As much as I love options trading and following the financial markets, I enjoy the challenge and process of building wealth. I think about wealth building as a 3-step process in broad terms--possibly in the shape of a pyramid even. Since it's our 150th show, I figured I would take a slightly new angle in today's podcast and discuss what I believe are the most valuable insights I can offer from my own experiences and research on how to manage your money and generate wealth. We'll use this 3-step or 3-part approach to help frame the conversation as best we can.
- Managing your money and building wealth is like a pyramid.
- The bottom levels seem unimportant, but they have the biggest impact on your wealth growth.
- Each level has elements that help you to grow your wealth and manage your money.
Level One: The Three Fundamentals
1. Optimizing Taxes
- The biggest investment partner you have, whether you know it or not, is the government.
- How you are taxed and what vehicle you choose to trade in has a massive impact on your performance.
- When trading, you have to try and optimize taxes as much as possible.
- This includes deciding to fully fund IRA's, Roth IRA's, 401(k)'s and SEP IRA’s.
- Do what creates the biggest tax advantage first, because it has the most impact on your success moving forward.
- Fees are the "death of a thousand cuts" — you don't feel it at first, but fees erode your wealth.
- This includes reducing or negotiating your trading commissions lower and choosing the most cost-effective trades.
- Fees are everywhere--do a personal audit and figure out where you can save on fees such as credit card fees, mortgage loans, auto loans, etc. as much as possible.
- This is something that's within your control and can have a massive impact on your long-term wealth.
3. COLA (Cost of Living Adjustment)
- You dictate where you live, what type of house you live in, the car you drive, etc.
- All the things that are associated with your cost of living have a huge impact on whether or not you can sustain or grow your wealth in the future.
- Consider moving to lower your cost of living, consider cheaper forms of transportation, and other ways to live below your means in order to get ahead.
Level Two: Building a Savings
1. Increase Your Earnings
- To grow your wealth, you have to actually earn money.
- Consider freelancing, starting your own side business with your niche skill-set, selling items around your house, and other ways to increase your income.
2. Save Money
- In order to grow your wealth, you have to save by spending less money than you make.
Ultimately, you either have to make more money, save more money, or do a combination of the two to be able to have savings. Investment does not come from borrowing; it comes from saving. You have to save to have excess for investment and take advantage of compounded interest. Earn. Save. Invest. Compound. Kickstart an investment with savings and then allow the investment to compound and compound and compound.
Level Three: Diversifying Your Income
1. Streams Of Income
- You should have multiple streams of income and investment. Don’t put all of your eggs in one basket.
- This includes your job, real estate, business, and options trading.
- Within those streams of income, you have to diversify the portfolio of each particular income stream.
- Thess can be different types of real estate (student rentals, duplexes, single-family homes) or diversified investments within your investment portfolio, such as including different ticker symbols, etc.
Use free tools such as Mint or Personal Capital to manage and track your spending. Create spreadsheets to organize and track your various investments and spending. I think of wealth generation as a pyramid. Build a strong foundation. Earn, save, and compound. Diversify your income streams.