Wealth, in the traditional, economic sense is all about owning shit that's valuable, having more resources than you need and leveraging your resources. Yes, of course, there are many definitions of wealth, like having the luxury of time or having fulfilling relationships, but I'm talking pure economics here. Ultimately, owning valuable things allows you to sell, rent or lend the value in exchange for resources, like money.
Wealth is having more resources than you need for the present and future. And having more than what you need helps quell any anxiety you might have about the relative present and the future.
So, if you were already born with wealth, all you need to do is have good luck and/or make smart decisions about how to maintain your wealth. Mind how you spend your money by keeping a low overhead. And mind how you leverage it by understanding the risks and you should be ok. If you weren't born with a big pile of money, keep reading and we'll explore how to build wealth.
If you're tying to build wealth and you don't have a lot of resources, the first thing you need to master is earning money. When you have more money than you need for the relative present, you can start to leverage that cash.
Earning Money Through Your Own Efforts
There are so many ways that you can earn money. One of the most common ways is by leveraging your skills to an individual or business. Simple right? A person who knows how to paint houses can paint other people's houses for a fee. A person who knows how to build apps can build apps for companies and get paid for their skills.
Another way to earn money is to make something that is valuable. If you wrote a book, screenplay or composed a song that gets sold or distributed, you've made something valuable and you can earn money.
Using Money to Earn Money
If you have money, you can buy something that's valuable and that valuable thing can give you more money now or later or both. Buying a house that you rent out is a good example of this. You get rent each month and then if you decide to sell the house in the future, hopefully you'll get more than what you bought it for.
You can also earn money by investing or lending money to an individual, company or to the government. When you lend money, you are giving a loan and earn income in the form of interest. When you invest, you usually get ownership in exchange for investing. Ownership means you can sell later, hopefully for a profit. It can also mean you participate in the profits in some way.
Create Multiple Income Streams
When you get income from more than one place, you are earning multiple income steams. Most of us have this. If you have a savings account or an investment account that earns you interest (or pays dividends) and you also earn money from a job, then congrats, you have multiple income streams. I know that $3/month in interest income doesn't seem like much, but if you could increase that to a more significant figure, it'll help you accelerate the amount of extra money you have to invest in valuable things AND it'll protect you from the risk of having all your money come from one place.
When you earn income from more than one place, you are diversifying your income. Diversification helps reduce risk by spreading it out. For example, let's say you earn money from your job as a graphic designer, you take on branding projects on the side and you have rental income coming from a house that you own. If you were laid off from your job, you still have other income coming in from other places, so you don't have to freak out and have a meltdown about how you'll afford your organic broccoli. What a goddamn luxury - the broccoli and the multiple income streams.
Multiple income streams helps you become wealthy, but it's also the result of being wealthy. Multiple income streams can be a result of leveraging things you own. Earning money this way is often referred to as passive income because you don't have to actively earn income by trading time for money or leveraging your skillset, instead you're leveraging something valuable.
Own Something Valuable
Investing can be distilled down to owning something valuable. You can own your own business, or have partial ownership because you bought stock or were an angel investor in someone else's company, you can own a piece of property, the rights to a book you've written, a stamp collection or collection of rare Air Jordans.
Here's how investing is supposed to work: you mastered earning money, so now you have extra and you're going to take a risk with it by buying valuable things. You are forgoing the opportunity to use all of that money now and you're taking a risk with it. The level of risk varies on what you're investing in. In theory, you'll eventually get more money than you put in because you are being compensated for taking a risk. You could also lose it.
Yes, there is a way to borrow money and leverage borrowed money to make money, but this can go terribly, terribly wrong. I don't recommend doing this. If you lose money - because you are taking risk - you can lose more than you have. And that's what those of us in the industry like to call totally fucked.
Just like there are may ways to earn money, there are also many ways to invest. Here are some of the most common ways to invest: Investing in the stock market AKA the market, making something valuable like a small business or work of art that you can sell or earn revenue from and everyone's favorite, real estate.
Notice how the channels for investing are pretty much the same channels for creating multiple revenue streams. See the relationship here?
Investing in the Market
There is the traditional way of investing; putting money into the market by buying investments or lending it in the form of buying bonds. There are a lot different types of investments in this world. From stocks and bonds to mutual funds and exchange-traded funds. Different types of investments have different risks associated with them. There are a lot of nuances and if you wanted to learn all about it, there's plenty of information available on the World Wide Web. You should get a general understanding of investments before diving in. (Our investment series can help you get some baseline knowledge: Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7
Investing in a Business or Something Else Valuable
If you invest in a business and the business does well, you'll make some money and people will talk about how smart you were to invest. Maybe people will write articles about it. If you invest in a business and you lose your money, people will think you're an idiot and maybe nobody will talk about it. Sometimes this is just luck or timing or both. This can even happen with your own business. Understand the risks, understand the business, the market, and the value proposition.
You can also invest in something else that's valuable like real estate or a bunch of rare coins. You're at the whim of the market here. This means the value of a house you own can drop because of things like a giant tsunami or the great mortgage meltdown of 2008.
We can't predict everything. We can try to find as many patterns in the world and make decisions based on what we observe - hence this entire article. Ultimately, you're still going to be taking some risk because that's kind of what it's like to be human, I think. Just all sorts of risks in life.