The Best Way to Build Wealth
“No great thing is created suddenly, any more than a bunch of grapes or a fig. If you tell me that you desire a fig, I answer that there must be time. Let it first blossom, then bear fruit, then ripen.” — Epictetus
This is great advice, but it is especially great advice when it comes to building wealth.
Because building wealth is not a single action nor a short term event; building wealth is a process that takes time.
What is the Best Way to Build Wealth?
When you decide to build wealth in your life, the decision is usually accompanied by an eagerness to capture the low hanging fruit; the extra hours, the side hustle, the promotion, the quick stock trade, and a multitude of other ways to make more money.
But remember, building wealth isn’t just about how much money you make. While more money is certainly one piece of the wealth puzzle, there is another mission-critical piece that many overlook.
That piece is time.
Time is such a critical element to building wealth because it’s the element that allows for other wealth building mechanisms to work their magic. These include things like:
- Compound interest
When you make money, use that money to strategically acquire assets that benefit from these things, and then allow time for them to work their magic, you have uncovered the best way to build wealth.
Therefore, the best way to build wealth is to consistently and strategically invest in assets over time.
To explore why this is the case, let’s break down each of the three mechanisms that take time to work in your favor.
Compound interest is the addition of interest to the principal sum. In other words, the interest that you make on your money becomes part of the new principal balance. Every time you reinvest the interest (or add it back to your original sum), your principal balance will grow without ever contributing additional funds.
For example, if you have $5,000 to invest and earn an annual interest rate of 3%, here’s what will happen over time if you reinvest the interest without adding any additional money to the initial investment (AKA principal).
|Time (Years)||Initial Investment||Annual Interest Rate||Total Investment (Compounded Annually)|
As you can see, by reinvesting the 3% interest, you now have more money which means the 3% produce even more money the next time your interest is distributed. Over time, this makes a significant difference; what started off as $5,000 grew to $16,310.19 after 40 years. What’s more is that after saving the $5,000 and putting it into an account that would earn 3%, you didn’t have to do anything! You just need to be patient and let compound interest work it’s magic over time.
Compound interest is so powerful, in fact, that Albert Einstein is attributed to saying, “Compound interest is the eighth wonder of the world.”
The mechanism of appreciation is the increase in the monetary value of an asset over time. It occurs for a variety of reasons depending on the asset, but can include increased demand, decreased supply, increased value, or increase in performance. Appreciation is the opposite of depreciation, which is a decrease in value over time.
As an example of appreciation, let’s say that you purchase a house in a city with a growing real estate market for $200,000. Over time, there may be more people moving into that city than there are people moving out of the city or new houses being built. As a result, there is an increased level of demand and a decreased level of supply. The result of this is that people will be willing to pay more for a house than they would if there were a lot of houses on the market and the value of the home may increase to $250,000 without any updates simply due to supply and demand.
As another example, you could purchase a stock for $20 per share. Over time, the company could perform extremely well and increase the value of the company—and subsequently the price of the stock. This could result in the same $20 stock being worth $30 or $35 over time.
Both of these examples show the power of appreciation and highlight the reason that purchasing assets that have the ability to appreciate is an important principle of building wealth.
Inflation is the decrease of purchasing power of a given currency over time. We live in a global economy where most governments have adopted financial policies that aid consistent, low, inflation.
As an example, during the last two economic downturns in the U.S., the federal reserve printed an excess of money for “quantitative easing” and economic relief. By doing this, the government effectively decreases the value of a single dollar.
When you don’t have assets that automatically adjust to the new value, then you lose purchasing power. However, if you have assets that do adjust to the new value (e.g. real estate, stocks, some businesses, etc.), then you will actually come out ahead.
Because if you purchase an asset for $10, and then in ten years that asset is worth $25 in inflated dollars, it is easier for you to pay off the original $10 and your asset has kept up or exceeded the inflation price.
If you didn’t invest in an asset, and you just kept that $10 cash, then in ten years you would need to make an extra $15 in order to have the same purchasing power.
The lesson here is that inflation can crush your finances over time, but if you invest strategically, it can also help you build wealth over time.
The Best Way to Build Wealth is to Consistently and Strategically Invest in Assets Over Time
Like Epictetus said, “No great thing is created suddenly…there must be time.”
So to build wealth, do your research and write down a strategic plan that you can execute upon to build your wealth. Ensure that plan is centered around consistent actions you can take to invest in assets that benefit from at least two (if not all three) of the following mechanisms:
- Compound Interest
If you do this, you will be on your way to not just meeting your wealth goals, but likely exceeding them.