6 Opportunities to Build Wealth
Lately, billionaires are all over the news. Elon Musk, Jeff Bezos, Richard Branson are all self-funding trips into space. What’s the secret to becoming wealthy? Most people would consider themselves wealthy with a fraction of what these guys are worth. Here’s the secret – once you create wealth, it reproduces.
Most of us take a modest approach to money management. We hit the maximum on our 401k, maybe have an investment app. We dutifully save an emergency fund and put money in a 529 plan for the kids to go to college. It’s all good stuff, but it’s not going to build real wealth.
What is Real Wealth?
Real wealth is defined by more than financial gain. It gives you the freedom to live life to the fullest. No more fussing with work/balance, counting your PTO, or putting your dreams on hold. Real wealth means having the income to do more of what you want and less of what you don’t. It’s a change in mindset for most people.
We look at our jobs as an inevitable part of life. That’s our financial security, right? It has never been more obvious how faulty that premise is than during the last decade. We’ve seen the economy tank twice, resulting in epic unemployment. Real wealth means independence. You aren’t dependent on a job – you create your own financial security. No fear of losing a paycheck.
How to Start Building Wealth
There’s more to this than the size of your paycheck. Yes, the more disposable income you have, the easier it is to put it to use. Just as important is your credit score and how well you prioritize saving instead of spending. Saving is how you build a nest egg that starts you on the path to real wealth. That goes for everyone no matter how big a salary you have – people making more money tend to spend more money.
There are several different ways to build real financial security. You’ll hear most advisors say you have to start early. But if you didn’t, don’t think you’re out of the game. Every investor has an investment time horizon. The time horizon is the length of time you expect to hold your assets. The younger you are, the longer the time horizon. It’s easier to take risks because you have time to recoup. The older you are, your time horizon is shorter but you may be less inclined to risk your money.
Investments show the most profit when they are held long-term. That’s a fact. But it shouldn’t stop you from trying to increase your wealth. Your investment strategy should reflect your current circumstances and risk tolerance.
1. Invest in Real Estate
This is an excellent entryway into wealth. Buying rental properties is doable if you have a good credit score. You don’t have to be a landlord – it’s smarter to hire a property manager as soon as you can afford it. They not only handle the property maintenance but also screen and vet potential renters. Foreclosed homes have bargain prices, but they need a thorough inspection. It’s easy to be tempted by a price only to find out the house is a money pit.
An important part of real estate investing is what you charge for rent. You want to make a profit but not price the rental out of the market. There’s a different problem when you go too low – you end up attracting tenants with less ability to pay. Research rents in the area and price your rentals accordingly.
If can’t afford a down payment or prefer a passive investment, you can still get into real estate. Real Estate Investment Trusts (REITs) pool money from investors to buy, manage or finance income-producing properties. A REITs’ investments might include apartment buildings, beachfront rentals, rental homes, and even commercial properties. At least 75% of their gross income must come from rent, real estate sales, or interest on mortgages.
REITs are required by law to distribute 90% of their taxable income as dividends to shareholders. For publicly-traded REITs, the minimum investment is the price of one share. For privately held REITs, there’s a higher investment threshold, typically between $10 and $20K.
2. Dividend Growth Stocks
Dividend growth stocks are a way to reproduce investment income. They pay dividends to shareholders annually or every quarter. The more shares you own, the bigger the dividend. If you want, you can keep the money and add it to your taxable income. Dividend growth stocks are a form of income investing.
These stocks are normally issued by large, well-capitalized companies. The expectation is the stock price will increase in value and so will the dividend. But here’s how building wealth begins. Unless you need the additional income, you can reinvest it. Buy more shares with the money the company paid out to you. This strategy allows you to build a strong portfolio of successful firms that have the resources to survive economic downturns.
This strategy can be actively managed or handled as a passive investment. One passive brokerage, M1 Finance, lets you pick from established portfolios or create one from fractional shares. There’s no minimum investment and no trading fees. If you are new to investing, it might make sense to rely on a robo-advisor to start.
3. Bond ETFs
These funds are a boon for late-in-life investors. Bonds aren’t as sexy as stocks, but they require less risk. A bond is a loan to the people who issue it. An EFT is an Exchange Traded Fund that tracks an index fund. This is a quick way to get in the market without buying individual bonds. Bond EFTs make frequent income payments.
When you buy an individual bond, it has a term to reach maturity. The bonds in an EFT do not typically mature. They are traded like you’d trade a stock, so there is some risk you could lose your money. But some bond EFTs like the Guggenheim and iShare, have begun offering some bonds with maturity dates. The bigger question on Bond EFTs is fees and taxes.
