How to truly build wealth

Building wealth seems simple enough. I remember hearing when I was younger, "go be a doctor, they make a lot of money". Making a lot of money is great, and necessary for early financial freedom, but making a lot of money is only one piece of the equation for actually building wealth. How many times have we seen pro athletes or celebrities who make millions but somehow wind up bankrupt? There's a little more to it than making a lot of money. Here's how you actually build wealth:

Pay down bad debt

Bad debt is any debt that produces a net negative cash flow. Credit cards, personal loans, car loans, etc. are all considered bad debt. These types of debt suck cash out of your pocket every month. Good debt is any debt that produces a net positive cash flow. A loan on an investment property is good debt because it's used to invest in a rental property that should produce cash flow over and above the investment's operating expenses and debt service, resulting in a net positive cash flow.

You don't need to pay more than the minimum on good debt right now, however, bad debt should be paid off ASAP, especially the high interest bad debts like credit cards and personal loans. These types of debts typically carry interest rates well over and above any possible investment return, therefore, your best investment is to pay off high interest debt to yield a guaranteed high return. Paying off the debt means you will no longer be charged interest for the principal paid, locking in a return equal to your interest rate, which could be 15%, 20%, or even 25%! See my blog post, How to get out of debt, if this is where you're starting.

Invest in yourself

Okay, so you've started paying down your bad debts. While you're doing this, it's time to make arguably the most important investment you'll ever make, which is in yourself. How do you invest in yourself? There are many ways. I would consider your financial education to be the most important. Your financial education is not a finance degree. A finance degree teaches you how to make your boss rich, not how to make yourself rich. A financial education involves learning about personal finance. Books, articles, news, and podcasts are all fair game. It's not enough to learn how to manage your finances, you also need to learn why it's important or you won't be motivated to make the right financial decisions. If you learn why it's more important to save money to invest than to buy a new sports car or big house, good financial decisions will become second nature.

If you have an entrepreneurial spirit, invest in yourself by learning how to buy or build businesses. You likely won't build significant wealth by working your 9-5 forever. If you work for 40 years and work your way up to the C-suite, then maybe. Similar to your financial education, you can read and learn about entrepreneurship.

Other ways to invest in yourself might include setting and achieving other personal goals that build your confidence. I set a personal goal to climb Mt. Rainier in 2017. It was probably one of the best investments I ever made, as I gained confidence from achieving my goal, which could be applied to other areas of my life.

Build or buy businesses

Buy franchises or build businesses that produce positive cash flow. The advantage with buying a franchise is that you're buying a business model that's been proven to generate profits. The disadvantage is that you'll have to pay franchise fees and the start-up costs can be significant. On the other hand, with starting your own business you do not have to pay franchise fees but the start-up costs can also be significant.

Start getting smart on entrepreneurship and what kind of businesses interest you. Perhaps you're a software engineer working for a company and you have a great idea to build a program that helps doctors find clients. Work on turning your ideas into a business. Buying franchises or building businesses isn't a requirement for building wealth, but it certainly helps accelerate the process.

Buy assets, not liabilities

An asset is something you buy that produces positive cash flow and a liability is something you buy that produces negative cash flow. Assets can be many things and liabilities can be many things.

Here are some examples of assets:

• Bonds
• Stocks
• Mutual funds
• Exchange Traded Funds
• Real estate

Here are some examples of liabilities:

• A financed house
• A financed car
• A financed education
• A financed lifestyle
• This wealth building concept is very simple: buy assets and don't buy liabilities.

Conclusion

This is a very simplistic layout of how to build wealth. The main thing is having the right mindset. You need to understand your "Why". Why do you want to be wealthy? If you understand this, the world will be your oyster.