I am a big fan of ownership. In fact, some of the best advice I can give you is that if you want to become wealthy, you will find the path to be much easier if it involves ownership. Economically speaking, there are three kinds of people in the developed world:
The first type pays interest. It isn’t cleanly divided by class, but for the most part, this is the lower class and a big chunk of the middle class.
The second type earns interest. These folks tend to be upper middle class and are earning more from their investments than they are paying in interest. Obviously moving from group one to group two is a huge step; that’s why I teach my children from a very young age that it is better to earn interest than to pay it. This group is building wealth and will likely have a reasonably comfortable retirement.
The third type owns stuff. Because of this ownership, they are not only becoming wealthy, but they are becoming wealthy very rapidly. Let me explain six ways ownership makes a difference in building wealth.
6 Ways to Build Wealth Through Ownership
# 1 Avoiding Consumer Debt
The first way is pretty basic. Lots of people rent the stuff in their lives. For instance, these people make car payments. I heard a call on the Dave Ramsey show the other day where a couple grossing $64K a year had a $25K car loan and a $30K car loan. They were underwater on both of them. Now I don’t know about you, but if I had a $64K income, I wouldn’t have $10K in cars. Reliable transportation can be had for $5K. These people might be making payments on (or even be renting) their furniture, their appliances, or television. This is not a pathway to wealth. When you actually own the stuff in your house (and garage) your life is much cheaper.
# 2 Enjoying Fixed Costs and Lower Expenses
Backpacking to remote canyons in Southern Utah is a privilege for people who control their time.
When you own your home, you have eliminated a significant expense from your life–rent. Not only is that a large expense, but it tends to increase with inflation. Now homeownership isn’t all cupcakes and unicorns and doesn’t actually make sense unless you’re in the home longer than it takes for appreciation to overcome transaction costs, but if you’re going to be there a long time, owning your home typically assists you in building wealth. You save rent, the home appreciates in value, you pay down the mortgage, and maybe you even see a tax benefit or two from owning it. Once that mortgage is paid off, you enjoy dramatically lower living expenses than your renting peers. Consider my home — my property taxes are about $306 per month and my mortgage payment is $0 per month. It would probably rent for $4,000 per month. Ownership has benefits.
# 3 Earning Higher Returns
Another area where ownership makes a difference is in your investments. The investments with the higher rates of return are investments where you own the business–principally stocks and real estate. Yes, there is additional risk there, but managed properly and over the long term, you are compensated for those risks. I once ran the numbers on what it really means to invest only in very safe investments — bonds, CDs, cash, whole life insurance, etc. It basically means you need to save 50% of your gross income for retirement for an entire career. You must take market risk. Ownership has privileges.
# 4 Windfalls
Here’s another great aspect of being an owner. Sometimes you just get lucky. Consider many people who have owned a home in California in the last 30 years. They’re millionaires. Just from buying a home and holding on to it. They probably could not have predicted that. When you own a home or a property or a business, all the really good things that happen benefit you personally. If the property appreciates more than you expect, you get to keep it. The renters get nothing. If the business is particularly profitable, you get to keep all of the profit. The employees generally get nothing aside from possibly a little bonus.
# 5 Controlling Your Work
Here’s another great aspect of ownership–you get to make the decisions and control what happens. I think doctors are all too willing to give up ownership of their practices or sign on to be an employee of a hospital, a contract management group, or a corporation. Not only does this usually put a cap on their income (admittedly often in exchange for a floor), but it also means they give up important aspects of the practice. If you own the practice, you control who you do and do not work with. You control the staffing levels. You control how holidays and nights and call are split up. I think that loss of control is a major contributor to the record levels of physician burnout we are seeing.
# 6 Earning in Multiple Ways
One of the best things about ownership is that you get to make money in two different ways. Consider a business that makes $1 Million a year in profit. Depending on the industry, perhaps that business is worth $5 Million, a 5X multiple. Let’s say you figure out a way for that business to make not $1 Million a year, but $2 Million a year. How much money did you make? Well, let’s add it up:
You made an extra $1 Million — that goes right into your pocket.
You increased the value of the business by $5 Million. You don’t get it until you sell, but it’s very real nonetheless.
You also benefit from that extra income from the business the next year. While it can be difficult to increase profit in a business, it often is not all that hard to maintain it at its current level. Let’s say you keep the business (now making $2M a year) for the next five years before you sell it for $10 Million. Figuring out how to earn an extra million a year from it really paid you $10 Million. Ownership has benefits.
Now it’s not an ironclad rule that the owners always make out better than the renters and the employees, but it is the expected long-term outcome. If owning a house didn’t pay off in the long run, there would not be such a thing as real estate investors. If leasing a car didn’t cost more than owning it, there would not be profitable businesses leasing cars. An employee can never be paid exactly what they generate for the business in the long run, or the business will not generate a profit.
As you work your way through your financial life, try to increase the amount of stuff–your consumer goods, your house, your practice, your investments, and your other businesses–that you own. Whether you like it or not, we live in a capitalist society. Expect to see the owners of the capital doing better financially than the laborers.
What do you think? What do you own? Do you think that has helped you build wealth or not? Comment below!
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