As the chart shows, if you want to build wealth, there are really only two things to get right:<ul><li>Increase the difference between your income and expenses</li><li>Save that difference and grow it exponentially over time</li></ul>That’s it.This chart shows you exactly how much you need to save, and the rate  you need to compound it at, in order to reach your goals!

How to Build Wealth: This Chart Tells All

Worrying about whether your wealth is growing by 6% or 8% per year won’t matter so much if you can’t make enough money to reliably save and invest each month.Here’s an overview of three ways to earn enough income to start some serious wealth accumulation.<ol><li>Pick a high-paying job</li><li>Make money with side hustles</li><li>Start a business, full or part time</li></ol>

How to Increase Your Income and Save More

To invest money for high rates of return, you usually either need to take on increased risk, increased volatility, or decreased liquidity.Here’s an overview of how to achieve your target rate of return. Usually you’ll want a blend of several of these asset classes for optimal diversification:How to produce 0-3% annually:<ul><li>Treasuries</li><li>Corporate bonds</li><li>Municipal bonds</li><li>Savings accounts</li></ul>How to produce 3-8% annually:<ul><li>Preferred stock</li><li>Peer-to-peer lending</li><li>Index funds</li></ul>

How to Achieve a High Growth Rate on Your Savings Pt.1

How to produce 8-12% annually:<ul><li>High-yielding dividend stocks </li><li>Emerging markets and other international stocks or ETFs trading at low valuations.</li><li>High-quality Real Estate Investment Trusts and Master Limited Partnerships</li><li>Investment strategies employing the use of cash-secured puts and covered calls to give good returns even in overvalued markets</li><li>Certain alternative investments that offer decent returns in exchange for lower liquidity</li></ul>How to produce 12-15% annually:<ul><li>Top-quartile private equity</li><li>Direct real estate investing</li></ul>How to produce 15%+ annually:<ul><li>Be a world-class investor</li><li>Start a successful business</li></ul>

How to Achieve a High Growth Rate on Your Savings Pt.2

This is a comprehensive guide on how to build wealth and make more money.  Includes specific information on investments and a financial freedom calculator.

Investing Tips

How to Build Wealth Fast- This Chart Shows What it Takes

We all know that we need to spend less than we earn in order to build wealth.

But how about something more specific ? Exactly how much do you need to save, and at what rate do you need to compound it at, in order to reach your goals?

Here’s a wealth matrix to help answer those questions.

If you have a certain level of wealth that you would like to achieve in the next 25 years, this chart shows you the combo of the monthly saving amount and the rate of return on your wealth that you’ll need to achieve that target:

Levels over $1 million are highlighted in green. Click <a href="https://www.lynalden.com/wp-content/uploads/wealth-building-table.png">here </a>for a bigger image.

I made the matrix inflation-adjusted, using an assumption of 2.5% annual currency inflation over the period. For context, the US Federal Reserve <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">aims for 2% inflation per year </a>.

So when you see a million dollars on the table, it means a million dollars in terms oftoday’s purchasing power rather than like, the less-valuable inflated Monopoly-money of the future.

The monthly savings numbers are inflation-adjusted as well, so for example if you look at the row for saving $1k/month, it means continuing to save an inflation-adjusted $1k each month for the 25 year period.

As the chart shows, if you want to build wealth, there are really only two things to get right:

<ol><li>Increase the difference between your income and expenses </li><li>Save that difference and grow it exponentially over time </li> </ol>

And yet, the vast majority of people never build any serious wealth. Rather than getting rich over time, they just stay afloat decade after decade, moving through life spending as much as they make. At most, they build a small nest egg, and rely on the government or a pension to support them in retirement.

This article breaks those two key parts into smaller pieces, and provides a ton of detail on how to do both of them, starting today.

Continue reading from here, or jump to the section you want:

Worrying about whether your wealth is growing by 6% or 8% per year won’t matter so much if you can’t make enough money to reliably save and invest each month.

Here’s an overview of three ways to earn enough income to start some serious wealth accumulation.

