Here I will lay out a simple strategy everyone should follow on how to build wealth. It’s amazing how easy this is to do, yet so few people do it. Following this strategy will guarantee that you invest your money correctly throughout your lifetime and truly get it to work for you.
It’s important to remind ourselves what really is the way to build wealth. After all, as Warren Buffet says “if you don’t find a way to make money while you sleep, you will work until you die.”
Today we’ll share a strategy that will do exactly that, and give you some real-life examples to help envisage how you can do this in your own investment choices.
The OPM Strategy
This is known as the ‘Other People’s Money’ strategy. This is explained in the book Rich Dad Poor Dad by Robert Kiyosaki, a book I would highly recommend for any investors starting out. If you haven’t already, it is a must read for anyone wanting to learn more about investing and building wealth.
So how does this strategy work? Let’s take a real life example, and imagine that you want to buy a car. The car itself is a liability, meaning that rather than generate you money over time, it takes money out of your pocket.
Owning one is a liability on your finances. A car won’t generate you wealth because it is a liability. Let’s say the car is worth £100,000, it’s a nice car and you’re a bit of an enthusiast. You like the finer things in life … don’t we all?
So you’ve saved up for a long time and you’ve finally amassed the £100,000 you’ve been waiting for to buy your car. Here’s where most people would bite the bullet and go out and buy that car outright. You’ve taken your hard-earned cash, an asset, and you’ve sunk it all into a fast-depreciating liability.
The second you drive that car out of the showroom, it falls by 30% in value. Congratulations, you’re now worth £30,000 less instantly because you like to go places faster.
Now you might say “this doesn’t sound like a good strategy at all, why would anyone do this?” And you’re absolutely right, it isn’t! But this is what most people do. This doesn’t help build wealth at all, in fact it massively hinders it.
Most people don’t try to be wealthy, they are simply content with appearing wealthy, and here on Wise Wealth we are not about that at all. So let’s talk about how we build wealth, and fortunately, here’s where the OPM strategy comes in.
Remember that car you wanted? Well you’ll be pleased to hear that you can still have it! But you’re going to need to do something first. Instead of buying that car directly for £100,000, invest that capital into an income-generating asset. This could be anything from real estate, shares, funds, peer-to-peer lending, bonds, anything that will make money for you.
Have that income-generating asset work for you over time. By doing this, somebody else is making money for you, even when you’re asleep. Remember what Warren Buffet said? You’re no longer trading your time to make money.
As you’re probably already aware, this is otherwise known as passive income. Now, you can use the money from your income-generating asset to pay for your liability, in this case, the car. Let’s say you invest that £100,000 into a buy-to-let property.
To get it to cash flow healthily you would probably want to take out an interest-only mortgage, but that discussion is for another video. You’ve got your tenant in and they’re now paying you a monthly rent for living in your property.
By taking the monthly income you get from the house, or the asset, you can now use that income to fund the lease of your car, or the liability. You may have to physically pay the monthly fees, but you’re using ‘Other People’s Money’ to do this. The OPM strategy.
The money comes in and flows straight back out as an expense. You’ve purchased a liability in the car, but you’re not having to pay for it, your tenant is. The car will depreciate over time, you might hand it back or trade it in for an upgrade years down the line, but this whole time you’ve not had to fork out of your own wallet to do any of this.
Instead, you’re using ‘Other People’s Money’. The best part of this process is that if you ever decide you don’t want the car anymore or maybe you want something a bit more practical and perhaps less expensive than your V10 500 horsepower coupe, you can reduce the cost of your liability, but your asset will still be generating you a steady stream of passive income, regardless of what car you have.
Now you’re even saving money. Look at how this scenario has transformed from instantly being £30,000 less wealthy the second your drove out of that dealership with the car to now; not having to pay for your liability, but still have an income after you no longer have use for it?
This concept of buying assets to buy liabilities should transform the way you look at investing and where you spend your money. Now you might think, what can you do with that money I’m now making off my asset? Whatever you want. Save for a rainy day, go on holiday, reinvest it to make more passive income. Whatever you want.
This is just an example of how you can buy liabilities through buying assets. The principle itself is something you can adopt for many other buying purchases. I’m a firm believer that investing and building wealth shouldn’t always be about cost-cutting and penny-pinching.
You should still be able to enjoy the things you want in life, but there is a way to do this. Investing in assets to buy liabilities will allow you to do this.
Now how much you yield from an investment from £100,000 depends on what you invest in. For example if I went down the route of buying property as my asset, I probably wouldn’t look to buy in London where I live, since rental yields here are low in comparison to other places in the UK.
Plus I probably wouldn’t get much for that deposit! Instead I’d probably look at investing in Liverpool or Manchester, big cities in their own rights with much cheaper property, and attractive yields of 7-8%.
Investing in startups versus FTSE100 companies may return higher yields as well, but there’s more risk associated with this. The risk-reward payoff of what you invest in is dependant on your ability and willingness to take risk.
Not only is real estate great for an investment in general, but tenants most often pay monthly, so if you’re trying to finance a liability like a car lease on a monthly basis, you’d ideally want to find a source of income that equals this payout frequency.
You could still have an stock that pays bi-annually to fund this, but you’d find you have the funds sat in your bank account for a long period of time. You may not want to have them sitting there in case you get tempted to use it for something else.
In any case, it is still a possibility. I’d probably recommend a buy-to-let property that pays monthly, or even a monthly paying ETF or stock. This, however, isn’t the end of the OPM strategy.
This is more of an advanced technique and I would recommend this for the more experienced investors, but once again, a prime example of how you can do this is through real estate. Many people have built wealth by purchasing real estate without having to invest any of their own money.
You might ask, how can you even do this? Well, instead of investing all the money themselves, they have a backer (investor) source the funds to buy the property. These investors allow the purchaser (you) to handle all the technicalities, manage the property, tenants and anything related to the day-to-day operational management of the asset.
In return, the investor will receive a return on the asset or have the loan paid off with interest. They are known as ‘Limited Partners’, the back-seat investor that is content making a consistent return of their investment while you, the ‘General Partner’, put in the hard work and effort of personally managing the asset, to make sure it is well maintained and its returns are maximised.
This is less ‘passive’, as you need to put the work in to ensure the asset is generating a return, but you’re still making money and building wealth through this methodology.
