In Part 1 of this series you learned the basics of how the wealthy approach money and investing.
In this Part 2 you’ll learn the Three Pillars To Financial Success, as well as an overview of the different types of assets the wealthy use to make themselves, well, wealthy.
Let’s begin with a review of some key concepts:
1) The wealthy convert their earned income into passive or portfolio income.
2) The wealthy buy assets that put money, or potentially can put money, in their pocket. They take the income they earn from their job or business and invest it in assets that pay dividends, rents, royalties, and other forms of income. This is called cash into assets.
In contrast, the middle class and poor buy things that lose value or are consumed immediately, or they purchase liabilities – things that take money out of their pocket each month via debt or credit card payments. This is sometimes humorously called cash into trash.
An asset is something that puts money in your pocket. It is something that increases in value or provides a return on your investment in that asset.
A liability is something that takes money from your pocket. It is money you owe to someone else.
Most liabilities are debt, such as the balance you owe on a credit card, car loan, medical bills, student loan, or a home mortgage.
The answer is both yes and no.
On one hand, your home is an asset because you build equity each month, and homes tend to go up in value over the long term. (Equity is simply the difference between the property’s value and what is owed on it).
You can borrow against your equity with a home equity loan, or refinance and take money out. This makes it an asset.
However, I like to use Robert Kiyosaki’s definition of an asset as something that puts money in your pocket today, while you own it. Your own home takes money from your bank account each month for the mortgage, property taxes, insurance, and maintenance.
Of course it is necessary to have somewhere to live, and home prices do trend upwards in the long term. But it is not an asset providing income for you today. So, your house takes money out of your pocket each month, and that makes it a liability to you today.
Now, in bookkeeping, someone’s asset is another person’s liability and vice versa.
Thus, your house is a liability to you as you have monthly payments to make.
But for the lender who loaned you the money to buy it, your mortgage is an asset, as it brings monthly income in to them.
OK, let’s move on from this review of Part 1.
There are three pillars to building wealth and creating financial success:
(Click to enlarge)
Let’s talk about each pillar in more detail.
Notice that investing education is the first pillar in the diagram.
This is because financial and investing education is the keystone of success.
Your financial education must come before you invest in anything. Otherwise you are just gambling with your money and your financial future.
You must first acquire the financial education and knowledge to know what you’re doing. Only then can you begin to formulate a plan to invest and build wealth.
The education must come first. Without an education your money is not likely to last.
Sadly, because no one is taught much about money and investing in school, the average American’s overall financial literacy is poor. Here are some alarming stats that demonstrate this:
If you are part of the list above, don’t worry! You’ll soon learn how to change your situation dramatically.
Financial education is vital to living a successful and fulfilling life. Money affects all aspects of our lives – where we live, what career we choose or job we take, our healthcare, our living standards, and more.
Financial education allows you to know what to do with your money, how to do it, and most importantly, why you should do it. It will enable you to do the following:
Financial education lets you plan and create the life you want.
The fact is that no one cares about your money as much as you do.
You need to know how to make the most of the money you make – how to keep it, invest it, and grow it throughout your lifetime.
Without financial education, you will not able to make the best decisions for yourself. Without an education you end up relying on others to make your financial decisions.
Now is the time to commit to getting the financial education you need. Start to make it happen today!
The second pillar is cash flow investments. The most popular investments you can choose are:
Let’s learn a bit more about each of these investments.
Dividend stocks, also known as income stocks, are stocks of companies that pay out much of their profits as dividends to their shareholders, rather than reinvest all the earnings back into the company.
A dividend is simply a cash payment to a shareholder. Dividend payments are usually paid in the form of a quarterly cash payment; however, a few companies pay a monthly dividend which investors love.
These stocks represent stable companies with predictable earnings, such as utilities or real estate investment trusts that invest in rental real estate or commercial rental properties.
According to Wisdom Tree, a whopping 97 percent of the stock market’s total return from 1926 through 2008 came from dividends!
According to a Wall Street Journal article in 2011, dividend-paying stocks returned an average of 8.92% since 1982, compared with just 1.83% for non-dividend stocks.
John Bogle, founder of the Vanguard family of mutual funds, writes that, “… an investment of $10,000 in the S&P 500 Index at its inception in 1926 with all dividends reinvested would by the end of September 2007 have grown to approximately $33.1 million. If dividends had not been reinvested, the value of that investment would have just been over $1.2 million – an amazing gap of $32 million”.
Wal-Mart is a great example of a dividend-paying stock.
Wal-Mart has been a fantastic performer over the last 25 years. Not only has the price of the stock risen, but the amount it pays each quarter for its dividend has also risen.
