One of the secrets to building wealth is ownership. It isn’t that when you’re wealthy, you buy and own stuff. Buying and owning things is the path to wealth. There are several reasons for this: 1. When you’re the owner, your income possibilities are essentially limitless. 2. When you rent, you pay extra. 3. When you own, you can rent or otherwise use your property to generate more income. 4. If you buy on credit, you pay more for things. In this article we’ll go into all of these aspects and then talk about strategies for becoming an owner.
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Ownership makes your income limitless
What professions do you think of when you think of wealth? You probably think about doctors and lawyers. You might also think about movie stars and other celebrities. Maybe you think about people who open and run a bank, insurance agency, or other business.
Basically all of these people are owners of a business. Doctors who get very wealthy own a practice. Lawyers are partners as owners in a law firm. They both have staff working under them, allowing them to make more money than they could by themselves. Obviously the people who start and run businesses are business owners. The exception would be the movie stars, where technically they get a “salary” for staring in a movie, but really they’re selling their name and talents and can effectively set their price, so it’s more like they’re a business owner, too.
The reason being an owner allows you to become wealthy is that your income is effectively limitless (your “salary” is whatever you can get others to pay you for the services you provide) and because you can hire employees and get a small percentage from the work that they do. If you run a store, if you add more products, attract more customers, and hire more employees and grow your space to handle those additional customers, your income goes up. If you’re a partner in a law firm and you add more junior lawyers so that you can work on more cases and charge more hours, your income goes up. Even a doctor, who has a limited number of patients he/she can see, can add a nurse practitioner and get a cut of the money he/she generates since the doctor’s name and license allow the nurse practitioner to practice under him/her. You also make money as a doctor from the work of the staff you hire that let’s you do things like book more patients, take care of billing, and do other chores that would consume your time.
If you work for a salary, while your salary can increase over time, you are limited in what you can make by how much income you personally can generate for the company. Training and learning to use tools that make you more efficient can increase your salary, but you’ll never see the kind of income a business owner can make. The most you can make is what you can generate, minus a cut to whomever you’re working for.
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Renters pay extra
Another benefit of ownership is that it cost you less for things. For example, if you rent an apartment or a house, the rent must cover the costs of the person you’re renting from, plus a profit. So, you’re paying enough to cover their mortgage payments, taxes, and upkeep on the place, plus providing a reasonable amount extra to make it worth renting to you for them. Otherwise, they wouldn’t be renting it and putting up with the hassle. They do take on the risk of a big repair coming due like replacing an appliance or the roof, but they’ll charge enough so that over time they can pay for these things.
If there is inflation, the value of the thing you own will increase as well. If the value of the property increases faster than inflation due to other factors (for example, a city becomes popular and more people start moving in, causing home prices to spike), you’ll get that, too, so you can actually make a profit in real-money terms if you’re an owner. If you rent, you’ll just see your rent increase with inflation and real increases in property value, so you don’t benefit at all.
Owning other things also has an advantage and a cost savings. If you lease a car, you’ll pay as much as you would have if you had been buying the car, but you’ll turn it in after the lease is over where you would have a car you could sell at the end if you bought the car. You’ll also only be able to lease new or newer cars, so you’ll be paying a higher price per year for depreciation on the value of the car than you would if you bought an older used car. Cars decrease about half of their value every four years, so a four year-old car will cost you half per year in depreciation than what a new car would. An eight year-old car is half again as expensive. If you buy an older car for cash, you’ll also save on interest, which is also priced into the lease rate.
All of this savings gives you extra money so that you can invest and save up to own more things, so it builds on itself. If you lease a car, you probably won’t ever have the money to pay cash for a used car, but if you start with a cheap used car, you can usually save up and buy a better used car next time. If you buy an inexpensive home instead of renting, you’ll build up equity in the home and be ready to put more money down when you buy the next, bigger home.
Ownership gives you the ability to rent
Owning something also means that you have the ability to rent it out if you so choose. This means that you can use the things you own to generate an income. Not only an income, but a passive income, meaning that it is in addition to any income you generate through your own work. Theoretically you can reinvest your passive income to buy and own more things, thereby increasing your passive income even more. This can grow and grow without bounds. Basically you’re only limited by what you can manage.
Of course the first thing you probably think of is renting homes or apartments. This is sort of passive income, but anyone who does this will tell you that it does take effort on your part. You need to spend time getting the place ready to rent and finding tenants. You’ll then spend time collecting rents, fixing things, and, sometimes unfortunately, evicting tenants who don’t pay. You’ll also need to send the tenant different paperwork and notices and take care of the tax paperwork for the rental income.
Another form of ownership that you can use to generate income that requires less work than real estate is ownership in stocks. Here you have an ownership stake in companies that already have a management team to run the businesses. The only effort on your part is selecting which companies to buy into and the paperwork for taxes each year. If you’re a long-term investor, which is really the only effective way to make money consistently, you’ll actually not need to spend much time managing the portfolio. You just buy the companies that are good long-term picks (or buy mutual funds), then check on things periodically (maybe once per year) to trim any picks that don’t work out.
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Becoming an owner
So, how do you become an owner? The answer all lies in your cash flow. Specifically, you need to find ways to have some money left over after you’ve paid all of your bills. This money is called “free cash flow” because you’re free to do whatever you want with it. (For ways to increase your free cash flow and use it to build wealth, check out FIREd by Fifty, How to Generate the Cash Flow You Need to Retire Early.) You can then save up this extra money, use it to buy things that generate more income (investments), then continue this process to continue to increase the amount of things you own.
Probably the most difficult thing is to create free cash flow to start. Most people take on obligations until they spend everything they make each month. If you can do things like take a higher paying job or get a raise at your current job, then not increase your spending, this is a start. You can also look for ways you can cut back on expenses and free up cash flow. Some of the easiest categories to cut and generate income are eating out and clothing because the mark-ups are so high in these areas. There are also more radical things you can do like sell a car you’re making payments on and buy a cheaper one (or be even more radical and go without a car) or move into a cheaper apartment, rent a room instead, or get a roommate or two.
You can then start to become an owner. Once you have a few thousand dollars, start by investing in mutual funds. The value of these funds will go up and down, but keep sending in money and buying more and you’ll see the value increase over time. Most big gains will happen over fairly short periods of time. Most of the time the value will fluctuate up and down and really go nowhere.
Once you have the cash built up in your stock investments, use some of the money to make a down payment on a home and stop renting. Be sure to have a little extra money left over because you’ll now be paying for things that break. You can buy a home sooner if you pick a cheaper starter home and then save the money you’re not paying for rent, plus the equity you’re building up in the home, to save up and invest for a larger home.
Also, look at saving up and using your stock investments to buy other things you’re making payments on now. For example, buy a used car for cash so you’re not making car payments or leasing a car. Just like with the home, start with a lower-priced car that you can afford, then continue to save up and buy a better car when you can until you get into a car that is good enough for your needs. You’ll lose some money to depreciation on the car you buy to start, but the older cars will go down in value more slowly the newer car you would be buying on payments or leasing. Someone is buying a new car right now that you’ll buy for half of the price in a few years.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.