Investing for Building Wealth

There are thousands of articles written in the personal finance space about investing for retirement. But far fewer focus on investing for building wealth. Investing for retirement is a form of investing for building wealth, but doing it with a very specific purpose.

In theory, you can have a very large retirement nest egg, but very little to finance your life between now and then. That’s why investing for building wealth is more basic than saving for retirement.

It’s also more important. After all, the financial goal in life shouldn’t be to end well, but to live well throughout your life. This includes everything between now and retirement, and ultimately the end of your life.

If you can achieve that--and it’s a goal well worth pursuing--you’ll enjoy prosperity throughout your life and not just in the last few years.

Why Investing for Building Wealth is More Important than Investing for Retirement

A lot will happen between now and the time you reach 65 (or 66 or 67). Back-loading your investments for the last few years of your life could mean living on a shoestring between now and then.

No one knows how long we’re going to live. It’s possible you won’t live very long after you retire and some may never even reach that age. That reality should cause us all to build a generous amount of carpe diem (seize the day) into our lives.

True enough, everyone wants to retire well. But investing for building wealth has even more benefits:

Wealth will lower your dependence on your job, giving you more options in life.
It eliminates short-term stress, creating a healthier life.
You’ll be able to have the experiences, adventures and lifestyle of your choosing much sooner in life. There will be no need to wait until retirement to live life. (Please read the very short story The Station, by Robert J. Hastings.)
Investing for building wealth may enable you to retire very early in life.
It can help you enjoy a series of short retirements during your life.
Should you burn out on your current career, you can make a career change, even if it involves taking a big pay cut.
You’ll be able to provide for your family more generously and contribute to charitable causes.
Building wealth now reduces reliance on dedicated retirement savings.

If I’ve whetted your appetite for investing for building wealth, let’s move on to how to do it.

The Foundation of Investing for Building Wealth: Live Beneath Your Means

Live within your means because, other than inheriting a fortune, there’s no way to build wealth without it. Whatever your income level, you must live on less to create the extra that will go into savings and investments. The better you are at living beneath your means, the faster you’ll attain wealth.

Most people are content with saving 10% or 15% of their income, mainly through a retirement savings plan. But if you hope to achieve wealth early in life, you need to think more in terms of 30%, 40%, or even 50%.

Some believe that level of sacrificial savings is impossible. But that argument is invalidated by the fact that millions of people do just that. Will it mean giving up some or many of the comforts of the suburban lifestyle? Absolutely!

There’s a price to pay for everything in life, whether it’s building a career, losing weight, achieving athletic excellence, or saving for retirement. You should expect nothing less when investing for building wealth.

Once again, the more successful you are at living beneath your means, the faster you’ll become wealthy. But saving money is only half the equation. The other half is what you do with it, and that will require consistent and relentless investing.

Related: How to Invest $20k

How to Invest for Building Wealth

To build wealth, you must earn returns much higher than what’s available on safe, fixed-income investments. What should you invest in?

Invest in Stocks

There are different ways to do that, but the easiest and most convenient way for most investors will be with stocks.

Stocks represent equity in revenue-generating companies. As they grow over time and earnings rise, stock prices increase.

The very long-term return on stocks going all the way back to 1926 is about 10%, including price growth and dividends. If you’re serious about building wealth, you must participate in that kind of return.

Stocks and other equity investments should represent most of your investment portfolio. There are different ways to own stocks:

Individual stocks

This method will work best if you have a large portfolio and can diversify across many companies. It also helps if you’re an experienced, successful investor.

You’ll also need a good, full-service discount broker to keep trading fees low. Examples include Ally Invest and TD Ameritrade.

Mutual funds

Mutual funds are portfolios of stocks. They’re typically actively managed as the fund manager attempts to outperform the general market. Unfortunately, the vast majority don’t, which makes them more than a little speculative.

Exchange-traded funds (ETFs)

Closely related to mutual funds are ETFs. Each is also a portfolio of stocks. But the major difference is that ETFs are tied to an underlying index, like the S&P 500, or specific industry sector indexes.

They don’t try to outperform the market, but only to match it. This has resulted in better long-term investment performance than mutual funds. Equally important, ETFs have lower fees than mutual funds. Those lower fees further improve investment performance.

Robo-advisors

These are online, automated investment platforms that create and manage your investment portfolio for you. That includes an appropriate mix of equities and fixed-income investments. Some robos also add alternative asset classes, such as real estate and precious metals.

