Ingredients of Building Wealth

Dear Looking for a Simple Wealth-Building Recipe, Today, I am going to discuss the four ingredients to building wealth.  

I spend a fair amount of time with friends who have children, or nephews and nieces that are in their teens and twenties. Knowing that financial literacy is one of my three main passions, these friends will often be eager to discuss how they can easily share financial ideas with the young people in their lives. On one particular day, a friend said that she wished that she could invite her nieces over for a meal and share some basic money ideas that they could carry with them. She talked about how maybe she could even invite them to even help prepare the meal.

What a lovely idea! I am all about family and think that it is one of, if not the most important thing in our lives. I think that having a family activity that involves cooking, eating, and discussing ideas for success sounds fantastic!  

So after thinking about it, I thought that it would be good for my friend to have something quick and simple to say about wealth building. (I assumed that they would want to spend time talking about other topics, also.) 

In the spirit of the food themed event that my friend was planning, I suggested that she frame her dinner talk around…

The Ingredients of Building Wealth

The First of The Ingredients of Building Wealth

The first ingredient of building wealth is the amount of money that you put into the mix. In fact, the money that you have is the number one ingredient to build wealth. If you use your money to buy non-assets, liabilities, and pay interest on debts, you are delaying or even stopping your ability to build wealth. But used to build wealth, you’ll be cooking! 

You need to do whatever you can to make more money. Fortunately, when you are young you have a lot of energy. You may need it to get multiple jobs. You may need to start a side hustle business. But, though probably being more difficult, a better idea would be to create an Internet source of income that can ultimately become more passive.

I know, I know…easier said than done. But, spend some time thinking about how you might be able to solve some problem (online) that people would pay to have solved. 

You may think that this doesn’t sound fun (or maybe you are excited for the challenge!) But, you need to make as much cash as possible in your early years of building wealth. 

Consider the Alternative

Consider the alternative. You can stay where you are. You can do what most people do. Just remember, doing so will likely end with you being where most people are. That is not wealthy. In fact, it is said that most people in the United States don’t even have enough money to cover a $1000 emergency. Sadly, this means that if they had to visit the emergency room, they would have to use a credit card or get a loan to pay that medical bill.

I hope that you want to have a better financial life than that. But, you need to want to make that happen. In this vein, I say to you… If you want to have a wealthy life, I suggest that you do what you need to do now so that you can later do what you want to do.  Getting income is your first wealth building ingredient that you need to get

.

If it gives you any inspiration, I am a lot older than you, and at the time that I am writing this letter, I have two jobs. I teach in the mornings, and in the evenings, I have a tax related job. I love teaching. But, I added the tax job, which I also enjoy, because I want more money to buy more of the second ingredient needed to build wealth. I know that I am only doing this for a short term. So, I am able to deal with it. 

The Second of The Ingredients of Building Wealth

The second ingredient of building wealth are cash flowing assets. Cash flowing assets are things that put money into your bank account. That’s it. If it doesn’t put money into your bank account, it is not a cash-flowing asset. So, while calling the home that you live in an asset is popular in some circles, it is not a cash-flowing asset. Whenever I mention assets, I am talking about cash-flowing assets. Your primary home is not a cash-flowing asset unless you are making an income from it. (There are some ways to do this. For instance, you could rent out a room to someone. But, most people are not.) 

To build wealth, you need to use as much of your money as possible to buy cash-flowing assets, and use as little as possible buying things that are not cash-flowing assets, or even worse, things that go down in value. 

Assets are the ingredients that earn income for wealth. In fact, they are the only ingredient that can help you create the financial freedom that will allow you to have enough cash flow to make work optional and allow you to be more generous with helping others. You may have a high paying job. That may make you rich. But, if you stop working, your job will stop paying you. The cash paying assets can continue to pay you even if you stop working. That’s wealth. 

The Third of The Ingredients of Building Wealth

The third ingredient of building wealth is the return (return on investment) that you earn from your money and assets. This is the percentage that your asset pays you or earns annually. If an asset that you buy is rental property, then the return can come from both the appreciation of the property and the rents collected from the tenants. If the asset that you buy is an S & P 500 index stock (such as ticker symbol VOO, which is an ETF), most of the return would come from the appreciation of the stock. But, at least in the case of the S & P 500 stock that I own, there is also some small return in the form of dividends. 