Option 1) Pick a high-paying job

The Bureau of Labor Statistics has a nice <a href="https://www.bls.gov/ooh/occupation-finder.htm">database of occupations </a>that you can rank by median pay. If you click on individual professions, you can get detailed breakdowns of their median pay, including the pay associated with different subsets of those professions.

Over 100 professions pay more than $80k/year. Physicians, lawyers, actuaries, nurse practitioners, engineers, managers, financiers, and other technical professions can easily break into the six figure range.

You also have to take into account the costs of education.

Surgeons and specialist physicians top the list of high-paying professions, but they require 12+ years of postsecondary education and fellowships before they start getting paid big money. MBAs and lawyers earn a lot of money too, especially from a top school, but those schools will cost $150k+ for the program, plus the opportunity cost of missing wages if you attend full-time.

Getting a bachelor’s degree in a technical profession like engineering (or an accelerated 5-year master degree), and then eventually getting a graduate degree or MBA part time on the job is one of the most efficient routes. You get to start making money early with less student debt, but can still eventually transition into management or project leadership.

Option 2) Make money with side hustles

Do you have a hobby or talent? If so, you might be able to do it as a side gig and earn an extra $5k-$50k or more on the side to complement your day job and increase your overall income.

Suppose someone makes $40k per year after tax, and has expenses of $30k per year. This only leaves her with $10k per year to save and invest and pay off debts.

However, if she can earn just $5k per year in side income after tax and keep her personal expenses the same as they are now, it would only boost her total income by 12.5% (from $40k to $45k), but it would increase her savings rate by a full 50% (from $10k to $15k)!

If you save an extra $5k per year, and invest it at just 7% per year, you’ll have $100k extra in your portfolio in 15 years after adjusting for inflation.

If you’re more ambitious, and can figure out how to pull in an extra $20k per year on the side after tax, and invest it at 8% per year, you’ll have $430,000 in extra money in 15 years. Again, inflation-adjusted.

Small or medium side gigs can seriously put you in the top 5% of people by wealth over time.

<ul><li>Freelance writing or editing </li><li>Freelance web design or coding </li><li>Freelance translation </li><li>Help out as a virtual assistant </li><li>Coaching, consulting, tutoring, marketing, copywriting, etc. </li> </ul>

<ul><li>Work part-time as an adjunct professor at a local college </li><li>Become a part-time fitness or yoga instructor </li><li>Do freelance property management or handyman fix-ups </li><li>Be a part-time freelance private chef </li><li>Tax preparation, bookkeeping, watching kids or pets, tutoring,etc. </li> </ul>

Some of these you can jump into quickly, while others may need an investment of time and money for training and certification.

I worked for a few years as a part-time martial arts instructor. I have two friends that have side gigs as adjunct professors, and one friend that prepares private Italian dinners for wealthy clients in their own homes a few times per month.

Option 3) Start a business, full or part time

The reason that so many millionaires are business founders is that successful entrepreneurship satisfies both aspects of wealth building: achieve a high income and achieve a high rate of return on your accumulated wealth.

A rather small percentage of people are going to start the next Facebook, but it doesn’t need to be that glamorous. If you know a trade, like plumbing or construction, you can eventually start your own contracting company and scale it up.

If you can provide a service, like marketing, consulting, fitness instruction, and so forth, you could eventually open your own place, hire people, and increase the scale beyond your own reach.  If you coach something really well, you might be able to turn it into a digital course and sell it to more people.

I started a small online business in my senior year of college, ran it on the side for a while as I worked as an engineer, and sold it a few years later, and made enough money from it to pay off most of my student loans. That gave me a boost to get the wealth-snowball rolling.

How to Achieve a High Growth Rate on Your Savings

To <a href="https://www.lynalden.com/how-to-invest-money/">invest money </a>for high rates of return, you usually either need to take on increased risk, increased volatility, or decreased liquidity.

Here’s an overview of how to achieve your target rate of return. Usually you’ll want a blend of several of these asset classes for optimal diversification:

How to produce 0-3% annually:

<ul><li>Treasuries </li><li>Corporate bonds </li><li>Municipal bonds </li><li>Savings accounts </li> </ul>

It used to be that savings accounts and treasury bonds would give you decent conservative returns, but not now.

Investment-grade bonds only give about 2% annual returns currently.

