How To Create Wealth

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How To Create Wealth

The framework I am using to achieve early retirement.

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Like most of us, I grew up believing that the way to get ahead in life was to focus on my job, my house, and my 401k. I worked long hours and was well-paid for it, owned a beautiful house in the suburbs, and maxed out my retirement plan every year.

After a few years of doing this, however, I realized that I was not building wealth as fast as I had hoped. Much of my money was tied up in my house, and most of my cash flow was used to pay bills (mortgage, car payments, etc.). I had little leftover at the end of the month to try to invest.

Not that I knew much about investing. I only knew the basics that I needed to spend less than I earned and invest the rest in low-cost index funds. While this is solid advice to have a comfortable retirement, it is not enough to be able to build life-changing wealth that can allow you to retire early in comfort.

I was struck with the fear that I would be forced to work for the rest of my life if I continued on that path. Something had to change.

So I started reading and trying to learn everything I could about investing and building wealth. I learned from many teachers, including Robert Kiyosaki, Warren Buffett, John Schaub, Gary Keller, John Bogle, Benjamin Graham, and many more.

Through these teachers, I learned how to change my habits, my behaviors, and my beliefs. I reduced my cost of living, increased my income, and I learned how to invest at high rates of return. This has allowed me to go from being afraid of working until I die to being ready to retire by the age of forty-five despite having 4 kids!

While I have learned something important from every book that I read, one book stands out as having the framework that I have used to go from living paycheck to paycheck to never having to worry about being fired again.

That book is “Creating Wealth” by Robert G. Allen. Allen is not nearly as famous as Kiyosaki or some other teachers in this space, but the path he lays out in his book is very much what I have used to build my wealth.

Let me walk you through the framework.

Limiting Beliefs

Allen points out that most of us are taught poor money habits from our parents and loved ones. While they mean well, if they aren’t wealthy themselves, are they the best place to search for financial advice?

He lays out 9 false assumptions that we need to overcome before we can build wealth. These are listed below, along with my thoughts on each:

Having a job is good and leads ultimately to wealth — I learned the hard way that your job won’t make you rich; it will make the owners of your company rich. You can use your salary to invest, but if you put all your time and energy into trying to get promoted, you will likely miss out on both life and wealth.
Saving your money is a good investment — this one should be obvious to everyone these days, with interest rates hanging out around zero; you cannot build wealth in a savings account.
Debt is bad — avoid it like the plague — consumer debt is to be avoided like the plague, but using debt on stable assets that increase in value is a great way to turbocharge your wealth-building efforts; more on this later
Security is good — while we all wish to be secure, much of what we think about security is a myth; you can be fired from your job, so a salary is not very secure; true financial security comes from having wealth outside your day job so that you can survive on your own
Failure is bad — in school, we all learn that failure is shameful; our job is to always get the right answer, always win 1st place. This works well in school, but it doesn’t work when building wealth, where you have to learn how to invest and will make mistakes along the way
Wealth is measured in material possessions — wealth is about freedom and time, not houses and cars; if you are free to spend your time how you like, then you have wealth
The government, my employer, or someone else is responsible for my financial well-being — the truth is we must all take care of our finances; no one will make you rich; you must learn how to do it yourself
Acquiring wealth is a win-lose game — wealth is created, not taken; if I find a higher use for an asset like turning a home into a rental property, I have not taken away wealth from anyone but instead built it from my financial knowledge
It takes money to make money — while having money certainly makes it easier; many have created wealth from nothing; they have to hustle more to find deals, find partners, provide sweat-equity, etc., but it is possible if you look hard enough

Photo by nappy from Pexels
Wealth Principles

Once you get over your limiting beliefs, then you are ready to learn the principles of building wealth. These are the ideas that will help your decision-making as you pursue your financial goals.

Below are Allen’s seven wealth principles and my thoughts on each:

Don’t count your dollars until they have passed through the strainers of taxes and inflation — although inflation hasn’t been a risk for some time (until very recently, perhaps), taxes have always impacted wealth; if you are not thinking about the tax implications of your financial decisions, then you will never get ahead; what impact does your holding period have on your tax rate, what impact does the source of income have on your tax rate, and more are critical concepts you should review for every investment
Make maximum use of your assets and sacrifice to invest in things that go up in value — if you spend all your money on cars, clothes, restaurants, a fancy house, and looking rich, you won’t have anything left to invest; it is investing in assets (real estate, stocks, etc.) that creates wealth, not looking good
Don’t diversify! Concentrate all your eggs in the right basket — you have to find which basket works for you, but once you find something that works, focus on that; if you love real estate and are successful at it, stick to real estate until you have the wealth you desire, don’t jump back and forth from real estate to the stock market or a business until you are already successful
Wealth seekers are always on the offensive, not the defensive — being overly conservative with your money by keeping it in savings accounts or money markets is not how you build wealth; you have to go out and find investments that will give you high rates of return
Money must multiply at wealth-producing rates of return — it is hard to get rich on a 7% compounded annual growth rate (CAGR), much less the 0.06% available in savings accounts; if you invest $1,000 per month for 20 years at 7%, you would have around $540,000, which is OK but if you invested that same money at 20% CAGR, you would have $2.7 million; of course you don’t want to gamble it away seeking higher returns, so you must be very careful in how you approach this — investment real estate is a stable and secure way to achieve life-changing returns
Choose investments that are both powerful and stable — this is one of my favorites because it helped me understand why real estate is such a great way to build wealth; it is powerful (high rates of return through the prudent use of leverage) and stable; the stock market and starting businesses can be powerful, but they are much less stable than real estate and so much harder to use to reliably build wealth
Control is essential — the way to get high rates of return is to have more control over your investment; when buying a single-family house as an investment property, I can control which house I buy, which area it is in, the price I pay, the rent I charge, the tenants I accept, the upgrades I undertake, the maintenance I perform, etc. — this is why I routinely earn more than 20% CAGR with single-family rentals
Four Stages of Wealth

With these principles burned into your thoughts, you can start to develop a plan to power your wealth-building efforts. The way Allen lays it out, there are four stages we go through as we become wealthy. He uses the analogy of a rocket going into orbit that needs preparation and powerful engines to lift off and escape Earth’s gravity before going into orbit (aka, coasting on financial independence).

Below are the four stages and my thoughts on each:

Pre-launch stage — this is the preparation stage where you must study and learn about building wealth; you must choose the asset class that you wish to use that is both powerful and stable, and you must become an expert at it; Allen recommends single-family rentals, which is also what I used to build most of my wealth
Liftoff (or the struggling stage) — this is the most difficult stage as you are starting with little money and a bit of knowledge and trying to make things work; Allen recommends buying one single-family rental per year for 10 years to get you going, but you can find a plan that works for you and your budget
Pre-Orbit stage — after you have accumulated assets in the liftoff stage, you will see your wealth start to grow significantly; your equity and cash flow from your real estate holdings will start to pay off
Orbit (autopilot) stage — once you have enough assets to be financially independent, you need to change your approach; you will move from being aggressing and focusing on growth to being defensive and focusing on cash flow; once you can get enough cash flow from your assets to support your lifestyle, then you will be free and can put your finances on autopilot

Recommended Plan

Here is my recommendation for a powerful and stable way to create wealth. Remember that the amount of time this takes will depend on your ability to save up money for investing and the rate of return you are able to achieve:

Study and learn about money and investing. Pick an asset class, like single-family rentals, and become an expert in it by reading everything you can find. Reduce your expenses aggressively and increase your income as much as possible to give you more money to invest. Start building up a down payment for your first property.

Find a team to help you (real estate agent, mortgage broker, property management company, insurance agent, etc.). Look at as many properties as you can to understand the locations, the schools, the crime, the appreciation rate, the rent, expenses, etc. Run the numbers and look at a hundred houses before trying to buy your first one, searching for properties that will have positive cash flow after all expenses as well as good appreciation in the future. Once you find one that you know is a winner, buy your first property.

Use the extra cash flow to help you save up for your next property faster. Repeat step 2 until you have built up a portfolio that can launch you into orbit. Figure out what your goals are and how many properties you need to get there. Use debt prudently to turbocharge your wealth creation.
Once you have enough property and/or equity to be free, you will either want to start using all your cash flow and savings to pay down your debt (which will increase your cash flow further), or you will want to sell your properties and invest passively in commercial real estate (or similar asset) that produces cash flow with very little effort on your part. This is how you will be set up for life and put your assets on autopilot to generate lots of passive income with very little risk. Enjoy the rewards and focus on what you want to do — volunteer, set up a non-profit, etc. You will be free to do what you want, even if it doesn’t make money, because you will already have all the money you will ever need.

Summary

As mentioned above, I very much followed Allen’s framework for building wealth (not so much intentionally as in hindsight). I sacrificed and built up a portfolio of seven single-family rental properties and one commercial property (with a partner) that have now placed me in the pre-orbit stage (step 3). My equity and cash flow have grown significantly such that I am already in a position to be secure if I lose my job.

The humble single-family rental has helped me to build up significant wealth and allowed me to become financially secure.

However, I’m not quite to where I want to be to put everything on autopilot. So after a few more years of building wealth, I will start to move my money from the single-family houses that have worked as a great growth engine to more income-producing assets that will allow me to live on the income without the need for a salary. My target for being on autopilot is in four years from now, at age 45. Stick around, and I’ll let you know how it goes.

It takes selectivity and patience (this is not a get-rich-quick scheme), but in the end, this framework has done wonders for me and I believe it can do wonders for you too.

Until then, good luck investing, and let me know how I can help!

Building Arks

After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.

CONTRIBUTED BY Building Arks with Jason Clendenen

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