Success

How You Can Build Wealth Using This One Simple Technique

how to build wealth

Building wealth takes time and knowledge. There is no get rich quick method. There are a few ways to begin building wealth.

Passive Income vs. Active Income

Active Income

Active Income is based on your own personal efforts to make money by exchanging hours for dollars.

It is the income that comes in when you are actively earning it, but ceases to exist when you stop your earning activity.

That means, if you work you get paid. If you don’t work, you don’t get paid.

It’s a simple concept.

So simple that the majority of humans follow it and exchange their hours for dollars.

The Rat Race

I first read about the rat race in Robert Kiyosaki’s book Rich Dad, Poor Dad.

In the book Kiyosaki describes the cycle of working for money that leads to nowhere, kind of like a rat running on his spin wheel inside his cage.

Working for money and exchanging hours for dollars is the hardest way to make it out of the rat race, and often it’s near impossible.

Disagree? How’s it working for you?

 

This is because once you are in the rat race you spin your wheels to try to maintain or advance your lifestyle and you often create more debt to do so.

Those in the rat race may not know how to get out because they do not know how to use assets and instead they keep creating liabilities.

If you have not read the book Rich Dad, Poor Dad by Robert KiyosakiI recommend it as a must read just to get your perception of assets and liabilities correct.

See all of my recommended books for personal financial success here.

How to Get Started

Most people are not ready to stop working for money, me included.

In the meantime, you can begin building cash for your portfolio. In the book The Richest Man in Babylon by George S. Clason, one of the characters, Bansir, seeks help from Arkad, who is the richest man in Babylon.

Arkad advises the man to pay himself first.

Each time he makes income, he should set aside 10% of that income.

That way, when an opportunity to invest comes his way, he will be ready.

Bansir follows Arkad’s advice and was able to invest in a business venture that provided him with passive income.

It is very difficult, if not impossible, to grow a profitable portfolio without income. Setting aside 10% of every dollar you earn will allow you to grow your investments consistently.

Passive Income

Passive Income is income that not based solely on your ongoing efforts.

It may be a recurring income stream from a one time job, like royalties for a singer, or recurring income from a business that you own.

When you can stop trading hours for dollars and receive dollars even without giving up hours, you will have passive income.

Using Dividends

Dividends can help you to make passive income. Some companies issue their stock with a dividend attached.

If you own the stock, they will pay you directly in cash, or additional shares, from the earnings that they make for that quarter or year.

If you have the right stocks you can also benefit from price appreciation.

Ready to start investing? Watch this video to figure out how you can get started investing in the simplest way possible.

The stock price and your overall portfolio will increase when the company does well. And even if the stock price declines, you will still receive the dividend as long as the company does not cancel it.

Some investors will not purchase a stock if it does not come with a dividend attached.

Using Bonds

Bonds are also a way to generate passive income.

You can use coupon paying bonds to increase your cash flow. Your initial investment will not grow however, like an initial stock investment might, but it will also not shrink on the downside.

Most investors use a combination of passive income sources to diversify their risk.

It is highly risky to depend on the cash flow from a bond or a dividend paying stock only.

When you are evaluating a bond for your portfolio, you will want to check the company or project that guarantees the cash flow for the bond.

The bond will be rated for its riskiness based on several factors.

Building Wealth

So there you have it.

Passive Income and Active Income.

There are two main ways to build wealth, by using active income or by using passive income.

Those who use active income to build wealth will find that there they do not possess enough hours to trade for the wealth that they want.

They will continue to spin their wheels in the rat race until they give up in frustration.

The smart investors that learn to use passive income to build their wealth will see their net worth grow with less and less work on their part.

Building a profitable portfolio with passive income investments is the key to building wealth.

That is why I recommend starting with your personal goals. In order to become a financial success, you have to be honest with yourself and willing to learn.

The first step is creating a budget that works for your personal goals.

But first I have a confession to make. I don’t have a budget. Here’s why.

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  • http://dividendmonk.com Dividend Monk

    Good article. I read Rich Dad Poor Dad once, and there were things I disagreed with in that book, but as a motivational tool and as a streamlined description of a few key core ideas, I think it can be a really important read for people.

    A combination of dividends, bond interest, and the occasional option premium or capital gain are great sources of passive or mostly passive income generation.

