The 3 Wealth Building Factors That Actually Matter

Read time: 5 minutes

I’ve been studying wealth building for over a decade. 

I’ve read all of the classic books on money and most of the modern new gems (and a few duds).

I’ve tried “hacks” like cash stuffing and flipping appliances on Craigslist, no-money-down real estate investing and retail arbitrage.

I’ve interviewed people in poverty and multi-millionaires.

And in all my searching, one thing slowly became clear - wealth creation really comes down to only 3 things.

Master these 3 things and you WILL build wealth. It will literally be impossible not to. 

Ignore one of these steps, and you might build wealth, but it will be like a 2-legged stool, ready to fall out from under you at any moment.

In today’s issue:

• Step 1: How to start building wealth

• Step 2: How to keep your wealth

• Step 3: How to stick with the process

Factor #1 - Savings Rate

Grandmas everywhere have been saying this for thousands of years.

And that’s for good reason - it works! 

The only way to reliably build wealth is to spend less than you make. 

Even if you’re only saving $5 a month, if your spending each month is less than your income, your wealth is growing. It’s as simple as that.

To build wealth faster, increase the difference between what you make and what you spend. I call this your Savings Rate. 

The bigger this difference, no matter how much you make, the faster you’ll build wealth. 

Here’s how to calculate it: 

Take your total savings for the month, including any cash you’ve saved, money you invested, or extra debt payments you made above the minimum, and divide it by your total take-home income that month. 

Then multiply that number by 100, and you’ve got your Savings Rate!

(Total Savings / Take-home income) x 100 = Savings Rate

A good rule of thumb is to shoot for a Savings Rate of at least 15%.

If you want to build wealth fast, get it to at least 25%. 

But even a Savings Rate of 1% means you’re moving in the right direction.

Factor #2 - Safety Factor

Overlook this piece of wealth building at your own peril. 

Ask anyone who invested in real estate in 2008 with no money down loans. 

In case you aren’t familiar, investors were making money hand over fist by buying houses for $0 out of pocket, putting them on risky short-term loans, and making a killing as home prices soared higher and higher.

If you bought real estate of any kind you looked like a genius, and if you were watching on the sidelines you felt like an idiot. 

But then the real estate market turned, house prices began to drop, and the rug got pulled out from under everyone as a runaway snowball of dropping home prices created an avalanche of foreclosures. 

Regular people like you and me who had been multimillionaires six months prior, were now bankrupt and sitting at the unemployment office with everyone else. 

What they had forgotten - what all of us tend to forget the longer the economy stays strong and our investments do well - is that rainy days always come. 

If you plan for it, you can shrug it off. If you don’t, it just might take everything you have with it.

So - what is your Safety Factor and how do you increase it? 

Your Safety Factor is made up of your debt levels, your cash savings, and your insurance policies protecting you. 

The goal is to keep the debt small, increase your cash cushion, and keep the right amount and right types of insurance covering you

Debt

The more debt you have, the greater your chance of losing everything. 

The Bible correctly says that “the borrower is slave to the lender”. 

When you have debt, your income is not yours. 

Every day you go to work, some of that time you spend screaming into a pillow pouring over spreadsheets is for the people you owe money to. 

15 minutes for Affirm.

2 hours for Visa.

A full 4 days for Carvana.

And if you ever stop working for and paying them, they’ll come and take your stuff. 

How fun.

Cash Savings

Having a pile of money saved up for a rainy day makes it really hard for you to go bankrupt. 

A good rule of thumb is to have 3-6 months’ worth of expenses saved up in a separate savings account that you don’t touch except for emergencies. 

That amount will get you through most bad events that can happen to you - a job loss, car accident, sickness, etc. but it’s not TOO much that it makes it hard to start investing and actually building wealth for the future. 

Careful though - more isn’t always better. 

Some people like to “play it safe” and pile up hundreds of thousands of dollars of cash under their mattress. 

That may be better than blowing it on Hello Kitty plush dolls, but it also keeps you from actually building wealth through investing. 

We keep cash savings to play defense, to protect us from the unknown. 

But we build wealth through investing. Don’t go overboard.

Insurance

This topic is too large to get into here, but in short, insurance covers you from getting wiped out if something really bad happens. 

There are five key insurance policies most people should have.

1. Term Life Insurance (if you have dependents)

2. Auto Insurance (if you have a car)

3. Homeowner’s/Renter’s Insurance (if you don’t live in the woods)

4. Health Insurance (if you have a body)

5. Long Term Disability Insurance (if you can’t replace your income if you got hurt)

Factor #3 - Systems

This is my favorite one. 

This is where wealth creation becomes easy, automatic, and inevitable. 

Every set a New Year’s resolution to get into shape? 

What happened a few months into it?

Did you run out of willpower and slowly slack off, all while getting mad at yourself for not sticking with your program?

Just me?

Well then, imagine that instead of making the conscious decision to go to the gym every day, I set up a system to help me out.

Instead of dragging myself out of bed, imagine I paid someone to show up at my house every morning to wake me up and drive me there.

How do you think I’d do now?

I’d crush it! 

90% of the reason people fail to get into shape is they stop showing up.

Let’s imagine we take it one step further.

Instead of just driving me to the gym, this person hypnotizes me so that while I’m still asleep, my body wakes up and takes me to the gym, moves me through the workout motions, showers, and drops me off at work, all without my mind thinking about any of it? 

How fast am I getting in shape now? 

Rocket speed.

That’s exactly what this step aims to do.

If you take your big financial goals and put them on autopilot, you will start reaching your goals before your brain has time to say “I’m too tired to save today”.

Login to your checking account, and set up a recurring transfer for the day after your paycheck hits that sends 15% of your income into a retirement account.

Or that pays down your debt.

Or $500 that goes towards your house down payment fund.

Whatever the goal, make sure these things happen FIRST, then figure out how to live on the rest, rather than what most people do, which is spend first, then save whatever is left over at the end of the month.

Instead of relying on your day-to-day willpower to make those extra debt payments every month, you’ve cashed in on the willpower of one single moment to put the process into place. 

Then, you let the system run and you never think about it again. 

Beautiful.

Do this, and you will become wealthy without feeling like you’re trying.

Did any of the 3 Wealth Building Factors surprise you? Share this article with a friend! Chances are, they’d like to know about them too.

Keep growing,

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