Let’s face it: When it comes to money, everyone wants more of it. Unfortunately, few people really understand what they need to do to earn it. Sure, landing a better job or getting a raise will boost your income. That’s great, but a small bump in your paycheck usually isn’t enough for building wealth on its own.
Instead, it’s more important to learn how to properly handle the resources you currently have at your disposal – money and time.
Are you ready to turn your pennies into Benjamins? These 6 ideas will help get you started.
Building Wealth with Residual Income Streams
If you’re serious about building wealth, you’re going to need to start investing. If you’re new to the idea, this concept can seem pretty overwhelming.
So much of the available information on investing is filled with gobs of jargon and complicated advice that’s hard to digest. If that describes how you feel, don’t worry.
One of the most important things you need to know about how to start investing – and how it relates to building wealth – is that it helps you establish residual income streams. This is an important concept that can help you build wealth much faster than with a simple paycheck alone. Here’s how.
What is Residual Income?
Residual income is income earned on a recurring basis, often as the result of an initial investment of money and/or time.
So, in the context of investing, you contribute money into your investment account and the value grows over time. It’ll grow a lot faster if you make regular contributions, of course; but, even if you don’t, that initial investment will grow. Why? Because of a magical thing called compounding.
The initial money invested is called the principal. The principal then grows (in the form of interest or dividends), and that growth is reinvested back into the original investment. The next cycle of growth will pay interest and/or dividends on both the initial principal + that first round of growth – so, you’ll earn even more than you did during the first cycle. That growth is again reinvested, and the cycle continues. In a nutshell, that’s compounding.
Time is More Valuable than Money
Do you see how you don’t have to do anything other than invest the initial money to earn even more? The income you earn after that initial investment is residual income, and it’s super important to building wealth.
Why? Because time is more valuable than money.
No, for real. You only have 24 hours in a day, and you need to spend at least a few of them sleeping. So, relying solely on exchanging your time for money (which is the situation in most jobs) is limiting to building wealth. At a certain point, your earning potential plateaus.
With residual income, you aren’t trading your time for money. Instead, you’re earning that income in your sleep. That frees up more time to invest in other income-generating activities.
There are other ways to build residual income streams, too. You might consider:
- Investing in real estate- Here's how to do it without debt or becoming a landlord
- Renting out a basement, apartment, or spare room
- Starting a blog that makes money through affiliate marketing
That’s not to say these are sources of easy money. They often require an upfront investment of hard work! After that, they can generate a relatively steady stream of recurring income. And recurring income is your friend.
This should go without saying, but if you’re serious about building wealth, you need to get out of debt. The exception here might be a modest mortgage.
If you currently have debt, you need to build debt repayment into your budget. Prioritize paying down your high-interest debts first. Then, use the extra cash flow to attack whatever’s remaining.
Once all of your debts (besides your mortgage) are paid, you'll have increased cash flow. And guess what you can do with that recovered cash? Pump it into savings and investments!
Pay Yourself First
Saving and investing is most effective when done consistently over time, which only happens when you make it a regular habit.
To make sure you establish healthy saving habits, I recommend paying yourself first.
This means building contributions to your saving and investment accounts into your budget and automating them.
This works for a couple of reasons. First, you’re essentially treating your savings/investments as an expense by including them in your budget. That ensures they get funded.
Second, you’re automating your contributions so that – on payday – money moves directly from your checking account into your savings and investment accounts. Automation makes it super-easy and eliminates that chance that you might forget to do it…or spend the money on something else.
Start a 401(k) or IRA
You know you need to save/invest consistently if you want to build wealth, but what kinds of accounts should you consider?
Investment accounts like a 401(k) and Individual Retirement Accounts (IRAs) offer a great opportunity to realize some tax benefits while saving for retirement.
If your employer offers a 401(k), you should absolutely take advantage of the company match. I recommend contributing at least enough to get the maximum match since it’s essentially free money.
For example, if your employer will match your contribution up to 4% of your salary, then make sure you put 4% in. Anything less, and you’re leaving free money on the table.
Since you’re serious about building wealth, you might also want to consider an IRA to help bolster your retirement savings. An IRA can be a great place to keep long-term investments since growth is tax-sheltered.
Invest in the Stock Market
Even if you have healthy saving habits and are participating in your work’s 401(k), you might be intimidated by the stock market.
I don’t blame you. The truth is that most people don’t have the knowledge necessary to start buying and trading stocks with the goal of beating market returns. In fact, some investment gurus argue that consistently beating the market just isn’t possible.
I’m not trying to discourage you. If you have some “play” money and always wanted to try buying your own stocks, then have fun. But, if you’re just getting started or you’re not comfortable with that, there are other ways to invest in the market and (hopefully) win over time.
Index funds can be a great way to invest in the market and generate a residual income stream, helping to grow your wealth over time.
An index fund is a portfolio of stocks designed to mimic the performance of an index (think the S&P 500 index) rather than beat it. In fact, Warren Buffett has famously stated that he thinks these types of funds are the smartest choice for the average investor.
One of the things that make index funds attractive is that they tend to have lower fees than other types of funds. This is because they aren’t actively managed. Fees eat into your returns, so the lower the better.
Start your Own Business
Looking for a way to increase your income so you have more to invest? Starting your own business might be an option.
Most people aren’t going to quit their day job and start up a new business tomorrow, and that’s probably for the best. Still, anyone can start a side hustle.
A side hustle is a job you make for yourself to earn additional income while continuing to work a full-time job. I’m pretty partial to blogging and freelance writing, since they’ve worked so well for us, but there are all kinds of side hustles you can try.
Remember, extra income on its own isn’t enough to build wealth – it’s what you do with it that counts.
If you spend all your extra cash on an inflated lifestyle, you won’t be any wealthier. But if you pump most of your side hustle income into your investment and savings accounts, you’ll see a real boost in growth over time.
Which of these ideas have you tried? Let us know in the comments!
Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.