This is a guest post by Gary Dek from Gajizmo.com.
Everyone dreams of being rich, but the chances of winning the lottery or inheriting wealth from a distant relative are pretty slim.
Building wealth isn’t a result of idly daydreaming about success or money; high income earners have worked and sacrificed to achieve their dreams.
While some luck may be involved, most successful businessmen and women agree that luck is a small part of the secret to successful investing.
After all, capital is necessary if you plan to make money with investments and the only way to raise or build your own capital base is to make smart financial decisions and save money to devote to investments.
Here are six secrets you need to know to see success when investing to build wealth:
Living Below Your Means
Most people who have built real wealth started out by living below their income and saving or investing the extra money.
Today, Warren Buffet, one of the richest men in America, still lives in the house he purchased in 1958 for $31,500. In fact, most everyday millionaires aren’t Wall Street hedge fund managers or CEOs of Fortune 500 companies, but individuals with well-paid jobs who have learned to manage their budget, max out their contributions to retirement accounts, continuously invest in index funds, and just keep saving.
Saving money on non-essentials means having more money to invest. The ideal is to have your money working for you instead of you working for your money, and that simple philosophy eludes most families today. That helps explain why the average retirement savings by age is so low.
The perfect example for me is that I’ve postponed buying a new car for a couple years now. I love cars, and as a 20-something, it would be awesome for me to have a 300+ horsepower luxury sports car. The payments would affordable and I could buy one if I wanted to, so what’s stopping me?
A simple back-of-the-envelope calculation tells me that spending $50,000 plus interest payments over the course of 5 years could prevent me from earning tens of thousands in investment income.
So early in my life, I’d rather create a nest egg to buffer any future cash needs – something I learned from my parents, who used their savings to buy a business. I'd rather be investing in my 20s than spending.
Unfortunately, the average American spends virtually every penny they earn each year, leaving nothing for savings and investment. Instead of buying the most expensive house or car you can afford, save money on your mortgage and car loan payments by purchasing a less expensive home.
Historically, the long-run returns on your primary residence are less than 5%. Instead, the money you do save on your mortgage can be invested in higher-yielding opportunities, such as the stock market, a small business or investment property. Many of the wealthiest people in the world started out with very little and built their fortunes by making good decisions. There is no reason you can’t join their ranks.
Education and Knowledge
The English philosopher, Francis Bacon said “Knowledge is power”. Formal education is not central to knowledge, but studying and researching potential investments and investors builds experience. Examining the good and bad choices made by other investors can help you avoid at least some common mistakes, and by having a thorough understanding of all the options available in the market, you can pull information from different sources to determine which opportunity will inevitably be the highest performer.
When you have capital, there are many types of investments with varying degrees of risk. As a rule, the riskier the investment, the greater the rate of return. Learning how to mix different types of investments to maximize and diversify gains and minimize losses is one of the best ways to make money over time. This means combining safe investment options, like Treasuries and high yield money markets, with riskier ones, such as growth stocks, real estate, or a small business acquisition.
Determination and Risk Tolerance
Successful investors are prepared for setbacks and do not become discouraged when they take a loss or buy an investment with lower returns than they anticipated. Remember, no investment opportunity with the potential for a huge return is ever guaranteed. If it was, everyone would take advantage of it. Anyone who wants to become financially independent has to have the ability to tolerate risk. The key is to never make the same mistake twice and to incorporate the things you learned from that failure into your next venture.
About a month ago, I had the opportunity to buy a very authoritative website in the self-help/productivity niche. The site had received about 500,000 visits per month consistently for the last 3 years, and there was tremendous potential to increase revenues due to under-monetization. The price was reasonable and the seller trustworthy, so why did I pass on the deal?
Plain and simple: fear.
I’ve been burned before in transactions. After buying a website with thousands of visits per month and a solid revenue stream, Google’s algorithm penalized the site into oblivion and the total investment was lost. Despite that risk being highly unlikely in this case, I passed up on a great opportunity because I was scared. I won’t be making that mistake again.
The difference between those who become successful and those who do not often comes down to determination, persistence, and overcoming your fear of risk. The investor who continues to take chances and make informed decisions to buy investments he/she truly believes in ends up with far greater wealth than the individual who stashes all his cash in a savings account, too afraid to make the rational decision and diversify his money. When a disciplined investor is determined to prioritize his long-term retirement needs over consumption, he re-invests his returns instead of spending them.
You Have To Be In It To Win It
Many people postpone financial planning, believing they don’t have the means to start now. This is usually followed by the self-promise that they will start next week, next paycheck, or next year. Then life intervenes and they decide to postpone saving and investing again.
Families who earn their financial independence start by investing their money early and building their portfolio over time. Like you’ll read in every personal finance blog – don’t underestimate the power and importance of compounding interest. Failing to take action is the biggest barrier between the average person and wealth.
While every investor, like every gambler, occasionally has a streak of luck, few successful investors depend on luck over the long run. Most take the time to research different industries, business models and companies.
Consider investing your second job. The more information you absorb and the better you understand a field, the more likely you are to find the gems others overlook.
One of the best examples of this is real estate. I have my Real Estate Broker’s License, and as a habit, I check out MLS listings every Sunday night. The more properties I review, the more insight I have into what is available in each neighborhood or city, the cost per square foot, how the interior and exterior condition of the property affects the final price, etc. Over time, you start to get a feel for the market, and when you see an undervalued property, you have the confidence to jump in and grab it.
Believing in Success
Some wealthy investors, like Sam Walton (Walmart) and Bill Gates (Microsoft), choose to invest in their own businesses while others, like Warren Buffet, invested by buying stocks and bonds to fund other people's businesses.
One thing that all successful businessmen have in common is an absolute belief in that they will meet or exceed the goals they have set for themselves. It is this complete faith in their own ability that makes these individuals keep striving, even after setbacks and disappointments. Consider making money from home – start a home-based business by turning a passion or hobby into a commercial venture.
There are no real secrets to building wealth and the opportunity is available to anyone who is willing to make the necessary sacrifices and put in the required effort. Just as there are no secrets, there are no shortcuts to financial success. Knowledge, time and hard work can make anyone the next American success story. Ordinary people can do extraordinary things, just ask the rich and the famous who were once ordinary too.