Simple Money-Making Secrets to Help You Grow Your Net Worth
When you start out seeking to increase your wealth, you may find yourself hoping to find the secret to making money. After all, it can seem so difficult; if it were easy, wouldn't everyone do it?
These secrets are simple, but the principles behind them will serve to guide your decision-making on your path to financial freedom. Learn how to make money and the mindset necessary for your success.
Know This Formula
When it comes down to it, the money you make can be expressed in a simple formula: Revenue minus expenses equals profit. To make more money, you must either increase your revenue, decrease your expenses, or both. It really is that simple.
How you increase your income or revenue may require tradeoffs in terms of time, relationships, and quality of living.
To increase your pay, you could go to law school or medical school to get a higher-paying job. Your future career will help you earn more money. But the tradeoff is the many years of schooling you'll need to complete, plus the student loan debt required to pay for it. Such careers can require long hours in the office, too. But if you're after a higher income, you may find it worth it.
You can also increase your revenue by investing in a business, whether it's your own or someone else's. Investing in your own business may require an outlay of capital at the beginning, which can make it feel like you're going backwards—paying out money instead of raking it in. Investing in another business through buying stock leaves you vulnerable to the management of that company and the value of the stock, two tradeoffs over which you have little to no control.
However, the investment could pay off handsomely in the end.
Control Your Risk
A part of making money is ensuring you lose as little as possible.
You should never be willing to take on wipe-out risk just for the chance of making money. For example, don't start speculating with options in the hopes of striking it rich, because the risk is too great that you could lose everything.
Similarly, don't recklessly borrow money, leveraging yourself to the hilt so you can make one big score. That's asking for trouble; one wrong move and not only are you broke, but also massively in debt.
Instead, try the Berkshire Hathaway model of generating wealth, where you invest in yourself, and then use the proceeds from that investment to buy other securities, which (ideally) then appreciate in value. The famed investor Warren Buffett, CEO of Berkshire Hathaway, used this method when he invested in his own operating businesses, then used the cash generated from those efforts to invest in marketable securities such as stocks and bonds.
Create Passive Income
Think of each dollar as a potential employee that could earn more dollars for you if you protected them and put them to work. At some point, your workers—that is, your dollars—would be earning enough for you to live off the passive income generated.
Investing is one such method of passive income: you put a few dollars to work by purchasing securities, then let the value of those investments grow over time. Stocks that pay dividends will reward you even as you sleep.
When investing, let compounding do all of the heavy lifting. With compound interest, the interest you earn is added to your principal and reinvested, growing your money much faster. As an illustration, consider an 18-year-old saving $500 per month throughout their career. They could retire at 65 with about $2 million in wealth if invested at a 7% rate of return. Add another decade of saving, and the fortune grows to about $4 million—all thanks to compound interest.
Be Honest With Yourself
In a 1982 speech to the British Parliament during an international visit, then-President Ronald Reagan said, "If history teaches anything, it teaches self-delusion in the face of unpleasant facts is folly." Although Reagan was discussing political science at the time, the same is true in finance. The first step to making progress is to confront reality, face it boldly, and recognize the situation in which you find yourself. Only then can you develop a plan to improve your life.
Sometimes, investors delude themselves into thinking that their financial situation isn't as bad as it really is. Other times, they delude themselves into thinking they can ignore their retirement and spend today's cash, then make up for it later—but they rarely do. Better to face reality as it is, and not as you wish it were.
In short, making money and building wealth is easy if you stay the course, keep costs low, and put your cash to work in good investments for long periods of time.