But even when finances are tight, there are still several things you can do to build wealth and achieve financial independence.

This article will discuss some of the ideas you can use to start building wealth no matter where you’re at in life.

Avoiding Debt

The first step in building wealth in breaking the shackles of poverty is to get out of debt.  If that means lowering your standard of living, sticking to a budget, and taking less vacations for a while, do it.

While some people will tell you to avoid all debt, for those trying to build wealth, it can be a double edged sword.

Instead, here’s the axiom I want you to burn in your brain.

Never borrow money or take on debt for a depreciating asset!

I have an entire article devoted to depreciating assets so I won’t rehash the whole thing here, but some common depreciating assets are cars, computers, and high definition televisions.  Whenever you buy something like that, make sure you’re paying cash in full every time (yes, even for a car – buy used if you don’t have enough cash for new).

It’s really hard to make your money work and get a return on your money if most of your money is going towards paying 18% interest on your credit card.  When you pay 18% interest, the people getting rich are the credit card companies and banks, not you.  You need to flip that equation around in order to build wealth.

Poor people buy depreciating assets (sports cars and big TVs) – rich people have appreciating assets (stocks and real estate holdins)

So now that you know you need to avoid consumer debt and keep the depreciating assets to a minimum, let’s start with some wealth building ideas you can start using right away.

Assets and Passive Income

One of the bigs things that separates the rich from the poor is assets.  Particularly assets that appreciate in value AND produce passive income.

While there are few that meet this criteria, a couple you’re probably already familiar with are:

• Single family rental homes – The value of the home appreciates over time better than apartment complexes and yet you still get monthly rental income from the property.
• Stocks that pay dividends – A good stock will go up in value over time and the best ones will even pay a dividend regularly helping you generate passive income.

Of course, in both cases, it can require a lot of money to have enough assets producing the passive income you want.

So when you’re broke, I recommend using your time and sweat equity to build your assets.  While most of us are plenty busy, if we had to, we could find a few hours a week to spend on building up the assets we need to build wealth.

If you’re handy with a tool belt, you could purchase a 2^nd fixer upper home, spend a few months fixing it up and then putting it back on the market.  People who do this can often turn profits of $15,000 to $100,000 each time they do it, but keep in mind you have to be good at fixing stuff around the house for it to work.  If you’re not, then I’ll give you more ideas below so don’t fret.

What I really want you to get out of this section is that you need to find something that allows you to use your time to build an asset (it could be a business of any sort) and then when you have more money than time to turn things around and do what rich people do – use money to make more money.

Become The Bank – Lend Your Money

When you look at the biggest buildings in your city, what do you see?  My guess is that many of them are banks.  Lending money is a damn good way to make money.  You give people money now and they promise to pay all it all back plus some extra.  It’s a good deal if you can get it.

But what about you becoming a bank of sorts yourself and lending money to people that need it?  You can do it and you don’t need millions of dollars to get started.  In fact, a few hundred is all you need with websites like prosper.com.  Prosper.com and websites like it are peer-to-peer lending sites.  That means that when people need money, instead of going to the bank, they go to propser.com and ask regular people just like you to help them fund their loan instead.  The nice thing about the site is that you don’t have to loan someone all of the money they need, just a small part of it and many other people do the same.

That allows you to spread out your risk over multiple loans and earn interest on the money you’re lending just like the bank does.

Just visit propser.com to get started and click on the invest now button to get started.

Virtual Real Estate

This topic is one that is near and dear to my heart as it’s one that I currently do full time and have been doing since 2001.

I probably haven’t mentioned this before on this site but I don’t own my own house.  I did for a while and didn’t like it and moved back into an apartment.  I don’t like doing any kind of home maintenance or mowing the lawn – it just isn’t for me.  I don’t purchase real estate as investment either.  Instead, I do what I know how to do – I build virtual real estate properties.

Let me use DebtReductionLessons.com  as an example here.  I typically spend about 2-3 hours a month working on this website and in return I make enough to make a typical car payment.  By itself, it’s really nothing to write home about, but just imagine if you had a dozen websites making a few hundred dollars a month?  What if you had 50 or even 100 websites like that?

I think you get the picture.  Now I’m not going to turn this into a post on building an online business, there are plenty of websites and books out there that can help you do that – I just want to introduce the idea to you.