In addition, there have been eight 2-for-1 stock splits since 1980. What this means is that once the stock price reached a high level that made it too expensive to attract buyers, Wal-Mart’s management would cut the stock’s price in half, but double the amount of stock each stockholder had.
Stockholders ended up with twice as many shares at half the price. But with the price now half what it was, buyers would once again return and the price would rise up again.
Accounting for dividends reinvested into more shares and for the 8 stock splits since 1980:
$10,000 invested in Wal-Mart in 1980 would
have grown to over 75,000 shares
worth more than $6.4 million today!
The annual dividend check today would be $141,000!
That comes out to $11,750 a month!
Dividend stocks are a fantastic way to create a growing income stream, and should be part of most investors’ stock portfolios.
Please check out my Ultimate Stock Investing System premium course if you’d like to learn how to invest in stocks.
Bonds are a vital part of an investment portfolio. Bonds have traditionally been considered as solid and dependable income investments with steady returns and a reasonable degree of risk.
A bond is essentially a loan of money to a company, city, municipality, federal agency, or government. When one of these entities needs to borrow money, they turn to the bond market to attract capital from both individual and institutional investors. In fact, the bond market is many times larger than the stock market in terms of size and flow of funds.
When you purchase a bond, you are lending money to that entity, which is known as the issuer. The issuer agrees to repay the principal – also known as the original investment amount or face value – of the bond when it matures at the end of the term you agreed to when you lent the money.
When the bond matures, the principal is repaid to the lender or owner of the bond, and the investment is complete.
However, you don’t have to hold the bond until maturity – you can sell it anytime in the open market.
Most bonds will have semiannual interest payments. For example, a $1,000 bond with an 8 percent interest rate will pay investors $80 a year, in payments of $40 every six months. This $40 payment is called a coupon payment.
When the bond matures, investors receive back the full $1,000 face value amount of the bond.
Bonds are used as part of a diversified investment portfolio because they are income-based investments.
Bonds usually move in an opposite direction than the stock market (but not always!) so they help even out any volatility in a portfolio’s performance.
You won’t get rich with bonds, but they are not intended for that. They are used to provide a safe and secure income stream with low volatility.
Please check out my Bond Market Mastery premium course if you’d like to learn how to invest in bonds,
Of all the asset classes, real estate has the biggest potential to make your wealthy for life.
Real estate is one of the best and safest investments you can make, as long as you have the financial education to understand the risks and rewards.
Real estate investing is broken down into two types: rental real estate and flipping.
Rental real estate is especially a great investment for anyone looking to become financially free because it can provide you with a stable long-term income stream.
Plus, you get all the tax advantages and all of the appreciation from owning the property. That’s a great deal!
Think about it – banks and other institutions will lend money for real estate, but not for stocks and bonds. They allow you to use their money to build your wealth.
There is no other investment where you can borrow 80% to 90% of the purchase price to finance your investment.
You can’t get a 30-year loan to buy stocks (though you can buy them on margin, which is a type of loan with restrictions).
You don’t get phantom losses like depreciation with most stocks or bonds.
You don’t have a way to roll gains from one stock to another to avoid paying taxes, like you can do with real estate in a 1031 exchange.
Finally, as everyone needs a roof over their head, buying real estate is part of the American dream.
Investors who are just starting out frequently look to purchase a small apartment building. They live in one unit while renting out the others, or convert a basement into a rental unit. This is something that you can consider.
This is especially valuable if you live in a high-cost city where properties are prohibitively expensive. If structured correctly, you can frequently live for free with your tenants paying all the expenses, including the mortgage and property taxes.
The wealthy may make their money in business, but they store it in real estate.
Please check out my Real Estate Riches premium course if you’d like to learn how to invest in rental real estate.
Tax Lien investing is a little-known but fascinating and lucrative way to invest in real estate.
Tax lien investing is ideal for investors who want to get into real estate but don’t have lots of money or don’t want to deal with tenants or be a landlord.
The two main reasons to invest in tax liens are for their high return – up to a 36% annual return – and for a nice income stream if you buy them consistently. And if you are lucky, you just may obtain a free and clear property (meaning without a mortgage) for pennies on the dollar!
Tax liens are considered a safe investment in that your investment return is fixed by law in each state and is backed by real estate.
Tax sales are not correlated with any other asset class like stocks or bonds, so they can be a great way to add diversification to your investment portfolio.
It doesn’t take a lot of money to get started. Counties sell tax lien certificates on all types of properties, so delinquent taxes can range from $50 or so at the low end to several million dollars at the high end.
In the U.S., every property owner must pay property taxes to their local county.
Counties and local governments rely on these property taxes to fund services like police and fire departments, hospitals, public schools, emergency medical services, welfare, and more.
When property owners do not pay their property taxes on time (and many do not), the counties run into financial problems.
