How to Build Wealth

7 min read

The Merriam Webster dictionary defines wealth as:

An abundance of valuable material possessions or resources.

In the traditional sense, most people consider “wealth” to be synonymous with “lots of money.” But wealth doesn’t have to refer only to money. You can be wealthy in many ways:

• Financially (having an abundance of money)
• Socially (having an abundance of relationships)
• Time-wise (having an abundance of free time)
• Physically (having an abundance of health)

Each of these forms of wealth is worth pursuing and each will add value to your life in a unique way. What is important to realize, though, is that pursuing financial wealth opens the door for you to pursue the other three forms of wealth.

By having financial wealth, you can literally buy time. You can choose to quit a time-consuming day job or drop down to part-time work and gain back a huge chunk of time each week. And with this extra free time, you can prioritize your relationships (social wealth) and your health (physical wealth).

This is why it makes sense to pursue financial wealth, not so that you can stare at a big number in your bank account, but so that you can acquire all three other forms of wealth.

Let’s check out some simple ways to build financial wealth.

How to Build Financial Wealth

No matter how many financial books you read or podcasts you listen to, you’ll always come across the same simple path to building wealth:

Spend less than you earn.

Invest the difference.

Repeat until wealthy. 

In terms of how you can actually pursue this path to wealth, try following the steps below:

• Get your “big three” expenses of housing, transportation, and food under control.
• Acquire a rare skill set and use it to earn a high income.
• Buy and create assets that pay you over and over again.

Get Your “Big Three” Expenses Under Control

For the average U.S. household, housing, transportation, and food account for 62% of total annual spending. By keeping these three expenses low, you can keep your total annual expenses low.

Housing Expenses

To keep your housing expenses low, it helps to understand two things:

(1) Human tendencies

(2) The nature of human adaptation

Human tendencies: In a fascinating 2012 study on how American families use their homes, UCLA researchers found that a typical family spends most of their time in either the kitchen or the family room. They found that many rooms often go completely unused like guest bedrooms and dining rooms.

In one example, researchers tracked the location of each parent and child on the first floor of their house every 10 minutes over two weekday afternoons and evenings.

According to the study:

“The researchers found that 68% of the family’s time was spent either in the kitchen or in the family room, near the TV and computer.”

The diagram below shows where members of the family were during each 10-minute interval:

Notice how the dining room is basically untouched and the porch is never used. Even the living room is only used sparsely. In total, the unused parts of the house accounted for nearly 75% of the home’s square footage.

These findings likely aren’t unique to the family in the study. In each of our homes, there are places we tend to use far more than others. We all have some wasted space. This is why it makes sense to buy or rent a place in which you’ll actually use all of the space on a regular basis. This helps you keep your housing expenses lower and eliminates the need for you to maintain and clean spaces you rarely use.

The nature of human adaptation: Understanding the nature of human adaptation can also help you keep your housing expenses low. As humans, we adapt to our environment shockingly quickly.

This means that a big, spacious home fails to feel so spacious after just a couple weeks of living in it. It begins to feel normal. Similarly, a smaller home fails to feel so small after a couple weeks of living in it. It, too, begins to feel normal.

Whether you choose to live small or large, it will become normal over time. Unfortunately, if you live in a large place with lots of unused space, you still have to make the rent payment on that space.

By making the choice to live in a place that suits your needs, with rooms that you actually use on a regular basis, you can reduce your housing expenses and keep your overall expenses low.

Related post: How Much Should You Spend on Housing?

Transportation Expenses

The simplest way to keep transportation expenses low is to avoid overspending on a car you don’t need.

Specifically, it helps to be familiar with the rich man in the car paradox, which can help you avoid the bias of spending too much on an expensive vehicle just to impress your peers. Financial writer Morgan Housel coined this paradox in an article he wrote on 20 biases he often sees people make when dealing with money:

“When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.

The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth solely as a benchmark for their own desire to be liked and admired.

This stuff isn’t subtle. It is prevalent at every income and wealth level. There is a growing business of people renting private jets on the tarmac for 10 minutes to take a selfie inside the jet for Instagram. The people taking these selfies think they’re going to be loved without realizing that they probably don’t care about the person who actually owns the jet beyond the fact that they provided a jet to be photographed in.

The point isn’t to abandon the pursuit of wealth, of course. Or even fancy cars – I like both. It’s recognizing that people generally aspire to be respected by others, and humility, graciousness, intelligence, and empathy tend to generate more respect than fast cars.”

Understanding this paradox can save you thousands of dollars. If you aspire to be admired or respected by others, you’re unlikely to gain this respect or admiration through buying a fast car.

