Build Your Wealth Generating Machine

Wealth Accumulation Driver #3:

Build Your Wealth Generating Machine

(How to Invest & Grow Your Cash Like A First Generation Millionaire)

We’ve covered the first two drivers of wealth – Lower Your Burn Rate and Maximize the Value of You.

These two drivers work together to throw off cash in excess of your living expenses, or what we call your Burn Rate.

This excess cash, which we refer to as your Personal Profit, becomes the cement that forms your wealth foundation.

With that foundation in place and growing, wealth driver #3, Build Your Wealth Generating Machine, moves to front and center in your wealth accumulation quest.

As an aspiring First Generation Millionaire, I started my wealth journey with a simple three point plan.

First, keep my Burn Rate well below my income by focusing spending on where I derived the most benefit, and cut spending where the benefit was less than the cash expenditure.

Second, focus my career on creating more and more value for my employer so that I could share in the gains through a steadily increasing income.

Third, save the dollars left over after my Burn Rate was covered and then learn how to invest to create a stream of returns that would eventually surpass my annual salary, at which point I would no longer have to show up at my day job.

The key to creating this reliable stream of returns started with building my Wealth Generating Machine (WGM).

What’s my definition of a WGM?

It’s a clearly defined repeatable approach, operating within your tolerance for risk, for how to invest your available cash to generate a reliable, long term stream of returns (investment income).

The importance of being repeatable is that your capital needs to generate returns for the long run.

Approaches that are hit-and-miss can result in investment returns that swing wildly or, worse, eventually destroy the very cash that you worked hard to earn.

The reason that risk tolerance is an important consideration is that you need to sleep at night.

Putting in place investing plans that are substantially outside of your risk tolerance can undermine your peace of mind, and may lead to poor decision-making at the worst possible times.

Your Wealth Generating Machine is a powerful tool in your wealth accumulation arsenal because its level of output will, in large part, determine how high you can set your financial targets, and how quickly you can reach them.

The wonderful part about your WGM is that if you build it right, it will spit out cash at an increasing rate because of three things.

First, you’ll make better investment decisions as you gain real world experience.

Second, with the action you take to Lower Your Burn Rate and Maximize the Value of You, your investible asset base will be expanding, generating more cash output even if your rate of return remains flat.

Third, you’ll benefit from the powerful principle of compound interest.

Even if you start with a lump sum and don’t add to it, compound interest can double and redouble your base investment several times over, depending on the interest rate and the amount of time you allow earnings to reinvest without removing cash.

Einstein was quoted as saying that compound interest is the 8^th wonder of the world, and I believe he’s absolutely right.

The most vivid example of the power of compounding is an old riddle about a boy who was hired by a shopkeeper who asked him what he wanted as a starting wage.

The boy said: “Pay me a penny on my first day and double it every day until the end of the month, and I’ll be very happy.”

Of course this sounds like a foolish and meager request, to the shopkeeper’s great advantage. But if you assume 30 days in the month, and that the boy works seven days a week, his salary on day 30 is $5,368,709.12!

While it’s not likely Your Wealth Generating Machine will be able to double what you initially invest 30 times over, each doubling adds significantly to your wealth.

Of course the rate of return, or interest rate, you earn on what you invest will determine how many years it takes for your principle to double.

With just a 7% rate of return, you’ll double your initial investment roughly every 10 years.

That’s why its so important to let time work its magic.

Excluding any taxes, with a lump sum of $100,000 in your 401k retirement account and a 7.2% annual return, in 10 years you’ll have $200,423.

If you let it sit for 20 years it would grow to $401,694.

In 30 years it’s an astounding it’s $805,088.

In this example, the final 10 years are a real game-changer for what type of retirement you can enjoy. So time matters.

However you look at it, compound interest is one of the most powerful concepts in the universe of wealth generation.

Your Wealth Generating Machine should be designed to produce the highest possible interest (return in some form) on your invested cash, within your tolerance for risk, and by leveraging any unique skills you have.

The other critical benefit that comes from Your Wealth Generating Machine is income diversification.

Prior to your investments throwing off cash, you’re completely dependent on your job or business to generate 100% of your income.

