The Wealth-building Funnel
The order of operations for building wealth
Building wealth is a simple process (on paper). Remember your net worth= assets-debts. So, building wealth means paying off debt and acquiring more assets.
It sounds simple, and it is. But, what steps can you follow to get started?
That’s where the wealth-building funnel comes into play; it acts as an order of operations for your wealth-building journey.
At the top, you have the most important action, which is making money.
In the middle, you have the action of cutting out unnecessary living expenses.
Finally, at the bottom, you have to invest what is left over every month.
Let’s get into it.
The wealth-building funnel
Let’s begin with a visual to better understand the order of operations of wealth building.
At the top, you have the money you make each month.
Before you even see a dime from your paycheck, you need to pay tax, insurance premiums, and contributions to workplace retirement plans. Whatever is left over after all the deductions are taken off your paycheck is your “take-home pay.”
In the middle, you have your living expenses.
Housing, transportation, food, and anything else you spend money on. Your expenses are paid for with your take-home pay.
Take-home pay - living expenses = investible income
Whatever is left over after paying your living expenses is your “investible income,” which is the money you use to build wealth. This can be through some combination of paying debt and investing in assets. The name of the game is to increase your investible
The top of the funnel: Making more money
Your human capital, AKA your ability to make money, is the most important asset you will ever have. It is the engine that drives your financial life and is what makes any other investments possible.
You can be the most frugal person who ever lived, but if you don’t earn any money, you won’t have any money to invest.
Increasing your take-home pay is a necessary condition for building wealth.
When you increase your take-home pay, you increase your margin of error with money.
If you can hold your living expenses constant, every dollar of increased take-home pay can be invested to build wealth.
How to increase your take-home pay
There are only three ways to make more money.
Earn more dollars per hour you work(such as asking your boss for a raise.)
Increase the number of hours you work (taking on a second job.)
Start a business/side hustle
I want to focus on starting a side hustle because it is the route I chose to increase my take-home pay and snowball my wealth.
How starting a digital side business increased my take-home pay
I have a great 9–5 job that provides everything I need.
A strong salary.
A pension plan.
Fantastic benefits.
My 9–5 job covers everything I need in life and allows me money leftover to invest.
But I faced the same problem most people in the middle-class face; I didn’t have enough investable income.
So, I decided to start a digital business that I could work on in my free time and would allow me to scale my income.
The scalable income piece is the key and is what differentiates a side job from a side business.
A side job provides predictable income based on the number of hours you work. Driving for uber is a perfect example of a side job.
A side business provides you scalable income: you aren’t guaranteed to make a dime, but there is no limit on earning potential. Creating your own website or selling a digital product would be a good example of a side business.
When I first started my online business, I dedicated my free time to my business and made next to nothing.
Over the past few years, I have been able to scale the income from my side business to a point where my take-home pay has increased by 60% since I kept my living expenses, which allowed me to increase my investible income by 60%.
If you work a 9–5 job, finding a way to scale your income is the easiest way to find more money to invest and quickly grow your wealth.