    • http://www.jaicatalano.com/blog.html Jai Catalano

      I love the idea of passive income. I am only seeing the fruits of that labor within the last 7 months. It’s nice to get paid for something you did a while ago and have the payments keep coming in from that source.

      • http://youngadultfinances.com LaTisha Styles

        Do you see recurring income from the photography business? It seems like that would be a good way to build some passive income.

    • http://youngadultfinances.com LaTisha Styles

      Thanks! Yeah, that book was really an eye opener for me because I really didn’t understand how money works and how we are trapped by falling in line with the traditional methods of working for money.

  • Adam

    I really advocate both paying yourself first, and making your money work for you. Dividends are a large part of that. In fact I am loving the fact that financially I am in a place that every 3 months I take home 20-25 dollars in dividends. While it will not make or break me currently, reinvesting and putting that money also at work for me, is only improving my odds of living comfortably in retirement.

    • http://www.20sfinances.com 20′s Finances

      I agree – passive income seems to be the only way to build wealth and have it manageable. I’d rather work hard now at passive income streams and have it easy in a couple years.

      • http://youngadultfinances.com LaTisha

        Exactly! I think putting the effort in now makes the payoff even better once it comes.

        • http://onecentatatime.com/ SB @ One Cent At A Time

          Good points. Mathematically you can build wealth by this formula

          Wealth = Income (tends to infinity) – expenditure (tends to 0). The limit is really infinity when your income tends to that number.

          Interesting, isn’t it?

          • http://youngadultfinances.com LaTisha Styles

            Nice equation. That’s really the best way to put it. The problem is too many people looking for a get rich quick scheme.

    • http://youngadultfinances.com LaTisha Styles

      I’m sure that helps with cash flow. I reinvest all of my dividends right now but I would change it up once I’m ready to go full time on passive income.

  • http://poorstudent.ca Poor Student

    I have yet to really start working for active income much, but I already am getting a head start on my passive income. I have started my dividend portfolio before I turn 20 and plan on increasing it every chance I have. It is one of the things I am most proud of. The money I have now is going to be paying me for many years to come

    • http://youngadultfinances.com LaTisha Styles

      Good point. The fact that you have more time on your side will really help with compounding.

  • http://www.thedebtmyth.com/ Jackie

    Paying yourself first is absolutely the way to go. I’d suggest a bigger percentage though, since you want some for retirement, some for emergencies, and some for investments.

    • http://youngadultfinances.com LaTisha Styles

      Very true. I have a minimum 10% that goes toward the emergency fund and then I save on top of that for investments and travel and such.

    • http://frugalportland.com Kathleen @ Frugal Portland

      How you can build wealth: make more money! :) It does irk me a little that blogging is considered passive income, since… who defined it as passive? If you think about it, you’re trading your time for VERY LITTLE money with a blog.

      • http://youngadultfinances.com LaTisha Styles

        Yeah, blogging is definitely not passive but if you do it the right way, you could launch yourself into some really passive streams of income.

  • http://www.worldoffinance.biz World of Finance

    Trading time for money, a classic way of earning money. As you mentioned, with this method one runs out of hours in a day making passive income a lot more attractive. One profession that doesn’t run out of hours in a day is recruiters, the more people they can get working for them, the more money they will make.

    • http://youngadultfinances.com LaTisha Styles

      Very true. That is also a benefit of referring products that offer monthly recurring commissions from the users. After a while the income continues to compound on itself.

  • http://www.freemoneywisdom.com Jon — Free Money Wisdom

    Great article! Blogging is a great way to make passive income. I suggest it highly for those who don’t already do it. It’s fantastic. But like anything it takes time to build a fan base and time to work to make it truly “passive.”

  • http://youngadultfinances.com LaTisha Styles

    So true! I am seeing that things are more passive now than when I first started. Especially since I used to change my design every couple of months. Now I just write a few posts at a time and I can just come by and respond to comments as they come in.

  • Thad P

    Passive income is a great idea, and one I have only come to in the past couple of years. Dividend paying stocks was something I learned 15 years ago from my parents (and I was in my mid 30s then).

  • http://youngadultfinances.com LaTisha Styles

    Dividend paying stocks are a great way to get into passive investing.