If you’re an entrepreneur wanting to create wealth and learn how to become wealthy, then it isn’t enough to rely solely on your business to make your fortune.
Yes, you can use your business at the core of your wealth-building strategy, but, there’s an art to developing real wealth outside the day-to-day operations of your business.
The risk with relying solely on your business, and not investing outside of your business to generate your wealth is that should something happen to your business, or should it become impacted by a black-swan event like a pandemic, for example, then you’re potentially left with nothing.
Imagine spending years building a successful business, and reinvesting all of your profits, year after year, back into your business, only to find that you open the papers one day to find that the government has shut down your operation for an indefinite period of time.
The scenario I just described is the unfortunate reality that many small business owners now find themselves in.
I’ve had multiple conversations with various entrepreneurs over the last few months who are just now realizing that they should have spent more time investing outside of their business.
And that brings me back to the point I made earlier … If you’re an entrepreneur wanting to create wealth and learn how to become wealthy, then it isn’t enough to rely solely on your business to make your fortune.
There’s a clear delineation between creating wealth and maintaining and building long-term wealth that is important to understand. And this delineation is something that defies many entrepreneurs, who are, at heart, risk-takers (related: What Every Entrepreneur Must Know About Taking Risk in Their Business)
Creating wealth requires that you take outsized yet calculated risks. Maintaining wealth requires an understanding of investing, diversification, and asset allocation with a long-term view because maintaining wealth is a long game.
Rich Vs Wealthy – What is the Difference Between Rich and Wealthy?
Here’s a question I want you to ask yourself – what is the difference between rich vs wealthy?
There are many entrepreneurs who have built amazing businesses, saved very little along the way, and then cashed out for a fortune. They got rich. They didn’t build wealth. As I said above, building long term wealth, and then maintaining wealth, is a long game requiring an understanding of asset allocation and investing.
These are different skills, and yes, creating wealth is a skill. Becoming rich is also a skill, but, don’t conflate rich with wealth.
You win the lotto – you’re rich. You invest, diversify, protect your wealth, and spend wisely, you’re creating wealth.
How to Become Wealthy. Step One in Building Your Empire
It’s now been over two tears since I published my best-selling book, The Kickass Entrepreneur’s Guide to Investing (you can get a free download by following the link).
So what’s changed in the last two years from an economic and business perspective?
A lot actually. When I wrote the book in 2018, the unemployment rate was at record lows, and the economy was firing on all cylinders.
Fast forward two years later, and if you were to ask me what changes I would make to the investment strategy I wrote about in my book, I would suggest that I wouldn’t make any. And this is in spite of the fact that we’re in the midst of a worldwide pandemic with volatile markets and a height of uncertainty.
The book and my philosophy are just as relevant today as they were in mid-2018.
What’s prompted me to write this blog post is the number of inquiries I’ve had in the last few weeks from various entrepreneurs with the same question … they want to know how they should invest their business’s profits in light of the current economic situation.
I want to be clear about something: my investment and asset allocation strategy are designed for entrepreneurs specifically. My book could have just as appropriately been titled: The Entrepreneur’s Guide for How to Become Wealthy. My book is written for entrepreneurs, not on how to build a business, or on how to become rich, but, on how entrepreneurs should create wealth, and then just as important, maintain wealth.
If you’re a successful doctor, employee, or high wage earner, then the concepts that I discuss in my book aren’t nearly as relevant, and while you can certainly invest in, and divide your assets across three equal buckets, cash, equities, and real estate, an entrepreneur’s reason for holding a third of their wealth in cash is very different from a traditional non-entrepreneur investor.
Let’s use my situation as an example. I’m at a very different stage today than I was when I was running my business where a large percentage of my income and wealth were sitting inside my business, and since I don’t really run a business, in the same way, I once did, and now that I’ve sold much of business interests, I’m more focused on building a resilient, tax-advantaged, multiple currencies, diversified, inflation-protected portfolio. Today I’m more interested in maintaining wealth.
And while I definitely still own real estate, and it comprises a large portion of my portfolio, I’m not as stuck on the three buckets.
If you’re an entrepreneur, I want to remind you, in order to importance, of three things on how to build wealth:
- You need to maximize your business’s profits. Today. It isn’t OK to forgo your profits, year after year, and pretend that maybe one day your business will be profitable.
- You need to have a sufficient amount of cash set aside in the very likely scenario that you will need that cash for some reason, and when you most need the cash, it just won’t be available. And what reasons might you need cash? A business emergency (a pandemic would be a good reason), an investment real estate purchase, or a competitor who is selling their business.
- An investment real estate property should comprise a good portion of your wealth. Whether it’s a third, a quarter, a half, is somewhat inconsequential. The ideal scenario is a third, but, if you don’t own any real estate, then start looking.
Enter the Three Wealth Creating Buckets: Real Estate, Cash, and Business Equity
What I propose in my book is that an entrepreneur needs to split their wealth into three equal buckets:
- Multi-unit residential real estate
- The business value (equity) of their business
In my book, I spent a considerable amount of time detailing the mechanics and calculations behind why I propose three equal buckets. I also explain how to build the buckets (and you can get a free copy from this link). If you haven’t read it, now is the time, especially considering how prescient the book was in 2018, and how current the fundamentals still are.
