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What’s the surest path to riches?

Since the dawn of history, human beings have fretted over this question, throwing themselves into schemes and enterprises to produce wealth. Often those schemes have promised to create wealth quicker and with less effort than ever before. More often than not, they haven’t delivered….

Whether it’s been trading tulip bulbs, sailing to the New World, traveling west to stake a claim, trading Internet stocks, or flipping real estate, the results have often been the same. A few lucky souls — usually the early arrivals — have done well. Some others — by taking on substantial risk and adding large amounts of sweat equity — have done OK. And many more — the late arrivals, the unmotivated, the underachievers — have lost more than they gained.

I know a little about building wealth, having reached financial independence and retired early at age 50. But I don’t have a clue how to “get rich quick.” It’s possible – a few people do it – but the process likely involves personal or situational elements, and a dash of luck, that can’t be easily duplicated. The only "quick" wealth I’ve seen has come from a foundation that was long in the making. For example, releasing a successful software product into a direct-mail market that had been nurtured for years, and seeded with a number of earlier offerings.

Preparation, patience, and persistence are common themes in all the wealth building I’ve personally witnessed, and those qualities are foundational to the wealth-building paths I’m about to discuss….

It Begins with You…

Much as we might wish otherwise, the capacity for wealth starts within ourselves, yes within you. Sure, some of us will inherit money, or connections, or game-changing talents. And most of us will be the beneficiaries of some generosity — perhaps financial, but more likely advice, support, and opportunity — along the way.

But nobody else, no external force, can bestow on you the ability to create wealth. That ability is essentially a natural outcome of your capacity to create value for other human beings. And where does that capacity come from? In today’s world, primarily from your education, and what you make of it. So the starting point for building wealth has to be equipping yourself with an education that leverages your talents to create value for others — an education that is valued in the marketplace.

Of course there are a few who will succeed without much formal education. Those are the rare individuals born with innate business or investing skills, and the drive and opportunity to take advantage of them. The members of that select group will likely already know who they are. But even they would not be harmed by more education — though they often get what education they need from the real world.

…And Your Savings Rate

Once you have an education, leading to a career that creates value in the world, you will have access to the initial income stream that can help you build wealth. But what you do next makes all the difference.

Will you relentlessly step up your lifestyle and consume all that you bring in? Or will you save a significant percentage of your income into wealth-building endeavors?

Living below your means, so that you can build wealth with your free cash flow, is key to assembling riches and creating financial freedom for yourself. Saving 15% is a common recommendation for retiring at age 65. But you’ll want to double that, or better, to build wealth and achieve financial freedom ahead of schedule.

So once you create that free cash flow, what do you do with it? Well, there are three paths that I know from experience you can travel to create wealth in your life:

Starting a Business

Starting and owning a business is probably the quickest path to wealth for many. But it is by no means the easiest, or the surest. It’s usually back-breaking work, and also quite risky. A high percentage of business startups fail: According to the U.S. Small Business Administration, less than 50% of small businesses will survive their first five years!  But if you are creative, with a strong work ethic, and have more time than money, then starting a business may be a good fit for you.

Business ownership was the start of my own path to wealth. A few years out of school I went out on my own, first as a freelance technical writer and software consultant. Later, in the days before the Internet, I started a small software company selling hypertext references. That company did very well for a few years, but, more importantly, it set me up for a merger with a larger company, where the real profits lay….

Getting Started: The single most important point in starting a new business is to determine, as quickly and inexpensively as possibly, whether customers will pay for your product or service. If so, you can scale up. If not, you should try another idea. Here are a couple resources that can help you get focused:

• 7 Business Startup Lessons
• I Will Teach You to be Rich: Earn1K on the Side

Investing in the Stock Market

Buying stocks (and bonds) is probably the surest and most accessible path to wealth for most. However it is neither quick nor highly profitable, unless you take on extra risk. And I would not recommend taking on extra investing risk (by dealing in more complex or specialized niches) in today’s world. You’d be playing in a game that is full of professionals and stacked against you, unless you have a very high degree of skill and knowledge. For many with more money than time, including those who work at high-paying careers and can be diligent and patient, buy and hold investing in the stock market using low-cost mutual funds and ETFs is the best choice for long-term wealth creation.

Investing was the second half of my own path to wealth. I made some false starts early on: buying and selling the wrong things at the wrong times. But I was fortunate to find the guidance of a seasoned, conservative investor while still in my 30’s. And the combination of a high savings rate from my technical career plus diversified, low-cost, passive index investing, and regular buying through market downturns, led to steady and substantial growth in our nest egg, and early financial independence.

Getting Started: The secret to investing success is to begin early and keep it simple, using a customer-centric custodian for your money like Vanguard. Invest steadily while learning the essential investing behaviors when the stakes are small. By the time your investments grow large, and the market takes a tumble, you’ll have the experience to handle it. These resources can keep you on track:

• Steps for Investing Success
• Oblivious Investor

Buying and Managing Rental Real Estate

Owning a portfolio of rental properties, usually financed with leverage (borrowed money), is a proven route to wealth for those with the right skill set and personality to maintain property and manage tenants. If starting a business or investing in stocks strikes you as too complex or abstract, then landlording may be your path: people from all walks of life have done well with it. If you have some seed money — for a down payment, and some time — for maintenance and management, rental real estate could work for you.

Other than owning and maintaining our primary residence — a modest home in a better neighborhood in the southeastern U.S. — I have no particular expertise with real estate. The value of our home has increased an average of 3% annually over the past 16 years, keeping pace with inflation. Given that we saved perhaps $1500/month in rent over the same period, it could even be considered a solid investment. This house could turn into a rental property some day, but we’d rather sell it. Beyond that, I have no great experience to offer.

Getting Started: In my opinion, the most important ingredient for success in rental real estate is knowing yourself. Do you like houses: shopping for them, maintaining them, remodeling them? Do you like working directly with all kinds of people: on their good days, and bad days? Then perhaps you are cut out to be a landlord. These resources can fill in some of the details:

• Get Rich With Owning Rental Houses
• Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves

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So those are the three paths to wealth that, in my experience, most people can follow. I’ve leveraged two of them myself: starting a business and investing in the stock market, while I’ve seen many others profit from the third path: rental real estate.

Whether you generate profits from your own business, produce growth and income from your investments, or collect rents from your property portfolio — it all flows to your bottom line, after expenses. And the wealth that you inevitably accumulate represents money, time, and — most importantly — freedom, to live the life you choose!