If something happens to your ability to work – sickness, a recession-induced job loss, an abrupt shift in the marketplace, a boss that hates you, an employer that goes bankrupt – you are, to use a technical financial term, screwed.

At least until you find a new employer so that your income stream begins to flow again.

But once your assets are producing an entirely independent stream of income, you now begin to reduce your reliance on your wage income.

In fact your asset income should be structured to be completely unrelated to your job income.

This decreases your dependence on either your job or investments.

If you experience failure in one, the other will still be there.

This will lead to increased peace of mind as it relates to your financial life, which is one of the greatest rewards of wealth.

And we’re not done yet, there’s another massive reward if you’re inclined to claim it.

The risk reduction that comes from diversifying your income sources can lead to even more income.

How?

With your two incomes streams isolated from each other, you can take more aggressive risks, with the objective of gaining higher rewards, with one of the two streams.

After all, if one stream slows you have the other backing you.

And to be clear, I’m not advocating reckless risks that are well outside of your comfort zone.

I’m talking about taking the type of investment risk that’s stacked in your favor, where you have a clear edge.

Maybe it’s using your investment dollars to buy a silent partner share of a business where you bring unique expertise.

Or a strategy to use a portion of your cash to invest in single stocks where you have deep industry knowledge and therefore may be able to create better returns.

Or perhaps, with your investments producing a reliable income stream, you can take a huge risk in your career by working 100% on commission, where the upside is massive.

Ultimately, Your Wealth Generating Machine becomes your engine for growing your wealth in a way that doesn’t require you to show up to work.

There’s much advice on how to invest your hard-earned money, but most of it misses a few really critical factors.

First, no two individuals have the exact same risk tolerance.

Risk tolerance is a very personal factor, often influenced by the money beliefs you gained in childhood, the stage you are in your life, your marital situation, your age, your industry, your health, and a host of other factors.

To make sound investing decisions that won’t keep you up at night, it’s important to determine your tolerance for financial risk.

Second, investing advice that has its basis in ‘common wisdom’ usually suggests a one-size-fits-all approach. It says “Just do this, and don’t ask any questions.”

While that’s easy, if you’re serious about wealth accumulation, it can be very wrong for your situation.

Your financial needs, and therefore your ‘right’ Wealth Generating Machine, are unique as your DNA.

Yes, there are only a certain number of basic investment options.

But the magic in getting the right solution for you is the mix AND the timing, the same factors a master chef uses to create a brilliant result.

One-size-fits-all rarely adjusts for those two factors.

As A First Generation Millionaire, I learned that as your wealth grows, it’s increasingly advantageous for you to take a hands-on approach to managing your investments.

After all, you worked hard to build and nurture every dollar.

And hands-on doesn’t’ mean that you shouldn’t also seek professional help, in the form of a fee-only financial planner.

A Financial Planner that’s a right fit for you can be invaluable in providing objective advice as well as acting as a sounding board.

In fact, I consider it a major mistake having not sought a fee-only financial planner’s advice during my early wealth journey, as an objective outside view of my plans may have saved me both time and pain.

However you proceed, I firmly believe that in order to architect the right wealth accumulation and optimization plan — to successfully master how to invest and Build Your Wealth Generating Machine – you have to be actively involved and know how every part works.

Why?

No one knows you as well as you.

And no one sweated over each tough decision the way you did, in order to accumulate your wealth to whatever level it is today.

You simply have more skin in the game than anyone else, and you will be motivated to play harder and smarter.

At Millionaire Foundry we are not about a single solution that works for everyone.

Instead, our objective is to give you ideas, perspective, a framework, and the ‘uncommon’ wisdom to successfully pursue your wealth journey in a way that’s unique and rewarding to you.

In the coming months we’ll talk more about how to Build Your Wealth Generating Machine, as well as the other three wealth drivers.

All this from A First Generation Millionaire who did it on his own, starting in the struggling part of the middle class, and reached $1MM in liquid, investible cash at age 43, while keeping his day job.

I hope to see you here every week as we add new articles.

Wealth is Freedom!

A First Generation Millionaire