Property tax delinquencies are continually rising and total approximately $15 billion nationwide annually. State and local governments find themselves in a difficult situation; the failure to collect on these past-due taxes dramatically affects their budgets, especially since the recent financial crisis.
To solve this problem, counties are allowed by law to sell the delinquent property taxes to outside investors and collect the money owed.
In many states the counties sell a tax lien, also known as a tax lien certificate, which is a lien secured by the real estate it is attached to.
By issuing a tax lien certificate, the county owed the tax revenue is paid by an investor purchasing the tax lien. These certificates allow the county to collect the tax revenue they need to run the government this year – rather than have to wait for the property to be auctioned to collect the taxes due, which could be many years down the road.
The government is satisfied because they now have the funds they need to pay for the services they’re providing.
In return, the investor receives a tax certificate that entitles them to a guaranteed interest rate on their investment.
This tax lien is backed by the property. How? When the investor buys the tax lien, he becomes a lien holder on the property. This gives the investor a legal right to foreclose on the property under certain conditions. In fact, the property cannot be sold or refinanced until the lien is satisfied.
This tax lien essentially forces the property owner to pay the taxes owed or risk losing the property.
The delinquent property owner is assessed penalties and interest on the balance owed. The owner is allowed a certain amount of time to pay the delinquent taxes, penalties, and interest.
Because most property owners don’t want to lose their property, they pay off their taxes within the allocated time frame.
The county then notifies the lien buyer that the property was redeemed and instructs them to turn in the tax lien certificate for payment. Upon receipt of the certificate, the county sends the lien buyer his original lien investment plus interest and penalties due. The process is complete.
However, if the property owner does not pay the delinquent taxes within the prescribed amount of time, the investor who owns the tax lien can foreclose and take ownership of the property.
That is the basic process.
Please check out my Tax Lien Money Machine premium course if you’d like to learn how to invest in tax liens.
Pillar #3 includes investments that are not designed to provide income, but to maximize growth in the price or value of the investment. The most popular growth investments are growth stocks, real estate, and gold and silver.
Growth stocks are stocks of companies that are expanding and growing rapidly. Growth stock investing is the most common way to invest in the stock market.
Unlike dividend-paying stocks that pay out part or all of their earnings to shareholders, most growth stocks do not usually pay dividends. They prefer to reinvest most or all of their earnings back into the company to fund growth.
Investors buy growth stocks because they believe the companies will continue to grow their profits over time, and the share prices will follow with continually higher prices.
Growth stocks tend to be fast-growing companies in rapid growth sectors like technology, software, mobile, and the Internet. Examples are GoPro (GPRO), Tesla (TSLA), Jazz Pharmaceuticals (JAZZ), Cavium (CAVM), SolarCity (SCTY), and Facebook (FB).
Growth stocks can also be large well-known companies like General Electric, Visa, Microsoft, and Coca-Cola. But it’s important to know that these companies no longer experience the fast growth they experienced in their early days, and now grow much more slowly.
It is important to always remember that you can only make money with growth stocks if the stock increases in price from where you bought it. This is in contrast to dividend stocks that pay you dividends, no matter if the stock goes up, down, or sideways.
Buying growth stocks means you are investing for capital gains which are gains that come when you buy at one price and sell for a higher price.
Let’s take a look at two growth stock examples.
Costco has been one of the best long-term growth stocks stories of the last 5 years. It took a large dip during the financial crisis of 2008-2009, but rebounded with a vengeance to all-time highs as of this writing.
Chart courtesy of Stockcharts.com
Chipotle Restaurants (CMG)
Chipotle also has been one of the best wealth-creating growth stocks of the last 5 years. It also took a large dip during the financial crisis of 2008-2009, but rebounded to rise over 1,000% from its lows in 2009.
Chart courtesy of Stockcharts.com
Growth stock investing is a great way to grow your wealth and account balance. In effect, you are investing in the power of American business, which has grown tremendously over the last 90 years despite recessions, wars, structural economic changes, and a depression.
Please check out my Ultimate Stock Investing System premium course if you’d like to learn how to invest in growth stocks.
While I covered rental real estate under Pillar 2: Cash Flow Investments, it is also a growth investment because the price of real estate generally rises over time.
While long-term real estate investors may eventually sell a property which has appreciated over the years, it is flipping real estate that has become the most popular way to invest in real estate today.
What is flipping? Flipping is simply a real estate technique of buying a property cheaply, usually at an auction, fixing it up, and selling it as fast as possible.
Flipping can generate significant income in a short amount of time. A flipper can make money as fast as he or she can buy a house, fix it, and flip it to the next buyer.
It can be a good way to get into real estate if you have little money or you don’t want to deal with tenants.
