Most people would agree that getting rich is a good thing. But most people also don’t realize there’s a difference between getting rich and building wealth.
Getting rich happens by chance. It is winning the lottery. It’s collecting an inheritance. It’s working at a startup that goes public. You get a lot of money, but it was the result of events largely out of your control.
As a result, getting rich is not something you can reliably repeat. The variables that made it happen are out of your reach.
By contrast, building wealth is a highly deliberate process. It’s methodical, incremental, resilient. And most important, it’s repeatable.
In other words, building wealth is a process you have complete control over and you can depend on to generate consistent cash flow throughout your life.
If disaster strikes and the money disappears, the person who got rich wouldn’t know how to make it back again.
The person who built their wealth, on the other hand, wouldn’t bat an eye. They have a system they know works, and by implementing it, they can rebuild their wealth on a predictable timeline.
So now that we’ve distinguished getting rich from building wealth, which option sounds better to you? Would you prefer to rely on getting lucky? Or would you like to have complete control over a resilient process that establishes a lifetime of financial independence.
As a self-respecting Wealth Staker, I’ll take building wealth, thank you very much. And I bet you would too.
So, of course, the question at this point is, how do we do it? What systems can we put in place to generate consistent, durable returns?
I’m so glad you asked, because today, we’re going to explore a reliable, battle-tested, three-step process to building wealth.
If that’s of interest to you, stick around.
Step 1: Establish Uncorrelated Income Streams
The first step to implementing a reliable wealth generating system is to establish uncorrelated income streams.
Now there are actually two important parts to this step. The first is the “uncorrelated” part. The second is “streams” -- note that streams is plural. You want more than one income stream.
To better understand how this works, let’s discuss a common source of income: a job. Most people rely on their full time job as their sole source of income.
And unfortunately, that violates both parts of the “uncorrelated income streams” concept.
Why?
Because first of all, your income is highly correlated.
Correlated means there is a relationship between two or more things. With a full time job, every aspect of your income, from your salary, to your bonus, to your 401k, to your healthcare subsidies, are all tied to the company you work at, which is tied to the industry you work in.
As you can see, everything in this situation is interconnected.
That means if something bad happens to your employer, or to your industry, or your boss just doesn’t like you, your entire income stream is endangered.
That’s the problem with correlated income. Everything is tied to the same thing. A wide variety of threats are concentrated into a single point of failure.
Second, since your job is your sole source of income, if you lose that job, for whatever reason, your entire stream income evaporates. There’s no backup. No failsafe. It’s binary, like a light switch. Either you have your job, i.e., your income, or you don't.
This correlated, single income stream setup is not what I’d call resilient. So let’s fix it.
First, let’s multiply your income streams. A great first step for this is to set up a side-business for freelance work.
That way, if you get fired, you won’t have to scramble to pay your bills. You can simply ramp up your existing freelance work until another full-time opportunity comes along. And you can start to build your own list of clients who have a relationship with you personally, rather than your company.
Eventually, this side business could become your primary source of income, meaning you don’t have to suck up to your boss and rely on your employer for your livelihood. That alone is immensely liberating.
Okay so now you have multiple income streams -- your job and your freelance work -- but there’s still an issue. Both of those income streams are tightly correlated, which means your setup is still fragile.
For example, let’s say you’re an accountant and a massive leap in AI technology renders human accountants obsolete. That instantly knocks out your job, but it also crushes your freelancing gig, because both occupations were tied to your accounting skills.
Fortunately, in the process of setting up your freelancing accounting work, you learned how to build websites on Wordpress. And in doing so, you realized you could easily charge $60/hr to set up similar websites for other sole proprietors.
If you can book 20 hours a week at that rate, you’ve got a $60k/yr income stream to keep you on your feet.
And just like that, you have a third, uncorrelated stream of income.
Even if the whole world of human-powered accounting is obliterated, at least part of your income is safe, because the accounting industry has no correlation with your ability to build websites for people.
That’s what we mean by resilient.
Entire industries could collapse, resulting in thousands of lost jobs, but you are safe, because even though you lost your job, and part of your freelancing work, you had other freelancing work, in a completely unrelated profession, that enabled you to keep building your wealth.
Now, the most powerful form of self-sufficient income is owning a profitable business, which is very different than freelancing, because with a business, your income isn’t capped by the number of hours you can work.
But we’ll save that discussion for another time.
For now, just work on diversifying your income streams.
Step 2: Use Money as a Tool
So now that we’ve established a resilient blend of income streams, it’s time to figure out what to do with all that money.