The book 4 Hour Work Week is a good introduction to running a business on just 4 hours a week.  While he prefers to spend the rest of his time on exotic vacations, it also applies to people who are also working full time jobs while they build up their online assets.

Time To Get Started

So there you have it – several ideas you can start using right away to start building wealth.  Time to get started.

What is a depreciating asset?

A depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles. Land and items of trading stock are specifically excluded from the definition of depreciating asset due to the fact that. Any improvements to the land are also considered depreciating, such as a windmill or a fence, and thus are not monitored with the land, even if they aren’t removable.
Most intangible assets are also excluded from the definition of depreciating asset. Only the following intangible assets are specifically included as depreciating assets:

• Certain items of intellectual property (patents, registered designs, copyrights and licenses of these)
• Mining, quarrying or prospecting rights and information
• Certain indefeasible rights to use an international telecommunications submarine cable system
• Spectrum licenses
• Data casting transmitter licenses.

The concept of depreciation is pretty simple. Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in your business, you can depreciate office furniture, office equipment, any buildings you own, and machinery you use to manufacture products.

To find the annual depreciation cost for your assets, you need to know the initial cost of the assets. You also need to determine how many years you think the assets will retain some value for your business. In the case of the truck, it may only have a useful life of ten years before it wears out and loses all value. Below are types of depreciating values.

Straight-line depreciation

Straight-line depreciation is considered the most common method of depreciating assets. To compute the amount of annual depreciation expense using the straight-line method requires two numbers: the initial cost of the asset and its estimated useful life. For example, you purchase a truck for $20,000 and expect it to have use in your business for ten years. Using the straight-line method for determining depreciation, you would divide the initial cost of the truck by its useful life.

The $20,000 becomes a depreciation expense that is reported on your income statement under operation expenses at the end of each year.

For tax purposes, some accountants prefer to use other methods of accelerating depreciation in order to record larger amounts of depreciation in the early years of the asset to reduce tax bills as soon as possible.

You need, additionally, to check the regulations published by the federal Internal Revenue Service and various state revenue authorities for any specific rules regarding depreciation and methods of calculating depreciation for various types of assets.

Physical Depreciation

Physical depreciation represents the accumulated loss in market value caused by physical wear and tear since the date the building was completed. Physical curable depreciation refers to damage that can be corrected economically, and it includes such items as poor decorative conditions, broken fittings, outdated or worn out carpeting, faded or old paint, appliances not in a proper working order as well as aging roofs. On the other hand, physical incurable depreciation includes wear and tear of structural members and foundations where repair or replacement is likely to involve significant cost.

These two kinds of depreciation are treated differently. The dollar amount of the deduction required for physical curable depreciation is generally based on the required cost of carrying out the repairs. Conversely, the allowance for physical incurable depreciation is more difficult to estimate, with the principal cause of such difficulty lying in the determination of the remaining life of the building.

There is no precise way to estimate the cost of correcting physical incurable depreciation. The cost of this kind of corrections is so great that in terms of economics the structure should either be left in its present state or totally rebuilt.

Governments tend to estimate the economic life of buildings in terms of straight-line depreciation, but this is so merely because it makes the estimate of capital gains and losses, as well as their recapture, a little easier to determine from an accounting point of view. Appraisers and experienced Realtors, on the other hand, will tend to make an educated guess more often than not as to the value of the physical incurable depreciation based upon visual observation while economists will base it upon knowledge of regional comparable market data.

Functional Depreciation

This type of depreciation describes the loss of value caused by outmoded or inadequate design. Here too it is necessary to distinguish between curable and incurable functional depreciation. Functional curable depreciation includes items such as the cost of replacing old-fashioned fittings, installing an additional bathroom or otherwise altering the existing plan by, for example, creating new doorways and blocking old ones, or by following market trends such as enhancing the visual appearance of rooms with open layouts and light-play. Again, the amount by which market value is reduced is in direct function of the cost involved in carrying out the necessary updates.

