Written by Barry Raber, Entrepreneur
Barry Raber is a serial entrepreneur, president of Carefree RV Storage, a 22-year member of the Entrepreneurs' Organization (EO), the founder of Business Property Trust, and an EO Portland Entrepreneur of the Year. He shares his successful business secrets at Real Simple Business.
“Hey, can you help me get rich? I want a pontoon boat, but I don’t think I can afford one,” my cousin Amy asked last month. It was that question that led to this article. There is, in fact, a formula for “getting rich.”
Here is the formula: live beneath your means, take the savings and buy appreciating assets, minimize money spent on depreciating assets, get your money working for you in every way possible, and then get rich.
So, if the formula is that simple, why isn’t everyone rich?
The answer to that is: it’s complicated, maybe more so than ever before. That said, if you adopt the right mindset, it is possible for most people to get rich.
Adopt a net-worth mindset
If you ask a rich person what their net worth is, they likely have a pretty good idea. If you ask someone who is not rich, they likely don’t know the term or what it means.
It is this little-known financial term that reflects the mindset I am suggesting: a net-worth mindset.
First, a quick definition: net worth is the total sale value of everything you own, minus everything you owe. Your net worth can be a negative number or a positive number, but it is the most accurate way to determine how rich, or “not rich,” you are.
At a certain net worth, typically $1–5 million depending on your living expenses, your money begins working for you, and you no longer have to work for your money. This concept, sometimes referred to as Critical Mass, happens when the passive cash flow generated from the interest earned on your total net worth is enough to cover your living expenses. At the low end of this range, you are likely on a budget. In the mid to higher range, you have extra money to enjoy more experiences and buy things.
Let’s talk about the formula in a little more detail.
Live beneath your means: The critical strategy
To live beneath your means, you must spend less money than you make, which is harder than ever before. Salaries have not kept up with inflation, and spending money is easier and more convenient than ever. If you can’t live beneath your means, you won’t get rich. This is the must-do.
For example, eating out has always been more expensive than eating in, but now you can eat out while staying in, significantly increasing your dining costs with Grubhub, DoorDash, or Uber Eats.
Eating economically at home is more difficult than before since pricey gourmet and specialty grocery stores have popped up in every neighborhood. And, of course, Amazon is just one click away, so you don’t even have to leave your house to blow your budget on things you want instead of things you need.
To make the most of your money, use Dave Ramsey’s personal budgeting tool.
Try to get into a role at work where you can add a lot of value and get paid more for it. If you’re married, work two or even three jobs between you.
Stay on a budget with housing, vehicles, and spending, keeping it as low as you can reasonably stick with. The time for spoiling yourself is after Critical Mass.
Acquire appreciating assets
The two most surefire appreciating assets are company stocks and real estate.
Notice I used the word “acquire” versus “buy.” When you buy something, you save up all the money needed and pay for the item entirely at purchase. With assets, there are many ways to acquire control of them and gain the benefits of owning them without necessarily “buying.”
For example, you can borrow to buy real estate or even partner with others to get a deal done. As for stocks, you may acquire them within a company 401(k) plan where your company “matches” your contribution, essentially giving you money to help you acquire them. In that same scenario, the government essentially gives you money too—by not taxing the profits you make from stocks held in a 401(k).
Real estate: The sure thing
Why is real estate such a sure bet? It offers the best supply-and-demand characteristics of all your choices. God is making more humans every year (demand), but not making any more real estate (supply). Buying a home to live in is your first no-brainer. As soon as you possibly can, become an owner, not a renter. As a homeowner, you are paying off the loan you took out to acquire your home with money you are working for, rather than paying off someone else’s asset as a renter.
Pro tip: About that home mortgage: while it might make you feel good to pay the loan off, don’t do it until you achieve Critical Mass. Borrowing money on your primary home is cheap and easy, and you need to use the mortgage payoff amount as your down payment for other rental real estate acquisitions.
Rental real estate is the most beautiful thing. With rental real estate, someone else’s work (your renters) is paying off your asset (the loan you took out to acquire it). Not only that, but your rental asset is depreciating according to U.S. income tax rules, even while it is appreciating in market value. This helps you minimize the taxes you pay while it makes you richer. My attorney says real estate is the greatest get-rich-slow scheme he knows. I reiterate: it’s a beautiful thing.