The reason for this long-term reduction in fixed-income returns is that the Federal Reserve has lowered interest rates dramatically over the past few decades, and especially since the last recession:

The interest rates for savings accounts, bonds, mortgages, loans, and other types of debt are extrapolated from the federal funds rate, which is the rate that banks can borrow at from each other over night. Read more about how interest rates affect everything in my <a href="https://www.lynalden.com/interest-rates-yield-curve/">interest rate guide </a>.

As long as interest rates remain at historically low levels, bonds will continue to be unimpressive investments in terms of their risk/reward ratio. If the federal funds rate moves a few full percentage points higher, up to at least 2% or so, and bonds begin returning substantially more than inflation, they’ll become more worthwhile again.

Bonds and savings accounts have a place in a conservative portfolio, but they’re not going to build you a ton of wealth over the long-term.

How to produce 3-8% annually:

<ul><li>Preferred stock </li><li>Peer-to-peer lending </li><li>Index funds </li> </ul>

Historically, bonds provided returns in this range, but that’s not the case today.

And as described in more detail in <a href="https://www.lynalden.com/index-funds/">this article </a>, US equity returns from index funds and ETFs are likely to be lower over the next 10-20 years than they have been historically, since the market currently has a high cyclically-adjusted price-to-earnings ratio. (In other words, it’s overvalued). Expecting somewhere in the lower end of 4-8% returns would be reasonable.

How to produce 8-12% annually:

The historical rate of return of the S&P 500 fell in this range. It’s less likely to be that good over the next decade or two.

Going forward, smart investment strategies may achieve returns in this range, but it’ll be difficult. I believe the most likely paths to reaching this level going forward will be:

<ul><li><a href="https://www.lynalden.com/safe-high-dividend-stocks/">High-yielding dividend stocks </a>with reasonable payout ratios and long histories of consistent annual dividend growth </li><li><a href="https://www.lynalden.com/invest-in-emerging-markets/">Emerging markets </a>and other <a href="https://www.lynalden.com/international-stocks/">international stocks or ETFs </a>trading at low valuations. </li><li>High-quality Real Estate Investment Trusts and Master Limited Partnerships </li><li>Investment strategies employing the use of <a href="https://www.lynalden.com/selling-put-options/">cash-secured puts </a>and <a href="https://www.lynalden.com/covered-calls/">covered calls </a>to give good returns even in overvalued markets </li><li>Certain alternative investments that offer decent returns in exchange for lower liquidity, like perhaps <a href="https://fundrise.com/">Fundrise </a>. </li> </ul>

I think the best investment platform for most people is <a href="https://m1finance.8bxp97.net/AN5mN">M1 Finance </a>. It is totally commission-free and expense-free, and allows for automatic investing in individual stocks and ETFs, and includes easy re-balancing:

How to produce 12-15% annually:

<ul><li>Top-quartile private equity </li><li>Direct real estate investing </li> </ul>

Private equity often provides returns in this range, since private equity managers can actually change and improve the businesses they acquire, and they typically invest for years in order to achieve the transformations that they set out to accomplish.

If you’ve already got several million dollars lying around, investing in  a reputable private equity fund may be a viable move. In exchange for low liquidity, your returns may be pretty high.

Perhaps ironically, there are also publicly-traded private equity funds that you can invest in, like <a href="https://bbu.brookfield.com/">Brookfield Business Partners </a>. They do the same type of work as private equity (buying troubled businesses, transforming them to be more profitable, and then selling them or continuing to hold them, or strategically lending money to them), but the ownership of the fund is broken into little pieces and sold on a stock exchange.

There’s no guarantee that any private equity fund will achieve the same results over the next few decades as they have over the past few decades, though. And measuring private equity returns as a group hasn’t been very transparent, so it’s hard to know what percentage of private equity funds do well vs those that fail.

Highly successful private real estate investing, employing considerable use of mortgage leverage, also has a decent chance of achieving this range.

How to produce 15%+ annually:

<ul><li>Be a world-class investor </li><li>Start a successful business </li> </ul>

History’s best investors have achieved long-term returns in this range. This includes top hedge funds, top private equity funds, billionaire investors, etc. Most people don’t come anywhere near this high with the stock market.