The general gist of what I detail is how important it is for a small business owner to invest in, AND also, outside of their business – again, create wealth vs maintain wealth. Winning the lotto (by selling your business), vs creating wealth through multiple diversified income streams.
It reminds me of the popular expression, “don’t work in your business, work on your business.” The same thinking applies with regards to entrepreneurial wealth-creating – don’t just Invest IN your business, invest OUTSIDE your business as well.
The idea is to turn your business into a cash-generating machine, and then use real estate and cash to protect, defend, and attack.
Here’s How The Three Buckets Help You Create Wealth
What purpose does each bucket, cash, real estate, equity, serve in the protect defend and attack approach to creating wealth?
- Protect – your cash and real estate is the protection
- Defend – your cash and real estate is your defense against a black-swan event
- Attack – your cash and your business is what you attack with, and use as your vehicle to build wealth
Some entrepreneurs might ask – do I really need to buy real estate? Can’t I just buy a REIT?
And my quick answer is NO, you can’t just buy a REIT. You need to own the property itself.
Why Buying Real Estate is Better Than Buying a REIT?
In my book, I suggested an alternative option to actually owning real estate is owning a REIT (real estate investment trust), and while a REIT is an excellent investment vehicle, it isn’t good enough for you hard-driving, type A, in-control entrepreneurs.
Entrepreneurs like to be in control. It’s in our DNA, and when you buy a REIT, you’re not in control of the outcome. It’s an investment into someone else’s business.
You’re trusting someone else with your finances. And that’s not what an entrepreneur does. As an entrepreneur, you need to be in control.
A REIT will make its best money by buying a building with rents below market, and slowly, and over time, creating value through the use of leverage, raising rents, and then potentially flipping the building at the new income level.
As an example of the potential wealth-creating power of real estate, if you have a building that’s priced at a 3% CAP rate, if you manage to raise the rents for just one unit from $1,000 to $1,600 per month, or $7,200 per year, then you’ve raised the value of the building by $240,000. And that’s just one unit. Imagine if you buy a five-plex and manage to do this with all 5-units inside 2-years!
What I’ve just described is possible. And this is what the astute entrepreneur needs to do.
You can read more about the above strategy here: Here’s How To Buy An Apartment Building And Make A Whopping 110% In Three Years
Does the Three Bucket Approach to Wealth Creation Still Work?
YES. The three-bucket approach still works. More so now than ever.
For those of you who took advantage of my three-bucket approach in 2018 and 2019, you’re now in an excellent wealth-creating position.
Your business might have taken a hit during the last few months, and hopefully, it’s back online, but, for many, this black-swan event has been devastating. If your business wasn’t profitable, if you weren’t putting aside some cash, and if you had all of your eggs sitting inside your business bucket, you now understand why I advocated a 3 bucket approach to wealth management.
I’ve spoken with too many entrepreneurs who hadn’t saved anything over the course of the last few years. They were investing their profits back into their business, and they were living large, leaving them with very little to no extra emergency funds. For some, they took a large revenue hit, and they’re now rebuilding, waiting on government hand-outs, and loans to survive.
You, The Entrepreneur, Are a Wealth Creator
One common objection I hear from entrepreneurs is that they’re too busy building their business to bother learning about and investing in real estate. That might be fine for when you’re just starting, but, if you’ve been running your business for a few years, and it’s profitable, I want to remind you about diversification.
I also want to remind you that you are a wealth creator.
Wealth creators don’t depend on one entity to create their wealth. They build multiple sources of passive income diversified across multiple uncorrelated asset classes.
In the investment world, there’s a known asset allocation strategy that’s defined as “The All-Weather Portfolio”.
The All-Weather Portfolio is an asset-allocation strategy that’s built to withstand major ups and downs in economic cycles and still manages to produce healthy positive returns.
Entrepreneurs need to invest differently. We have our own all-weather asset allocation portfolio
As an entrepreneur, you need to stop thinking of yourself as the creator and owner of one business and need to start thinking of yourself as an entrepreneurial wealth creator.
That’s why my three-bucket approach to investing is more relevant today than it ever was.
And that brings me back, yet once again, to the point, I was making earlier in this article: Creating wealth requires that you take outsized yet calculated risks. Maintaining wealth requires an understanding of investing, diversification, and asset allocation with a long-term view because maintaining wealth is a long game.
Don’t conflate the two. As an entrepreneur, it’s time you stopped thinking of yourself as a business owner and start thinking of yourself as a wealth creator. Wealth creators create wealth through multiple diversified sources. If the world caves in, they’re protected. The business owner who is just focused on one entity, their business, with essentially everything they have inside one bucket is … playing the lotto.
You, the entrepreneur are a wealth creator. Let’s say it together. You’re a wealth creator.
Understand the difference, diversify, protect, defend, and attack, and you’ll build a war chest that can last multiple lifetimes.
Before you go, I wrote this blog post that I think you might find interesting (and it’s on target to what I just discussed) How I Protect and Grow My Wealth With These 8 Simple to Understand Concepts.
If you liked this post, you might also enjoy this one: Do you Have the Most Important Trait Required to Become a Millionaire?
Download my book and Amazon bestseller (number 1 in business, number 1 in non-fiction). You can get your FREE copy here. This book covers in great detail how I protect and grow my wealth through strategically investing in real estate, and maintaining a healthy cash position.