I bought my first rental triplex when I was 23 (I am 56 now) and have advocated owning rental property to all my friends. While two of them took me up on it, the rest didn’t, and that’s a shame. The two who did have already reached Critical Mass, but the others are still a long way away from it.
Why people avoid rental real estate
The three reasons people do not buy rental real estate, despite its almost surefire ability to make them rich, are:
They fear debt and borrowing money. No one builds wealth without using debt, period. Get over it.
It’s too much work to learn about it and then do the advertising, renting, repairs, and maintenance. Yes, it’s work, but you own it. You are working 100% for yourself, not 100% for your boss and their company. You will get used to the work and, at a certain stage, can justify hiring others to do most of it.
Financial advisors discourage it. Why? Because they don’t make money off of it like they do on the money you invest with them. Despite being educated in securities, most advisors don’t know or invest in real estate, so it’s a big unknown to them.
Pro tips on rental real estate
For rental real estate, here are my pro tips:
Calculate cash flow. Acquire rental properties that will yield a cash flow of at least $200 a month after paying all your monthly expenses, including loan payments.
Find value-add deals. These are properties you can improve to increase the rent you can charge and the value of the property on Day One. For example, you could add a second bathroom to a three- or four-bedroom house with only one, or build a garage in cold or wet climates for a house without one. There are many ways to add value to every property type.
Look for specific types of properties. If you’re buying a rental house, stick with three- or four-bedroom homes. For apartments, buy primarily two- and three-bedroom units. On the commercial real estate side, focus on warehouse or storage properties over office and retail spaces.
Hold your investment for at least 10 years. You will be blown away by how much the property’s value increases during that time, and how much of the mortgage has been paid down by your tenant.
Rinse and repeat. After a property appreciates in value by more than 30%, refinance it, pull your down payment out, and buy another one with it. Repeat until you have the number of assets needed to reach your net worth goal. Additionally, you can trade smaller properties for larger ones tax-free through a common process called a 1031 exchange.
For more information on starting your rental real estate journey, I recommend Brandon Turner’s books. Start with How to Invest in Real Estate or Rental Property Investing. After those, if you want more, consider Investing in Real Estate with No Money Down, Managing Rental Properties, and Multifamily Millionaire.
David Greene’s Buy, Rehab, Rent, Refinance, Repeat is my real estate investment formula of choice.
Robert Kiyosaki also has some good resources for beginners on his website. Check out Rich Dad Poor Dad Real Estate Investing.
Stocks: A 100-year record
The American stock market has averaged a 10% annual return over the past 100 years. Acquiring stocks is, therefore, a smart move. Acquiring them through a company 401(k), especially at a company that matches funds, is the best method because it saves you taxes and helps you grow your investment to a significantly larger amount due to the 401(k) match.
Virtually no fund or financial stock picker has been able to beat the stock market index over a 10-year period, so stock market index ETFs (exchange-traded funds) are a top choice. No matter what, you want to target that 8–10% growth range.
One important note: you don’t want stocks to be your only appreciating asset besides your house. Don’t put all of your savings into stocks. You need to invest in rental real estate, too.
Pro tip: Stay in stocks 100% until you reach Critical Mass. Ignore age-based allocation formulas and recommendations to add bonds. Only move to bonds and other income-oriented, closed-end funds and stocks after you need the passive interest income to pay your living expenses.
Bitcoin is better than dollars
Bitcoin is the first fixed-supply currency that is available for purchase instantly worldwide on your phone. I don’t know why governments haven’t established fixed-supply currencies, but they haven’t.
Governments increase the supply of their currencies, which reduces buying power to the detriment of their citizens. The U.S. has increased its money supply by 30% in the last five years, which is why we have inflation and why U.S. dollars are worth 30% less now. All countries do this, including those you think are more responsible than us, like India and China.
Think of Bitcoin as a “better dollar” for your savings purposes, and put up to 4% of your current net worth in it today. That will hedge against the reduction in buying power your U.S. dollar savings are experiencing. Bitcoin is an appreciating asset that has doubled in value every year on average since its creation 12 years ago. As adoption and acceptance of Bitcoin (demand) rises, it should continue to increase in value, because there will only ever be 22 million Bitcoin (supply).
While it likely won’t continue to appreciate in value like it has, Bitcoin is very likely to outperform the decrease in value of your U.S. dollar savings, because the supply of dollars is increasing, which reduces each dollar’s value.
