). Are we speaking… Read more »

Mom of five
Mom of five
6 years ago
Reply to  Rory & Robin

We still have some mortgage debt, but taxes are our biggest liability. Because our mortgage is low and our income is high, we basically pay a flat tax. We’re working on trying to have more income through capital gains rather than earned income but it’s slow work. I would love to hear some suggestions.

BIGSeth
BIGSeth
6 years ago

Good article. I’d like to see some of the items in longer form posts as there are some interesting ideas that I think everyone would enjoy knowing more about.

Also great to read an article with content presented directly – not everything needs to be a blogger narrative.

*Missing link to car book*

Chase
Chase
6 years ago

Maybe 4 should be to minimize your liabilities. Your description doesn’t really turn it into an asset. I looked for something like you’re describing recently. If i’d have found a low mileage 3 year old car for half off the new price i’d have bought that baby in a heartbeat! Instead I bought a new car and plan on keeping it for a very long time ~10 years or so. Also, I’d love to see that link. If those cars are that easy to find instead of driving them for 2 years I could just open a used car lot… Read more »

Elizabeth
Elizabeth
6 years ago
Reply to  Chase

That example made me wonder too. My car was worth 2/3 of its value after 5 years. When I bought it, there wasn’t a huge difference between a new car (with dealer incentives and a better interest rate) and a comparable model that was 2-3 years. I bought it with the intention of driving it into the ground — and it’s still going!

Besides, any car that loses half of its value in 3 years is not a car I’d want to own.

Jane
Jane
6 years ago
Reply to  Elizabeth

“Besides, any car that loses half of its value in 3 years is not a car I’d want to own.” But a lot of what keeps a car from depreciating is not necessarily performance but public perception. For instance, Toyotas and Hondas don’t immediately depreciate like Kias do. But the safety and performance ratings for these cars are not that much different. Being too brand loyal and prejudiced against depreciating models could likely cost you money. In 2011, we bought a 2010 Kia with 35,000 miles for around $13,000. New I believe it cost closer to $19,000. In this case,… Read more »

Elizabeth
Elizabeth
6 years ago
Reply to  Jane

Sounds like you got a great deal 🙂 When I bought my car, I spent a lot of time looking at ratings and determining total cost of ownership. The cars that depreciated quickly also had less-than-stellar maintenance and repair records. It didn’t make sense to buy a cheaper car only to spend more on maintenance and repairs. But we’re talking more than a decade ago now. I think some companies have been relying on their reputation a little too much while other companies have been improving the quality of their vehicles. When/if I buy another car, I will probably buy… Read more »

GamingYourFinances
GamingYourFinances
6 years ago

Creating residual income steams is something we’re trying to do now. We love the idea of having multiple sources of income!

Matt @ Your Living Body
Matt @ Your Living Body
6 years ago

Creating multiple streams of income is probably the best thing you can do. You’ve got to get bigger than the problem (of not having enough income). Usually, getting just another job won’t do the trick. You’ll just end up in a higher tax bracket and that to me is not worth it.

The problem is most people think in a linear path and don’t recognize residual income streams when they see one. They’re stuck in a work/get paid for it mentality where sometimes you need to work for little in order to get paid more.

Elizabeth
Elizabeth
6 years ago

Other than the bank, does anyone actually list their car as an asset when figuring out their net worth? I’m curious — no judgement either way.

I’ve always ignored my car when calculating my net worth. (Of course, it’s part of my budget and my emergency fund.) With insurance, gas, repairs and maintenance, it’s hard to think of it as an asset. Maybe I’ve got it backwards?

Jeff
Jeff
6 years ago
Reply to  Elizabeth

I do list it as an asset but I acknowledge that it is a depreciating asset and check every year what it’s current worth has gone down to. I feel that the only people who consider their car to be a liability are those who don’t truly need a car in the first place. If you don’t have to drive then don’t own one. If you do have to drive then it is a depreciating asset, not a liability. Of course it also helps to have bought a reliable car in the first place, perhaps that is where the “a… Read more »

Marsha
Marsha
6 years ago
Reply to  Jeff

I agree that a car is a depreciating asset, not a liability like the article states. A car loan is a liability, to be subtracted from the estimated value of the car, to determine the net asset or liability of the vehicle. At least this is what I learned in Accounting 101, although that was many, many years ago. Perhaps the author was using “liability” in a more general way. Since I paid cash for my car, it will remain an asset until I get rid of it. (Although I don’t include it in net worth calculations: only actual money… Read more »

Elizabeth
Elizabeth
6 years ago
Reply to  Marsha

That approach makes sense to me 🙂 I guess I didn’t consider my car to be an asset because much of the time it was a necessity. (Ah, the joys of commuting.) I tend to think of “assets” as being a home, investments, savings, etc. — not something I needed that I had no intention of selling.

However, my family could sell my car if something happened to me. Ergo, it’s an asset. Funny how I had that gap in my thinking.