Two of the best robo-advisors are Wealthfront and Betterment. Each provides complete portfolio management for a low annual fee of just 0.25%. That means you can have $100,000 professionally managed for just $250 per year.

Read More: Betterment vs. Wealthfront

If you are really eager to start investing, one of our recommended choices is Wealthfront. They have an easily attainable minimum balance, low fees, and a simple, convenient interface. They're a great choice to start investing easily and quickly.

Invest in Real Estate

Historically, real estate has been one of the very best wealth building investments. This has been true for the middle class, for whom the family homestead is often the largest single investment.

Much like stocks, there are several ways you can invest in real estate.

Buying a home

This is the most basic form of real estate ownership. Even if the value of your home never increases, you’ll build wealth by paying off the mortgage. The $300,000 home purchased today with a $270,000 mortgage, will represent a $300,000 capital asset in 30 years when the mortgage is paid off.

But house prices have steadily risen throughout history. According to the Federal Reserve Economic Data, the median price of a home in the U.S. was $113,000 in January 1989. By the first quarter of 2019, the median price reached $307,700. That’s nearly triple the value.

So if you pay off the mortgage on your $300,000 house purchased today, in 30 years--based on historical performance--you’ll have $900,000 of equity in it.

Related: How to Buy Your First Home

Buying investment property

This is not an investment for everyone. It requires the ability to spot a deal, and a willingness to manage the property and get your hands dirty.

But the same principle that applies to buying an owner-occupied home also works for investment property. You pay off the mortgage, and over time, the property will increase in value.

An investment property has a major advantage over an owner-occupied home. You can collect rent from the tenants to make the monthly payment. Your tenants are helping you build equity in your investment property. Owning two or three such properties could make you wealthy quicker than a retirement plan can.

Real estate investment trusts (REITs)

REITs are mutual funds that hold real estate. Most commonly, a REIT holds a portfolio of either commercial property, large apartment complexes, or a mix of both. A well-managed REIT can produce higher returns than the general real estate market.

The 10-year performance of REITs is more than 10% per year. That’s higher than the long-term average annual return on the S&P 500.

If you don’t want to get involved in direct investment property ownership, REITs may be the next best alternative. A mix of REITs and stock ETFs can provide a well-diversified equity portfolio, producing generous returns in a variety of market settings.

Real estate crowdfunding

Real estate crowdfunding is a relatively new investment type. It’s a form of peer-to-peer lending (or equity investing), except the borrowers are real estate investors and not consumers.

There are different real estate crowdfunding platforms. Some may invest only in residential properties, others in commercial. Some will do small residential properties, others only large ones.

And a few even do property flipping. Depending on the platform, you could either be an equity investor, a debt investor, or a combination of both.

These are high-risk investments because they aren’t particularly liquid. However, some offer consistent double-digit returns on relatively small investments. Two that have been reviewed here on Dough Roller are Fundrise and Roofstock.

Real estate crowdfunding isn’t for everyone, but if you have a high appetite for risk and a desire for very specific real estate investments, they’re worth checking out.

Fixed-Income Investments

Because of the current low interest rates, you won’t get wealthy with fixed-income investments. But they do have a necessary place in any portfolio. At a minimum, having a portion of your portfolio in fixed-income investments will reduce overall volatility.

They can also provide a source of funds so you can take advantage of new investment opportunities or bottom feed after a decline in the stock market.

There are many fixed-income investments, but two of the most common--and the safest--are online bank investments and U.S. Treasury securities.

Online savings accounts and certificates of deposit (CDs) pay rates well above typical local banks. Alternatively, you can also invest directly in U.S. Treasury securities. Since Treasuries are issued directly by the U.S. Government, your investment is fully guaranteed.

There’s no FDIC insurance and no $250,000 maximum per depositor. They’re the perfect safe investment for large investors.

Build a Business

One advantage of having a business is that it enables you to combine earning a living with building wealth. And it doesn’t come just from generating handsome profits. Many businesses--started with very little capital--became million-dollar entities.

The owners could eventually sell them for millions of dollars. Personal finance blogs are an example. Several personal finance blogs--begun by individuals on a shoestring--sold for millions of dollars.

This is not unique to blogs either. It’s possible with any business, even one that doesn’t own real estate or other physical assets. In most cases, the buyer of a business is paying for the company’s cash flow.

For example, a service business that generates $1 million in gross revenue per year might sell for $2 million. The buyer is purchasing the seller’s book of business.” They’ll do this because buying an existing business with a stable cash flow is often less capital-intensive than building one from the ground up.

