As you start your career, you should start thinking about how to grow your assets and wealth. After all, if you spend all your earnings, you’ll have nothing left for emergencies, your family, healthcare, and retirement. Here are five ways to build wealth. Not one is better than another, they are just simply different. Each one has its own pros and cons. It is ultimately up to you to decide what strategies to pursue.
Growing up, I learned that it was important to save money. My dad is a businessman and I watched him build and grow his own business. I also watched him invest money in various assets to provide for my sisters and me. I am extremely grateful that he was able to pay for our college educations and provide me a basic financial education.
1. Real Estate Investing
You can buy commercial or residential property and rent it out for income. You can fix it up and sell it for a higher price. The advantage of real estate is that it allows you to take on debt (leverage) to fund your purchase. However, you’ll need to be careful as to not bite off more than you can chew and go bankrupt. Many people have built their fortunes with a simple property acquisition strategy over an extended period of time. After buying a property, they would then fill their properties with tenants and use the collected rents to service the debt payments. Over time, the property owner would eventually own the entire property, all paid for by the tenants. Leverage can definitely magnify your returns as long as you use it properly.
Pros: Leverage, tax advantages, medium barriers to entry, “real” asset
Cons: Illiquid (can’t easily convert to cash), may require a lot of work and cause headaches, tenants can be hit or miss
2. Stock Investing
Stock investing is another way to grow wealth over time. The key is to consistently invest in the markets over an extended period of time. Whether you are looking for dividends or capital appreciation, there are stocks and funds that cater to every need. Warren Buffett became one of the richest people in the world by making wise investments over the years. If you want to start learning about stock investing, here are my top resources. If you are specifically focused on building a passive income stream, I recommend dividend stocks.
Pros: Liquid (easily converted to cash), low barriers to entry, lots of accessible options
Cons: Short-term volatility may upset those with weak stomachs
Perhaps you can start your own business on the side or even a business that replaces your full-time job. If you have an idea, I think the best time to take the risk is a few years into your career. At that point in time, you are still young with less to lose and you’ll have the benefit of a few years of work experience to rely on. If things fail, you can always go back to a regular job.
Pros: Highest potential reward
Cons: Requires a lot of work, may be extremely risky depending on your circumstances
4. Tax-Advantaged Retirement Accounts
Many employers offer tax-advantaged retirement accounts such as a 401K. There are also individual tax-advantaged retirement accounts such as a Roth IRA or Traditional IRA. These investment vehicles allow you to save for retirement while avoiding a layer of taxes. If you are in the 25% tax bracket, that’s an automatic 25% return on top of the performance of the stock you buy just by putting your money into a retirement vehicle. How many investments will beat a guaranteed 25% return?
There are just so many different tax-advantaged retirement accounts out there. To hopefully not confuse you any further, I have put together a map of the most common retirement plans.
Pros: Tax Advantages, access to stock investments
Cons: Cannot take out until close to retirement age, not for early retirement, your contribution amount is capped
5. Stock Options
If you work for a tech startup or are an executive to a large company, you may be given stock options. Early employees at companies such as Facebook, Linkedin, and Google were given stock options as an added incentive to grow the company. Stock options give you the option to purchase a stock at a certain price. You would exercise the option once the market price is above the strike price. So, if your options were issued to you at $30 per share and the current market price is $25 per share, you would not be able to exercise your options. However, if the market price is at $40 per share, you can exercise your options and sell it for a $10 gain. Options are designed to give the owner an incentive to grow the share price of a company.
Better yet, if you can put your stock options into your tax-advantaged Roth IRA, you can generate a tremendous amount of tax-free wealth. The government may not like this very much, but it is a way to avoid paying a LOT of taxes.
Pros: High potential
Cons: Hard to obtain for most people
There you have it, these are five ways to grow your wealth over time. If you are interested in any of these ways, I highly recommend that you do your research and ask people for advice. It is best to get started early. Also, if you are looking for a quick and dirty guide to start learning about personal finance, check out my personal finance primer.
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