To begin, let’s talk about our psychological relationship with money.
Too often, we think of money as the objective. We chase it without fully understanding what we’ll do with it once we get it. That downward spiral doesn’t end well, as we discussed in a separate lesson on the danger of chasing money.
The key is to instead treat money as a tool.
It’s not an end. It’s a means to an end.
What does this mean in practice? It means that your money should be deployed toward advancing your objectives.
If you have a business, invest money in equipment and services that enable you to grow the business.
If you have a full-time job, invest money in professional skills that make you even more productive and indispensable to your employer.
If you’re short on time, use money to outsource laborious tasks like cooking and cleaning, and purchase courses that enable you to do things more efficiently.
If you’re overworked, use money to buy experiences that take your mind off of work, like active vacations, spa treatments, meditation retreats, and performing arts.
Instead of blindly chasing more money for no specific purpose, start pricing out your various objectives.
Do you want to build a dropship business? Do you want the freedom to explore a new country each year? Do you want a single-family home?
Figure out what exactly it is you want, and then determine what it will cost to get from where you are, to where you want to be.
Once you start doing this, money becomes a means to an end. It’s a tool that you can use to accelerate your progress toward more meaningful objectives that enrich your life.
And as a welcome bonus, most of the time, the pursuit of those meaningful objectives ends up generating substantial income in surprising ways.
That’s certainly been my experience, at any rate.
Step 3: Don’t Save. Invest.
The third step to building wealth is to invest, rather than save. And I’ll explain what I mean by that.
It’s important to put your money to work. We just discussed how to do that in ways that further your objectives.
But when times are good, you’ll be earning more income than you need to meet your objectives.
In this excellent situation, we have three options:
Blow the money on impulse purchases
Stash the money in a bank’s high yielding savings account
Invest the money in a portfolio of diverse, low-fee, market tracking index funds
Which would you choose?
Well, as an intelligent Wealth Staker, you really only have one option, so it’s kind of a trick question.
Spending the surplus on a sports car is fun but, since most cars are depreciating assets, that’s definitely not going to build wealth.
Stashing money in the bank is tempting because it feels safe. But it’s not as safe as you think. Every day your wealth remains in cash form, its value is eroded by rising inflation, reflected in the ever increasing price of everyday items like groceries, education, and medical care.
Want proof? Just ask your grandparents what they paid for their first house.
So yes, you want to keep a certain amount of cash available for emergencies and your ongoing recurring expenses, but every penny in excess of that should go straight to your investments.
Now, when I say investments, I don’t want you to get creative.
Don’t invest in your friend’s brewery or indie movie. Don’t buy that hot individual stock your trusty financial blogger was raving about. And certainly don’t wait until the market dips to buy in.
Just dump it straight into your carefully curated brokerage account.
Don’t have a brokerage account yet? No problem.
Pause this video and sign up for either Wealthfront or Betterment.
Both of these platforms make it super easy to get started. They offer a fantastic blend of diversified, low-fee, market-tracking index funds. And they customize your allocation based on your age and financial priorities.
My favorite part is that you can set up a recurring investment that pulls from your bank account every time you get a paycheck or when your bank account balance exceeds a specific threshold you set.
And since it’s automatic, you won’t have that painful psychological battle with yourself about market timing. The money gets invested without you even thinking about it.
I’ve invested with both Wealthfront and Betterment for years and can say they are equally excellent. You can’t go wrong with either. If you’re like me, go with both.
I’ve included links to both platforms in the description box below. You and I both get a referral bonus when you sign up, which helps support what we do here at Stake Your Wealth.
The System In a Nutshell
And presto: there you have it. Your three step guide to establishing a bulletproof wealth building system.
Let’s quickly recap:
Step 1: Set up multiple, uncorrelated income streams. The more you have, and the less they overlap, the better off you’ll be.
Step 2: Treat money like a tool. It’s not an objective in its own right. It’s simply a means to an end. Price out what you need, and use money to accelerate your progress toward your actual objectives.
Step 3: Don’t let your money waste away in a savings account. And don’t place bets. Just invest the excess in a healthy blend of diverse, low-fee index funds, ideally in an automated fashion, so that you can get back to steps 1 and 2.
That’s all there is to it. Surprisingly straightforward, if you ask me.
Now I realize that all of this rides on succeeding with Step 1. Building income streams is no simple task. Which is why we dedicate a lot of time at Stake Your Wealth to discussing how to do that.
But the key right now is to understand the principles. Master those now, and then you have the rest of your life to nail the execution.
So what are you waiting for? Go stake out your wealth!