An example is, according to Investopedia, the S & P 500 has historically returned an average average return of approximately 10% since its origination (in 1957) through the end of 2023. 

You need to have as high of a return on your investment as you can while at the same time not having too much risk with the investment. (*Note that all investments have a degree of risk. The key is in managing those risks.)

(If you are interested in reading about risk, check out this post: Managing Personal Finance Risks.)

The Fourth of The Ingredients of Building Wealth

The fourth ingredient of building wealth is time. This means how long you own an asset. 

We need the element of time in order to experience the compounding effect. When your previously earned interest starts to earn interest, that is compounding. Compounding is like a financial superpower that grows your wealth. 

Time is also needed to allow for appreciation of your assets.

 

One thing that I like about dividend paying stocks is that with time, they can both appreciate in value and pay compounding dividends. 

Time Out!

This is a good time to remind you that investing is a marathon, not a sprint. You start now, and work at it as hard and as long as you can to get to the finish line. But keep in mind you can have multiple finish lines, with each finish line being a goal. Your first finish line might be earning the average of $10 a month. Your next finish line may be earning an average of $25 per month. The finish line after that may be earning enough to pay your cell phone bill each month. In essence, your finish lines are a succession of short term goals.  

Now that you know the four ingredients of building wealth, let’s look at some examples.

Examples 

In the first example, you use the first ingredient (money) to buy the second ingredient (assets, in this case S & P 500 stock), with the third ingredient (return in this example,10% annually) and add in the fourth ingredient (time, in this case 10 years). 

So, imagine that you invest $300 a month into a retirement account (like an IRA). You invest at a rate of 10% for 30 years. You could end up with $650,000. 

However, let’s look at a second example. if you invest the same amount per month at the same rate of return for 35 years into your retirement account, you would earn a lot more. Those extra five years could have you end up with over $1 million! 

Why did I share the second example with you?

I did it to show you how important the time ingredient is. The more of this ingredient that you have the more time your wealth has to grow. .  

Let me share an example of a specific person whose investments were reportedly positively impacted by time…Warren Buffett. Warren Buffett, in case you don’t know, is reportedly worth $138 Billion at the time that I am writing this.  He started investing at the age 11 and he is currently 93 years old. Also, he is currently listed as the 7th richest person in the world. It is said that Buffett made 99% of his money after the age of 50. In fact, he went from $84 billion in 2018 to $114.5 in 2023. 

So these are the four simple ingredients to building wealth. First, you need money to buy assets. If you do not buy assets, I don’t care how much money you make, you will never be wealthy. Your assets are what creates the cashflow that eventually you could live off. Of course you need to purchase assets that have a history of providing a quality return. But, if you delay getting started, it will seriously impact how much wealth you can eventually be able to build.

My advice to my daughter is to start now. Time is a major ingredient. There is no substitution for time. So, you need an urgency in saving and investing. 

The Ingredients of Building Wealth

: Key Takeaways

• There are four ingredients of building wealth. 
• First, you need the ingredient money. You need it to buy assets.
• The second ingredient is cash-flowing assets. You need these to put money into your bank account. 
• Another ingredient is a good return from your assets. So, definitely don’t just keep all your money in a bank account.
• The last ingredient is time. You need time for your assets to grow and compound. 
• Start today. Don’t delay. Even small amounts help and make you better off than not investing at all. 

There you have it…the four ingredients of building wealth. May you pursue it, achieve it, and then use your life and time to help others.  

You can do it! I have faith in you. 

Hugs, 

Rich Mom

Looking to read more? You can check out these posts: 

Building Wealth In Your Twenties

Having Fun While Building Your Wealth

Pay Yourself First

What to Do With Cash

If you want to take a look at the Investopedia article on the S & P 500 average return, you can check it out here:

S & P 500 Average Return and Historical Return

Who is Rich Mom? 

If you stumbled upon this post and you are wondering who Rich Mom is, check out my “About Rich Mom” page. 

Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

Also, remember that past performance is not a guarantee of future performance.

The information shared here is not intended as financial advice, just entertainment and entertainment.