When you read the title of this post, what did you expect? Maybe you were expecting me to describe some sophisticated investment strategy that allows me to earn huge returns. Nope. Maybe you were expecting me to share some business secret that would help you open the floodgates to wealth. Nope. Maybe you were expecting inspiration for the “next big thing,” that one great idea you can build a million-dollar business around. Nope.
My Wealth Building Strategy
My wealth-building strategy is as old-school as it gets: earn a solidly above-average income and invest a large portion of it reasonably. That’s it. If you can earn a lot of money, save most of it, and earn a decent rate of return on those savings, you can build a pretty nice-sized chunk of wealth a decade or two before traditional retirement age (65).
Note: By “a nice-sized chunk of wealth,” I mean in the $3+ million range, which is enough to live a comfortable middle class (or even upper middle class) lifestyle without having to work for a living. In other words, total financial independence.
Step 1: Makin’ Paper — And Keeping It
While I realize some who live in high-cost-of-living areas of the country (i.e. Manhattan, etc) probably need to adjust their income goals upward, for most people in most parts of the country, a 6 figure salary is enough to build significant wealth. $100,000 is just a minimum, though. Ideally, you’d earn upwards of $200,000 per year. I’m not quite there yet, but I’m working on it!
How do you earn all this money, especially if your “day job” is, say, a teacher? Teachers are incredibly important to society, but they unfortunately aren’t paid all that well. Ditto for other kinds of civil servants such as police officers, fire fighters, soldiers, etc. There are a few ways for moderate earners to boost their income and ability to save, which I’ll get into below.
If you take only one thing away from this article, let it be this: you’ve got to save around 50% of your gross income every year. Just earning a large salary isn’t enough. You’ve got to save a large portion of it. If you can’t make 50%, start with 20% and work your way up.
How I Earn Income
- My day job - I work for The Man as a Software Engineer. While most software people don’t make 6 figures where I live in Atlanta, we do pretty well. Still, even with my frugal lifestyle, I wouldn’t be able to save nearly enough money from my job alone to join the $3+ million club before traditional retirement age.
- My websites – I’m not one of those bloggers who writes monthly income reports like, say, Pat Flynn – nor do I plan on becoming one. I will say, however, that my income from online sources is in roughly the same ballpark as that from my day job. In addition to amateurassetallocator.com, I run a number of other websites on a wide variety of topics. Most of them are very small niche sites that don’t earn much individually. Collectively, they do add up. The majority of my online income does come from the main finance blog, though. For the record, I do think the small niche site business model is nearing death and I don’t build them anymore. I don’t think I would recommend that model going forward, either. Still, the ones I’ve already built do earn some income, so there are obviously at least some opportunities for profit.
Possible Future Sources Of Income
Currently, I only have two main sources of income. Ideally, I’d rather have at least 3 or 4.
- Real estate - I’ve been toying with the idea of getting into real estate investing for years now, but I’ve never pulled the trigger. While I never see real estate becoming my main wealth engine, it does have some very beneficial wealth-building characteristics. Even a goal as modest as owning 3 or 4 paid-off units would add meaningfully to my monthly cash flow.
- Internet startup – I have a ton of experience building web applications and plenty of decent ideas. What I haven’t had so far is execution. I’ve had too many other projects going on. That may change in the future, though.
How I Keep What I Make By Minimizing Taxes
I take full advantage of my tax-deferred investment account space. I…
- Max out my 401k at work – I’ve had the extremely good fortune of being able to max out my 401k at work every year for the past several years. Not only do I get to grow my net worth, it significantly reduces my tax bill at the end of the year.
- Invest 20% of my website earnings into a SEP IRA – This is huge. Since business earnings are taxable at my full marginal rate in addition to self-employment taxes, the SEP IRA has easily allowed me to invest tens of thousands of dollars more over the past few years than I would have otherwise been able to. That will make a big difference come retirement time.
- Take full advantage of the tax code – Some people seem almost afraid to take deductions they’re legally entitled to out of fear of being audited. Not me. I qualify for the home office deduction, so I take it. If the IRS audits me, I can prove the deduction is legitimate. I have nothing to fear when taking legitimate deductions, and neither should you.
So How Much Am I Really Saving?
Using the above tools, I’ve been averaging around $40,000-50,000 in annual savings. My ultimate goal is to get that number over $100,000 by the time I’m 35 (roughly 4 years away). Difficult, but I think it’s achievable. Of course, any number of things could go wrong. A bad Google update could drop my income in half (it’s happened before). Still, I’m cautiously optimistic about the future. And besides, even if my income does drop significantly, I’ll still be able to save an above-average amount of money every year. That coupled with the money I’ve already saved should yield significant wealth over time.
How I Invest What I Save
I don’t do anything fancy when it comes to investing. Anyone who’s read my other blog knows I believe in keeping things simple and cheap. As I noted above, I will probably get into real estate at some point, but for now, I invest only in low-cost index funds. You can get an overview of my actual asset allocation here. Since I’ve written hundreds of investing articles on my other site, I won’t rehash that here. All I’ll say is: costs are important. They are the most important thing when it comes to investing, in fact. Keep them low and keep it simple.
Alternate Wealth Building Strategies
There are many roads to Jerusalem, of course. I chose the strategy I did because it best aligns with my personality, interests, and risk tolerance. It’s not the best wealth building strategy for everyone, but it works for me. Here are a few other common approaches you should look into.
The Build-A-Company Approach
There’s one school of thought that cuts against the “don’t put all your eggs in one basket” grain. It says, “do put all your eggs in one basket, and then watch that basket!” This approach most closely describes the act of starting your own business (not a side business, but a full-blown full time business in which you invest all your time and savings).
Building a successful start-up is a particularly glamorous way to wealth, but what are the odds of success? If you’re an average Joe, probably not very good. For every Facebook there are dozens of failed social networking sites. Remember Friendster.com? Unless you’re 30+, probably not. People with specialized marketable skills, a very high risk tolerance, or uncommon business savvy will often do well with this approach. Most of us? Not so much. I’m not saying you shouldn’t try, I’m just saying you should know what you’re getting yourself into and understand the cost of failure. Building a business isn’t for everyone, but it can be extremely rewarding.
The Real Estate Approach
Real estate has probably been, by far, the most common way to wealth for Americans over the past 200 years. Real estate is attractive for several reasons:
- Tax benefits – There are some very nice tax benefits of investing in real estate.
- Tons of freely available information – Getting started in real estate can be as simple as a visit to your local library or opening your web browser.
- There are a lot of people out there already doing it (and blogging about it) - You definitely aren’t alone. Plenty of bloggers, like Paula over at Afford Anything, seem to have done pretty well in real estate and they are quick to share their experience with you if you ask.
Insert Your Approach Here
Have you adopted a novel approach to building wealth? Do you do what I do? Disagree with me? Leave your feedback in the comments section below!
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