If you’re self-employed or have the desire to be, do all you can to build up the revenue of your business. When the day comes that you’re ready to move on to the next adventure in life, you may find a buyer willing to pay a not-so-small fortune for it.

Stay Out of Debt

Debt will be a necessary evil if you plan to invest directly in real estate, either in a personal home or one or more investment properties. But apart from that, debt should always be kept to an absolute minimum.

The problem with debt is that it a) reduces income, and b) lowers your net worth. A person with both a large asset base and substantial debt may not be worth nearly as much as he or she thinks.

Staying out of debt gives you more control over both your cash flow and your wealth. A debt-free position will enable you to build wealth by default. If you’re serious about investing for building wealth, keeping debt to an absolute minimum will be a necessary strategy.

Retirement Investing

It may seem somewhat ironic to include retirement investing in a general discussion of investing for building wealth. But since building wealth can (and should) come from multiple sources, retirement savings have to be considered.

Retirement investing has major advantages over other types of investing. Consider the following:

Your plan contributions are generally tax deductible.
Investments held within the plan produce tax-deferred income.
Retirement assets are generally shielded from lawsuits and creditor liens.

With that in mind, retirement investing should be another basic foundation of investing for building wealth. Fortunately, there are many retirement plans you can consider and even use two or more together.

Traditional IRA

This is the most basic form of retirement plan, and virtually everyone with earned income is eligible. You can contribute up to $6,500 per year, or $7,500 if you’re 50 or older. Contributions are generally tax-deductible and investment income accumulates on a tax-deferred basis.

One of the biggest advantages is that you can create a self-directed IRA, where you can choose and manage your own investments. There are many excellent investment platforms where you can do that.

Roth IRA

A Roth IRA is like a traditional IRA. The primary difference is that your contributions are not tax-deductible. However, distributions taken from a Roth IRA are tax-free, as long as you are at least 59 and have participated in a plan for at least five years. There are also excellent investment platforms for Roth IRAs.

Self-employed retirement plans

There are three primary retirement plans you can set up if you’re self-employed.

A SIMPLE IRA works just like a traditional IRA, but with a more generous contribution amount. You can contribute up to $15,500 of earned income per year, or $19,000 if you’re 50 or older (in 2023). You can also add an employer-matching contribution of between 2% and 3% of your earnings.

A SEP IRA has even higher contribution limits than a SIMPLE IRA. For 2023, you can contribute the lesser of:

25% of your compensation, or
$66,000

A Solo 401(k) is basically a 401(k) plan for a sole practitioner. It has the most generous contributions available for the self-employed. You can contribute up to $22,500 of earned income, or $30,000 if you’re 50 or older (in 2023).

But you can also receive an employer matching contribution of up to 25% of your compensation up to a maximum of $66,000, or $73,500 if you’re 50 or older. (With a Solo 401(k) plan, you are both employee and employer for plan purposes.)

Employer-sponsored retirement plans

There are several types of employer-sponsored retirement plans, and you should absolutely participate in one if your employer offers it.

The most common is the 401(k) plan. It’s offered by most large employers and many smaller ones. You can contribute up to $22,500 per year, or $30,000 if you’re 50 or older.

Many 401(k) plans also come with an employer-matching contribution. Most often, the employer will match 50% of the employee contribution up to a certain limit, like 3%, 5%, or 10%. Some plans even come with a Roth option.

A close relative of the 401(k) is the 403(b) plan. It works just the way 401(k) plans do, but it’s offered by governments and nonprofit organizations. Some also have a Roth option.

The Thrift Savings Plan is also similar to the 401(k) plan and is available for federal employees and members of the military.

Whichever plan you choose, retirement investing is a big part of investing for building wealth throughout life.

Bottom Line on Investing for Building Wealth

We’ve covered a lot of territory in this article, so let’s summarize the process of investing for building wealth in 5 key points:

Live beneath your means: It will be the primary source of capital to build wealth.
Save and invest consistently and relentlessly: It’s how you’ll grow your savings and convert them into income-generating wealth.
Maximize retirement contributions: They’ll add valuable tax deferral to your long-term wealth-building strategy.
Stay out of debt: It reduces income and lowers your net worth.
Combine several investments: Invest mostly in stocks and real estate for growth, but have a small amount in fixed-income investments for safety, liquidity, and lower volatility.

Follow these five basic steps--using the strategies outlined in this article--and you’ll become wealthy long before you ever retire.

DoughRoller receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. DoughRoller is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.