They call if capitalism for a reason. How investors become rich is simple enough: They use money to make more money.
It’s nearly impossible to become wealthy through your labor unless you are in the top tier of entertainers, athletes, or CEOs — unless you control and manage capital for growth.
Even professional such as doctors, attorneys, and stockbrokers are stuck working much longer hours than they want and also many more years before retirement in order to maintain their lifestyle.
Accumulating and investing capital is the way to break out of that chain of endless labor and work only when you want to as well as retire and pass a legacy to your children.
The rich have made a science out of the accumulation of growth of capital, but you don’t have to be a Rockefeller or Rothschild to create your own financial empire.
Here are the steps to how investors become rich.
First, create an emergency fund
Discipline yourself to save so that you can build up an emergency fund with around six months of cash in it.
This is very old-school advice that was proven true after the last recession when many multi-millionaires lost everything, including their own homes.
Having enough cash to cover your basic bills means you don’t have to worry about an investment going South and destroying everything you took a lifetime to build up.
As an added bonus, when things do go wrong in any market you can dip into this fund to buy up investments at a deep discount. Then just replenish the funds.
Own real estate
For most Americans, their homes are their primary source of not only wealth, but also wealth they can access during their working careers.
Now imagine if you owned 10 homes you could rent out and see increase in equity.
Or 10-unit apartment you can not only rent out but sell for a profit, then reinvest in a new project tax-free.
This financial vehicle is only right for you if you love property and all the challenges that come with maintaining property.
If you dread picking up a drill and fixing things or doing regular house maintenance, avoid real estate altogether.
As one longtime real estate investor put it, “Once you’re bitten by the real estate bug you’ll either be hooked for life or you’ll never do it again.”
That is true and also just as true is that it’s better to have a team to help you build your real estate empire:
- an agent to spot deals in upcoming neighborhoods
- a mortgage broker or banker to get the best financing
- an attorney to make sure you’re compliant with even obscure real estate law, and
- a CPA to get you as many tax benefits as possible.
Many investors prefer multi-family properties (twin homes, duplexes, and apartment buildings) over single-family homes. That helps to keep all the maintenance issues isolated in a few locations rather than having issues spread all over town.
Look for real estate deals at good prices, in quality areas, that show the promise to be good investments for the long haul. Focus on good school districts and safe neighborhoods.
Those tend to attract responsible people you enjoy working with, who have good jobs and can afford their rent.
Own your own business
It’s nearly impossible to become wealthy working for someone else. It’s not just the cap on income, but also the way tax laws are structured it’s hard to not to pay lots of taxes on your income.
Robert Kiyosaki’s book Rich Dad/Poor Dad introduces the concept of the cashflow quadrant.
He looks at four different entities to explain how investors become rich:
- the employee
- the self-employed
- the business owner and
- the investor
Employees are stuck making whatever they make and have limited investment opportunities, such as investing through IRAs.
The self-employed work for themselves, but still are limited by the number of hours in a day and also by their inability to make big enough returns to invest.
The business owner can leverage the talent, work, and credit of others to build a business that pays them multiples of what they would earn as an employee or self-employed.
Likewise, the business owner can minimize taxes and become true investors. That’s really how investors become rich, by paying less taxes and investing the difference.
The final quadrant, the investor, allows you to earn money while you’re sleeping and takes all limits off you ability to earn massive amounts of income without killing yourself in the process.