The 1% usually don’t get rich by accident. Most of them don’t inherit their wealth, and most of them aren’t any smarter or more hardworking than you or me.
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They simply do two things that you don’t (or haven’t yet):
1. Save significant chunks of money consistently over a longterm period
2. Achieve a strong return on savings over a longterm period
Yes, we’ve all heard about people who get wealthy by building a massive business or who invested in Apple and hit the jackpot. Good for them. Too bad that fairytale just isn’t gonna happen for you. You are going to have to follow the above rules and crush it if you want to be in the 1%.
And you are going to have to do it the hard way.
Let’s Examine These Two Rules
Rule #1: Save significant chunks of money consistently over a longterm period
As I see it, there are two ways to increase the “chunks” of money that you consistently save:
a. Earn more money OR
b. Spend less money
Notice that I list “earn more money” first.
If you aren’t able to earn a high income (for example, maybe you make less than $30,000 per year), then you probably aren’t using your time effectively by learning to invest. Your time might be better spent developing a skill that will allow you to earn more money. On the other hand, if you earn a high income (maybe you make over $50,000 per year) and aren’t able to save $2,000 – $3,000 per month or more, you are spending too much money.
Related: How Much Money Do You Need to be “Rich” and Is It Worth It?
Once again, you need to figure out how to reduce your monthly expenses before there is any point in learning how to invest. In my opinion, achieving a strong return on a $5,000 investment is unimpressive. Why put in hours of work to try (and probably fail) at getting a 1-2% boost in return? That’s just $50 -$100 on your $5,000 in the bank, and unless you are a prodigy, any outsized returns are probably just lucky.
The return on your time is incredibly negative if you don’t have significant capital to invest.
Rule #2: Achieve a strong return on your savings over a longterm period
This is where those one percenters really separate themselves from the rest of us. Achieving a strong return over a longterm period isn’t necessarily hard, but it does require two things:
a. A clear understanding of the rule book (better known as “tax laws”)
b. A foundation in Real Estate
Once able to consistently earn and save large chunks of money on a regular basis, a future one percenter needs to study and have a working knowledge of tax laws and understand how to value an investment.
Think of wealth creation like a game or a sport. There is no possible way you can play and have a fair chance at winning any competition without knowing the rules! Before working out, attending practice, or scoring a touchdown, every single football player gets started by watching the game and learning the rules. This obvious undertaking is completely ignored by most Americans, but I’d guess that about 1% of the country knows the rules inside and out.
Related: How to Get Rich: 7 Awesome Ways to Build Big Wealth Today
To my second point, some of you might think it controversial to list “a foundation in Real Estate” as a must for any of us aspiring to be in the 1%. This is BiggerPockets. Come on. Do I really have to spell out why Real Estate should absolutely be the first significant investment any future one percenter makes? Whatever.
Here goes.
3 Reasons Real Estate Should Be Your First Significant Investment
1. A first investment in Real Estate (as in a primary residence for most) returns part of your living expenses back to you. If you rent for $700 per month, your return on that $700 is negative 100%.
On the other hand, if you buy a small property that ends up costing you around $700 per month to live in and maintain, then your return on that $700 is a flat 0% for the few hundred that go towards principal (because paying down principal builds your equity in the property; you are basically moving money from your bank account and into your equity in the property) and perhaps negative 70% (depending on your tax bracket) for the interest, as mortgage interest on a primary residence is tax deductible.
Instead of a negative 100% return, you might now be achieving a negative 60-70% return on an expense that you would have to pay anyway! That might seem unimpressive, but it is WAY better than negative 100%. I challenge you to to find me any other investment that returns you 30% or more annualized. Ever wonder why the majority of the net worth of an average American is in the value of their home?
2. While boosting your return on living expenses by 30-40%, you are simultaneously earning a shot at appreciation.
The average annual rate of property appreciation in the United States is about 5% per year. That’s not going to beat the S&P, but combined with the benefits of increasing your return on living expenses, its a nice bonus.
3. Real Estate, if purchased correctly, can produce cash flow for you in perpetuity.
This is something that BiggerPockets users are quite familiar with and can talk about in greater detail than I. But the first investment should absolutely be a property that can cash flow if a tenant were to occupy it instead of you.
Conclusion
When it comes down to it, all I did here is list out four things you knew already. They are obvious to anyone attempting to build wealth with time tested strategies:
1. Earn more money
2. Spend less money
3. Know the rules (of investing)
4. Buy Real Estate
If you don’t earn a lot of money and save a lot of money, make no mistake – Real Estate Investing is NOT for you.
You can certainly make money in the Real Estate Industry through wholesaling, selling, marketing for investors, or by working at BiggerPockets, but do not mistake that for “investing.” Those types of work are no different than any other line of business in the sense that you aren’t making money off of your money; you are creating value for yourself with your TIME and SKILL.
Develop skills and earn money by applying yourself to them with your time, and then invest.
On the other hand, if you are able to regularly and significantly save and invest, then you need to be learning the rule book and playing the (investing) game. Unless you have access to investments that the rest of us don’t, then Real Estate is the way to go.
What’s your get-to-the-one-percent plan? How does real estate figure in to your wealth building strategies?
I want to hear from you — leave me a comment below!