How to buy bitcoin
You could buy it in your 401(k) account, if they allow it, through ETFs such as Blackrock (ticker symbol IBIT) or Fidelity (ticker symbol FBTC). I like buying Bitcoin through these ETFs because they add a layer of security and regulation.
You could also buy Bitcoin through a regular non-401(k) brokerage account at Fidelity or Charles Schwab. It is worth the trouble of opening a new account just for this.
You can buy it directly by opening an account at Coinbase Exchange. Bitcoin is easier than ever to own.
The magic of time
With each of these appreciating asset options, you must hold them for 10 or more years to realize the significant appreciation (increased richness) that is coming your way, and to eliminate any risk of losing money due to sale timing. That said, sometimes one or more of these assets goes way down in price, essentially going on sale, so if there is an opportunity for you to acquire appreciating assets “on sale,” definitely do it.
The bottom line: If you plant these appreciating seeds, they will grow and create a higher net worth for you in the long run.
Minimize depreciating assets
Depreciating assets are the exact opposite of everything we’ve discussed so far because they lose value over time. The biggest offender here is vehicles, including boats, cars, motorcycles, travel trailers, RVs, and any vehicle except a collector car.
Vehicles are wealth killers. Someone who gets a new car every few years is simply burning their money. Autos depreciate an average of 12 percent per year until their final years of life. Never buy a new car. They lose 25 percent of their value immediately. Also, minimize the amount of money you have tied up in vehicles. You can buy more of them when you reach Critical Mass.
The second big depreciating asset is not well-known. Surprisingly, it is checking and savings accounts and the cash balances held in them. People think this is the safest place to park money and believe they won’t lose it. But they are losing it right now. While the actual number of dollars might be safe, their overall buying power is decreasing. The U.S. government has increased the number of dollars in circulation every year for the past 75 years, except for five years. Your cash is depreciating.
Pro tip: There are times when you can put your money in a CD or money market account, and the rate is enough, or close enough, to at least offset the devaluation caused by the government printing money. Not all banks or credit unions offer these, so you may want to open an account with one that does. Aim for one that pays at least four percent interest.
If you have large balances in checking or savings accounts, it is time to move that money into appreciating assets. Your goal should be to have less than 10 percent of your assets in depreciating categories.
It takes work, but it is worth it
Yes, getting rich is a little more complicated than the simple one-sentence formula I led with, but it is not wildly complicated or impossible. I have covered most of the basics in a short article you can read in 10 minutes.
Back to my cousin Amy. She did everything she was supposed to do, according to the traditional advice for building wealth. She and her husband both worked full-time for several decades, bought and paid for a house, and built up their 401(k) retirement savings. While they quit working full-time jobs around age 60, they are on a budget and likely will be for the rest of their lives, which could be 30 more years. They don’t have extra money to take their kids and grandkids on big vacations or buy a pontoon boat to create fond memories at the lake. Their budget only allows for two Starbucks coffees a week.
Sadly, I think that is the reality for most dual-income families who follow the traditional advice for personal finance. They save money, buy a house, and build up a 401(k) retirement fund. This is their mindset. It is no fault of theirs. It is the predominant mindset for most people in our country.
But if you want to be unlike most people and have extra money, you need to be unlike most people and invest in more appreciating assets. You need to know your net worth and focus on increasing it with the formula I suggest, a proven formula, and choose the road less traveled toward Critical Mass.
An entrepreneurial note
The formula shared here is a one-size-fits-all formula. It can work for everyone and anyone.
That said, another common way wealth gets created in America is by starting a business and building it up. Well over half of the Forbes 500 richest people list followed that path to Critical Mass. Everyone else on the list either followed the path I suggested above or inherited their wealth.
If you are older than 50, you may be familiar with the books Rich Dad, Poor Dad or Millionaire Next Door. Both are great reads and were huge best-sellers that inspired many to take the less-common path to Critical Mass.
Ready to calculate your net worth?
If you feel ready to take the next step toward developing a net-worth mindset, it is simple to do.
You can calculate your current net worth and project your future net worth by using the Net Worth Guide plus the Worksheet and Tracker I created for you to utilize. You can also access an example of a completed worksheet here.
Start today. Your future self will thank you!
Read more from Barry Raber
Barry Raber, Entrepreneur
Barry Raber is a serial entrepreneur, president of Carefree RV Storage, a 22-year member of the Entrepreneurs' Organization (EO), the founder of Business Property Trust, and an EO Portland Entrepreneur of the Year. He shares his successful business secrets at Real Simple Business.