For example, Warren Buffett has grown the per-share book value of his company Berkshire Hathaway by an average of over 19% per year since 1965. It’s important to note, though, that he used financial leverage to achieve this return.

Seth Klarman has also achieved better than 15% annual returns over three and a half decades so far for his Baupost Group hedge fund.

Peter Lynch grew the Magellan Fund at a compounded 29% rate of return during his tenure from 1977 to 1990.

A more likely path to achieving returns in this range is to start your own business. The probability that you’ll be a world class investor is extremely low, but your chance of being able to create a highly profitable small business is not too bad.

Successful small and large businesses often achieve returns on equity that surpasses 15% per year. For small and highly scalable businesses like software or services, return on equity can exceed 30% or more in their early stages.

More key reading on this topic:

One way to figure out how much wealth you need to accumulate to reach your financial goals is to determine how much investment income you want it to provide you per year.

A common rule of thumb is to withdraw no more than about 4% per year if you want your portfolio to last forever.

That’s not a perfect rule but it’s a good starting point.

Here’s a table that shows how much withdrawn investment income that different portfolio sizes can generate at different annual withdraw rates:

The ones highlighted in green are fairly safe, but once you start withdrawing more into yellow or red territory, your chances of eroding your principal increase.

In reality, your withdraw rate depends on what rate of return your portfolio delivers. If you have a portfolio invested entirely in bonds and treasuries that provide you a rate of return of 2.5% per year, and inflation is 2% per year, then of course you can’t withdraw 4% per year without reducing your principal.

If US stocks only grow at 5% per year over the next decade, then the general rule of withdrawing 4% per year will be too aggressive, since inflation will be eating away your principal faster than it replenishes itself.

If you want your portfolio to last forever, then subtract the approximate inflation rate from your portfolio’s expected rate of return, and don’t withdraw more than the remaining number.

Max withdraw rate = Annual RoR – Annual Inflation Rate

So if your portfolio is growing at 6% per year, and inflation is 2.5% per year, then don’t withdraw more than 3.5% of your portfolio per year. That way, your portfolio will keep growing as fast as inflation to maintain its inflation-adjusted size, while you continue to withdraw 3.5% of it per year.

However, that approach doesn’t give you any margin of safety. If a market crash occurs and your investments temporarily lose 30% of their value, then your investment income may take a big hit.  That figure should serve as an absolute upper limit, and ideally, you should keep it lower, especially since you can only estimate your forward rate of return rather than know it for sure.

Safe withdraw rate = Annual RoR – Annual Inflation Rate – 1%

One thing to keep in mind is that although the life expectancy at birth in the United States is less than 80 years on average, the life expectancy for someone who is currently 65 is about 85, <a href="https://www.ssa.gov/planners/lifeexpectancy.html">according to the Social Security Administration’s actuarial data </a>, give or take a year depending on your gender. If you’re 75, then your life expectancy averages into the late 80’s.

The overall life expectancy includes children who die young from health problems, teenagers that die from reckless driving, etc. Once you’ve already gotten to 65, you’re expected on average to hit 20 more years, and potentially far more than that if you live a healthy lifestyle.

Bite-sized knowledge
to upgrade
your career

Everything You Need to Know About Wealth Building

How to Build Wealth: This Chart Tells All

How to Increase Your Income and Save More

How to Achieve a High Growth Rate on Your Savings Pt.1

How to Achieve a High Growth Rate on Your Savings Pt.2

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Bite-sized knowledgeto upgradeyour career

Everything You Need to Know About Wealth Building

How to Build Wealth: This Chart Tells All

How to Increase Your Income and Save More

How to Achieve a High Growth Rate on Your Savings Pt.1

How to Achieve a High Growth Rate on Your Savings Pt.2

IDEAS ABOUT

MORE LIKE THIS

5 Key Retirement Planning Steps That Everyone Should Take

Financial planning for Beginners - Top 10 Golden rules

Everything You Need to Know About Stock Options and RSUs

It's time to

READ

LIKE

A PRO!

Bite-sized knowledge
to upgrade
your career