Marsha
Marsha
6 years ago
Reply to  Marsha

Anything you own that has any market value is technically an asset: your clothes, dishes, electronics, furniture, etc. It’s just very hard to come up with reasonable estimates of market value for most of these things. I’m leaving my children lists of those items that may have some substantial value when I’m gone (jewelry, antiques, and some collectibles) so they can sell it wisely; the other stuff can be sold in a garage sale or go back to the thrift store from whence it came.

Debi
Debi
6 years ago
Reply to  Elizabeth

I don’t add any personal property, even my house, in my net worth calculation. Whether you rent or own, you still need to live somewhere.

Susan
Susan
6 years ago

Bought a Volvo new while doing high mileage sales work and drove it for 11 years with over 250,000 miles at the end, got a couple thousand as sales at the end. Bought a Honda CRV new and drove it for 11 years and sold it for $3,000. Just bought a new Subaru last year, expect to get another 10+ years from that. I use an automated car replacement savings plan. Love not having car payments! I am a single woman and prefer to buy new (warranty) and take very good care of the car to make it last. I… Read more »

Cassi
Cassi
6 years ago

Extremely interesting article! I’m following some of these steps already, but there are a few that I need to deploy into my everyday routine. Thanks for the tips and tricks!

Vanessa
Vanessa
6 years ago

“I made my first million before the age of 27. It took me close to 14 years of hard work…”

So you started at age 12 or 13? By doing what?

Patrick
Patrick
6 years ago
Reply to  Vanessa

My guess is your going to have to buy his books to see how he made his millions.

Bill
Bill
6 years ago
Reply to  Patrick

According to his website:

1. Drop out of school in the 9th grade.

2. Start internet marketing company.

3. ???

4. Buy Lamborghini with your millions.

BD
BD
6 years ago
Reply to  Bill

The “About Us” page was chock full of flashy exotic cars and hot women. I assumed that he produces James Bond movies? 😉

Elizabeth
Elizabeth
6 years ago
Reply to  Bill

@BD – thanks for the laugh! I guess I can ignore his books — clearly I’m not his target audience!

Mike
Mike
6 years ago

Nice to see asset allocation being implemented into your financial strategy – so many people get fixated with property or index funds that they forget about the benefits of diversification

Mom of five
Mom of five
6 years ago

I have to disagree with the advice to buy a 3 year old certified vehicle and save big bucks. We’ve recently purchased two new 2013 vehicles – a Honda Civic LX Sedan (automatic transmission) and a Honda Pilot Touring (AWD). For the Civic, we paid $16,500. For the Pilot, we paid $34, 800. Both of those were the full price – we still had to pay tax and tags, but that was it. We were a little picky about the colors for the Pilot so we probably paid a little more than we ultimately could have. Sure, in most cases… Read more »

Chad
Chad
6 years ago

All great pieces of advice, especially #1. I actually just wrote an article about this idea on my blog (Article Title: “How to stop pay increases from hurting your finances”). As you mention, many of us think in terms of “gross” dollars instead of “net”. As a result, we often make poor spending decisions based on false information.

Thanks for sharing this info!

Chad
http://www.MakingFinancesSimple.com

Justin
Justin
6 years ago

Any ideas on where I can throw my money? I’m 24, make about 55k gross, I save 100% of my salary due to living at home and having other side income that covers my expense which is very minimal. I’m surprised how you reached 1mil so fast by 27? What sort of investments did you make or any advice on where to get started? My only path is long only indices which at this rate would not make me anywhere near that amount.

Chad
Chad
6 years ago
Reply to  Justin

Hi Justin. It sounds like you are doing great! Make sure you are thinking about all aspects of your financial life, not just the retirement figure. Do you ever plan on getting married and having kids? Do you want to buy a house one day? These are things that determine if you should be saving for college education, house down payment, etc…things in addition to your retirement accounts. I created a “Next Money Moves Guide” that I give away free to subscribers on my blog. While it won’t tell you what types of accounts to invest in, it will address… Read more »

Graham
Graham
6 years ago
Reply to  Justin

Sounds like you’re in good shape Justin! Honestly, you’re probably not going to make a million too quickly. If you have money to throw around, your best shot would be to start your own business. Either that, or start investing in real estate. Rental property is a great way to wealth. It’s also nice if you have your own business doing what you love. When you enjoy what you do for a living, it’s not work.

stellamarina
stellamarina
6 years ago

Having a nice garden can be a liability….cost of plants, fertilizer, lawn furniture etc. I like to make enough from the garden in plant and fruit sales to cover the cost of garden maintenance. A garden blogger that I follow does this by having an annual plant sale at his garden.

LD @ Personal Finance Insider
LD @ Personal Finance Insider
6 years ago

One can never stress enough the impact taxes can have on wealth. Many of the financial planning steps we take is to avoid or reduce taxes. Most people just think of income taxes, but for the wealthy, transfer taxes can also take a big bite out of one’s wealth.

Tim Mobley
Tim Mobley
6 years ago

Very good list!

I especially agree with the advice of not saving too much. While savings are definitely important, once a sufficient emergency fund is established (6-9 months of living expenses) there is no need to continue boosting the savings account. Instead invest based on your risk tolerance/age/time horizon etc.

shares