Because EFTs are traded, these accounts are actively managed. That means they may charge fees and/or commissions. Make sure you check to see the costs before you pick your brokerage. The other issue is taxation. Unless you reinvest your income from the account, it’s taxable. Municipal bonds are tax-exempt. Depending on your tax status, they may be an option.
Bond EFTs offer high liquidity and add diversity to your portfolio with a single purchase. Find the fund that best suits your situation.
4. Invest in Farmland
If you live in any city in the U.S, you might think this is crazy. But what if investing in farmland could produce an average annual yield of 12% Got your attention, didn’t we? This is an emerging investment opportunity in the crowdsourcing space, called AcreTrader. It’s open to accredited investors.
Farmland investments have been high performing assets since the 1990s. In 2018, they outperformed the S&P 500 and gold. Like other real property investments, farmland is a hedge against inflation, when food prices rise, crop values rise too. Overall, these investments have a low versatility ratio, which will appeal to conservative investors.
AcreTrader identifies and vets parcels of land. They put each parcel into a separate LLC and break them up into a limited amount of shares. Each parcel is put up on their website. Investors log in to a customer portal to buy shares. The minimum investment runs between $10 and $15k. They buy farmland all over the country and have a map that shows estimated return by state.
5. Renewable Energy Investments
You don’t have to be a tree-hugger to see that climate change is affecting the world. Renewable energy is consists of sustainable resources, like solar and wind, that can’t be depleted. It’s expected that investments in the renewable energy sector will grow to over $5T by 2030. It’s expected that fossil fuel stocks will fall significantly as a result.
The President’s new Infrastructure Bill includes incentives for renewable energy. Funding for new projects will accelerate the growth of smaller or mid-size alternative energy firms. Renewables can experience some weather-related volatility, but fossil fuel stocks collapsed during the pandemic. Energy consumption is forecast to grow by 50% over the next 30 years.
Renewable energy looks to be a major growth industry. There’s the Global Clean Energy ETF (ICLN) from iShare, which tracks to the S&P 500 Global Clean Energy index. Another is SPDR S&P Kensho Clean Power ETF (CNRG) focused on solar, wind, hydro, and geothermal productions. If you prefer to buy individual stocks, consider Bloom Energy (NYSE:BE) or Atlantica Sustainable Infrastructure (NASDAQ:AY).
5. Startup Investing
Before we start, this is only for people with a high-risk tolerance. Startups are unproven business commodities that may or may not survive, no matter how much funding they get. It’s important to look at leadership, organizational hierarchy, and debt. Plenty of investments are lost to a “great idea” the founders didn’t know how to manage.
Crowdfunding platforms are how to Invest in startups, prior to an IPO. Some platforms are only available to accredited investors, but not all. Two interesting options are StartEngine and MicroVentures. StartEngine leans toward startups in high growth potential industries, like robots and space exploration. But it’s kind of a weird mix – they also offer food and beverage startups. You can buy shares in the company or finance debt. You don’t have to be accredited. The minimum investment runs between $100 to $250, depending on your pick.
MicroVentures has a mixed bag of investment opportunities, leaning toward consumer products. But they also have some high-growth niche industries like cannabis and biotech startups. They serve all types of investors, accredited and otherwise. For the non-accredited crowd, the minimum investment is around $100 but can be higher depending on your pick. One of the complaints about crowdfunding is the illiquidity – once you buy, it’s hard to get your money out. MicroVentures offers a secondary marketplace for early investors to sell their shares and get out.
None of the money you put in crowdfunding is insured or guaranteed. All crowdfunding platforms vet the opportunities they offer but make sure you take a look at any information they provide. If you’re going to invest in a startup, don’t ever invest any amount of money you can’t afford to lose.
To Build Wealth
The best way to get started is to live below your means. That’s the mindset – step away from instant gratification. Make sure you have some financial goals in mind – ideally on paper. Writing it down is a commitment to it. Carry that paper (or digital note) with you to every store you visit.
Next, evaluate your goals. If your goal is to make a million dollars in 7 years, how much money do you need to invest, and at what expected rate of return? That should give you extra incentive to keep your eye on the prize. Remember, this isn’t a retirement plan. Real wealth means financial independence.
When properly managed and invested, money reproduces like rabbits. Education yourself on investing, not just on your investments. There are lots of strategies to make the most of your money. Find the one that works for you and follow it.
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