Flippers generally buy single-family homes with the intent of selling them quickly to someone else for more money (hopefully!) than they paid. Foreclosures, short sales, tax sales, and REO properties are prime candidates for flipping.
Timing is everything when it comes to flipping. Flipping works best in rising markets like we experienced from 2003-2006 and from 2012 through today.
Many people made a lot of money flipping houses from 2003-2006, but a lot of them lost a lot of money in 2007 and 2008 when prices crashed and they couldn’t sell their properties at a profit.
Flippers don’t get into a property’s financials in terms of determining if it is a good investment for the long run or not. Flipping is all about the quick buck.
A flipper’s financial due diligence on a property is usually limited to running comps to estimate what the property will hopefully sell for, estimating repairs costs, and estimating sales costs.
Check out the many TV shows devoted to flips like Flip or Flop or Flipping Las Vegas to get a feel for what flipping is all about and its benefits and challenges. It is not for everyone but it can be quite lucrative if you are good at managing people and projects. Competition is fierce, but many flippers who work efficiently can make very good money.
Please check out my Real Estate Riches premium course if you’d like to learn how to flip properties.
For over 5,000 years, gold and silver have been known as pure wealth. Gold in particular has always been relied on to be a storehouse of value for centuries.
Currencies come and go (not only in recent years but throughout the ages), but gold and silver have endured as real money.
One of the primary reasons to invest in gold and silver is to protect your existing wealth.
For much of the 20th century the U.S. operated under the gold standard, which meant that the dollar was backed by gold. What this meant was that you could take a dollar bill to your local bank, and they would exchange it for a dollar’s worth of gold. Having a stable currency helped make the U.S. the economic powerhouse it had become in the 20th century.
But when Nixon took the country off the gold standard in 1971, everything changed.
Under our current fiat money system (meaning that our money is not backed by anything but the government’s regulations and laws over its citizens), central banks around the world could print money at an ever-increasing rate to pay for government spending and debt. There are no limits imposed on money creation as there were when the gold standard was in effect.
This has caused economic problems. Slowly but surely the value of money is being eroded, year after year, decade after decade, through inflation. We’ve all seen the effects of inflation where a candy bar that once was 15 cents is now $1.25.
Economists argue on how the current U.S. debt of over $18.2 trillion will play out (check out the debt clock at www.usdebtclock.org). But sadly, over the centuries all governments that have issued fiat money have eventually gone bust, taking the populace’s wealth with it. The U.S. may not be any different.
For this reason alone, investors purchase gold and silver as a hedge against government’s tendency to print unlimited amounts of money, thereby destroying the value of their money.
Many investors flee to gold when they become fearful or uncertain, whether it is of a looming financial disaster, government misdeeds, a falling dollar, or rising inflation. For this reason, it is considered a safe haven investment.
Both gold and silver play a role in the markets as a safe haven in times of financial and economic uncertainty. Both metals tend to rise when issues such as debt defaults, currency manipulation, and economic problems rise to the surface.
In essence, gold and silver move in tandem with the degree of trust and perceived safety in our economic system. When there is smooth sailing, prices decline. When there are hiccups and convulsions, prices rise.
Gold especially is an international currency. Though no Western country will admit that gold holds a role in modern international finance and banking, all countries hold part of their wealth in gold.
Gold and silver, as scarce commodities, cannot just be printed or created out of thin air like dollars or euros or yen. And because central banks continue to print trillions of dollars, yen, and euros, gold and silver will almost certainly continue to increase in value and ultimately become money once again.
In fact, it is starting to happen now. In 2011 and 2013 respectively, Utah and Arizona passed laws allowing gold and silver coins to be used as legal tender, as they once were throughout the U.S.
Gold and silver have been stores of value for many thousands of years, and will continue to be so for many thousands of years to come. All investors should hold some gold and silver as part of their investment portfolio.
Please check out my Gold & Silver Profits premium course if you’d like to learn how to invest in gold and silver.
The Three Pillars of Financial Success are your blueprint to becoming wealthy. Together, these three elements lead to lasting wealth:
If you want to become wealthy, just follow these five steps:
1) Buy income-producing assets that put money in your pocket. This is investing for income or cash flow.
2) Buy more income-producing assets that put money in your pocket.
3) You guessed it – buy even more income-producing assets that put money in your pocket.
4) Use the money generated by an asset to buy more of that asset, or other assets. This is using compounding to leverage your return and wealth.
5) Keep your expenses lower than your income so you can save enough money to purchase assets on a continuous basis.
It’s consistent action that leads to results. Get started today!
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The wealthy may make their money in stocks or in business, but they hold their wealth in real estate.
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Gold and silver have been considered wealth for over 5,000 years, and will continue to be for the next 5,000 years. All investors should hold some gold and silver as part of their investment portfolio.
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