I have finally managed to simplify and visualize ‘the wealth building machine’ boiling down the whole process of growing my family’s Net Worth to just one page.
This is how my wealth building machine works:
STEP 1: Generate Active Income and start developing Passive Income sources
Regarding Active Income, our salaries from full-time jobs and wages from part-time jobs are stable and predictable. Our Passive Income sources are also doing alright. So, boring, and this is what I like! I wrote extensively about my Passive Income and Active Income.
STEP 2: Keep monthly spending low
The key is to spend much less than you earn, always! Our Total Costs in July returned to the average monthly level despite being a bit lower in May and June. In general, our expenses are divided into Fixed Costs which are the same every month (stable and predictable) and account for roughly 90% of total spending. Variable Costs are different every month and account for only 7% of total spending. And Maintenance Costs of Passive-Income-generating assets account for approximately 3% of total spending.
STEP 3: Maximize net savings
We have always been saving most of our total income since we have entered the job market after graduating from the university. I even remember saving most of my monthly scholarship payments when I was in the graduate school at Tsinghua University in Beijing, China.
STEP 4: Invest to Acquire Passive-Income-generating Assets
We mainly own three different assets of this kind – residential Real Estate, long-term bank deposits and online business (this website and YouTube channels). These three years (between mid-2021 and the end of 2024), I have been building our second Passive Income stream which is receiving interest from bank deposits. I am building something like ‘the CD ladder’ with different deposits maturing each month generating us cash inflows every month. I am investing all our savings into 3-year bank deposits currently at 3.5% annual saving rate (at 3.9875% earlier this year and last year). We currently do not own any shares in other businesses, but we seriously consider investing in dividend stocks in the future. In general, stocks can generate approximately 8%-10% annual returns on average, but have high volatility of moving down by as much as 50% once every six years. The stock market goes down around 10% every three years.
STEP 5: Avoid liabilities
We use our own cash to pay for investments. We do not use outside financing such as bank loans or mortgage, so we do not have any long-term debt. Using someone else’s money will always cost you. We have never had any loans like student loans or consumer loans in the past either. In fact, we have always been debt-free.
STEP 6: Grow Net Worth every year
My family’s Net Worth, or wealth, is growing each month, and increases at around 20% annually given almost zero risk. We are very comfortable with this arrangement. One of the popular mainstream strategies for building a model portfolio is to have 40% of your Net Worth, or wealth, allocated into your primary residence (your house or apartment) with the remaining 60% invested in various investment products such as ETFs / Mutual Funds, dividend stocks, municipal bonds, commercial Real Estate or residential Real Estate, etc. I am currently doing the 20%-80% split between our home and investments.
The main goal in my investment strategy is to preserve capital and earn predictable income, that is why I mainly choose fixed-income investment. By investing in certificates of deposit (CDs) or bonds, you can also increase stability of your portfolio (reduce volatility comparing to stocks).