This is why it makes sense to buy a car that, similar to buying a house, suits your needs. By avoiding the simple mistake of overspending just to impress your peers, you can save thousands of dollars each year.

Food Expenses

The last of the “big three” expenses is food expenses. The simplest way to save money in this category is to simply cook most of your meals at home. In particular, I’ve found it helpful to meal-prep all of my lunches for the week ahead on Sunday evenings. Then, in the evenings I can cook my dinners.

This isn’t to say that you shouldn’t dine out at all. Personally I get Chipotle all the time with my friends, my girlfriend, and my cousins. Because it’s a social experience, it’s worth the price to me. And since I cook most of my meals at home, I never feel guilty about dining out. 

It’s also important to view your food expenses in relation to your larger expenses like housing. You probably spend roughly three times as much on housing as you do on food expenses each month. This means if you’re able to nail your housing expenses, you can afford to be more flexible with your food spending without breaking the bank.

Acquire a Rare Skill Set and Use it to Earn a High Income

Cashiers earn minimum wage because anybody can be taught how to operate a cash register in under an hour. Brain surgeons earn hundreds of thousands of dollars each year because very few people have the knowledge necessary to perform brain surgery. 

The more rare your skill set is, and the harder it is to teach to others, the more money you can earn.

The way to build a rare skill set is to learn how to do things that are hard and uncommon. Ideally, if you find something easy that most people find hard, you’ve hit the jackpot.

For example, I find statistics concepts to be easy to learn and apply. Most people do not. This makes my knowledge in statistics rare. This is why I’m able to leverage that knowledge to demand $40-50 per hour for stats tutoring.

In addition, it helps to develop more than one skill in an area that is considered hard and uncommon. This way, when you combine your skills you have an even more rare skill set that you can use to demand an even higher income.

For example, I decided to learn the programming languages JavaScript and R in my free time outside of classes in college. Eventually, these programming skills combined with my knowledge in statistics enabled me to land a data scientist job that paid $80,000 when I was just 23. Because my skill set was rare and in demand, I was able to earn a high income at a relatively young age.

Related post: How to Become a Data Scientist

Building wealth is much easier if you’re able to earn a high income. Combine this with low expenses, and you’ll find that you have an excess of cash each month that you can use to buy and/or create assets that will help you build even more wealth.

Buy and Create Assets that Pay You Over and Over Again

By developing a rare skill set, you can earn a high income. However, you’ll find that at least in the early stages you have to trade your time for money. Whether this means freelancing, working for a corporation, or consulting, you’ll likely have to exchange your time for money when you’re just starting out.

The way to separate your time from your income is to buy and create assets that earn money without your attention. Some examples include:

• Real estate
• Stocks
• Websites
• Products

Here’s how I have been able to acquire each of these assets myself:

Real estate – I choose to buy REITs, which are real estate investment trusts. These are companies that own or finance income-producing real estate. Each month, these companies pay me a dividend simply for owning them. While I could decide to buy an investment property myself, I prefer this hands-off approach that is a completely passive way to earn income. This is a perfect example of an asset because it pays me each month and requires absolutely zero time commitment from me.

Stocks – In terms of stocks, I invest exclusively in index funds. These index funds also pay me a dividend each quarter simply for owning them. In addition, the value of these index funds is highly likely to increase over the course of several decades, which means I can sell off shares whenever I’d like in exchange for cash without depleting the value of my shares.

Websites – I currently own several websites (including this one) that earn income each month from ads, affiliate links, and products. Some of these websites require active attention to bring in traffic, but some are completely hands-off because traffic comes mostly from recurring organic search traffic. Each website I own is an asset that brings in income for me each month. 

Products – Products are assets because once you build them, they no longer require your attention to bring in income. You can sell the same product over and over again to different people without rebuilding it each time. Some examples of products I have on this site include The Excel Genuis Toolkit, The Data Scientist Resume Pack, and the Elements of Freedom ebook. It took time to build each of these, but now they bring in income each month without my attention.

Pursue Wealth

If you’re able to:

• Get your “big three” expenses of housing, transportation, and food under control.
• Acquire a rare skill set and use it to earn a high income.
• Buy and create assets that pay you over and over again.

then building financial wealth will be inevitable. And with this financial wealth, you’ll be able to pursue:

• Time wealth – having an abundance of free time
• Social wealth – having an abundance of relationships
• Physical wealth – having an abundance of health

So, pursue financial wealth. Not just so you can stare at a big number in your bank account, but so that you can gain all of the other forms of wealth that form the foundation of a rich and meaningful life.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.