Moreover, like before, the amount by which market value is reduced because of functional incurable depreciation is entirely a matter of judgment and cannot be determined with an arithmetical calculation. There are, of course, limits to what can be done to cure functional depreciation. For example, if an architectural style has gone out of fashion, nothing can be done and a higher factor of deduction will be applied. The opposite is true, of course, of plans that never go out of style. For instance, residential ranchers are always high on the list of demand and very much sought after by elderly and younger couples alike but for opposing reasons: a lack of stairways for the first and easy maintenance for the latter.

Overall, buying depreciating assets on credit is a highly negative thing. To buy something that has a value that degrades over time would be a poor choice to add to your credit as if you needed to sell it to regain the money to pay off the amount, then you will be caught in a perpetual losing battle with debt.

The definition of investment is different depending on it’s context. In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns is the proper definition. In general terms, investment means the use money in the hope of making more money.

In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business is considered an investment. As there are different definitions, there are also different types of investments; however, this article will focus mainly on personal investments, as well as some pitfalls you may face along the way.

Personal finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation. In many instances the term saving and investment are used interchangeably which confuses this distinction.

For example, many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an asset is saving(s) or an investment you should consider where your money is invested. If the answer is cash then it is savings, if it is a type of asset that can fluctuate in value then it is investment.

Mistake #1

Underestimating the time horizon for your assets. How long do you think you’ll live? Most people are far too conservative in estimating the length of their lives, and that can be a problem when planning your financial future.

How to avoid it

Breakthroughs in medicine happen so often, yet we frequently do not even hear about them. As progress has occurred the effectiveness of disease treatment, improvement in general nutrition and higher standards of living, most people now live longer than they think they will.

This means there are new and costly healthcare methods now available for increasing life span as the population ages, which raises the costs of healthcare and of living longer. For these reasons, we find that most people estimate on the low side when it comes to how long they will live.

As a result, many fail to implement financial plans to accommodate their longer life span. Many today run the risk of depleting their funds long before their lives are over. It is important to have a sound financial strategy, one that will provide for your financial stability and income needs throughout your entire life. Sound financial planning is equally important for those whose goals are to grow their assets so they can pass an inheritance on to loved ones and family members who survive them. In either case, a realistic life expectancy time horizon is vitally important.

Mistake #2

Misaligning investment objectives and portfolio strategy. Aligning your portfolio strategy with your objectives is a critical factor in determining long-term investing success. This may sound obvious, but many investors actually employ strategies that work against their objectives.

How to avoid it.

A common error investors make is improperly judging risk. Generally, the longer the time-horizon of your investments, the more risk you are able to take on. However, a typical mistake that investors make is to take on too little risk. They focus on short-term volatility rather than, more properly, the long-term probabilities of achieving their objectives. The result tends to be portfolios that underperform their goals. For example, some persistently load up their portfolios with low coupon Treasury bonds, due to fear that stocks will drop in the short-term. Then, they often barely generate a return that is over the rate of inflation. This reduces the odds of achieving a long-term goal of growth– especially if withdrawals are also anticipated. Conversely, those with short-time horizon objectives are often overly exposed to risk, which creates a danger of asset loss during a short-term period of volatility. This can put their entire financial future in jeopardy.

Mistake #3

Forgetting the fundamental importance of supply and demand. The fundamentals of supply and demand of securities are easy to overlook. Analysts and pundits cite an endless list of theories about what mechanisms drive stock prices. However, the simple fact remains that supply and demand of securities will always be the fundamental driver of share prices.

How to avoid it.

Basic economic theory states that the relative supply and demand for goods in an open market will determine their prices. For example, holding supply equal, the demand for ski equipment increases around the winter months, and thus the price for skis increases at that time. In the other months of the year when people ski less, demand decreases and prices fall. Stocks are no different: we think it is common sense that their prices fluctuate based on short-term demand. Supply of equities is relatively fixed in the short run because it takes time for companies to create new issues of stock.

Therefore, shifts in demand primarily cause price changes in the markets in the short term. However, in the end, supply has the ability to change almost infinitely. That makes supply the dominant factor in stock prices over longer periods. Understanding the relationship between the supply and demand of securities is vital in choosing whether to be invested in stocks or not. The ability to accurately track, analyze, and evaluate this fundamental tenet of economic theory is vital, in our view, to making successful forecasts in the markets because it allows you to screen out unimportant noise.

Other type of Investment: Real Estate Investment

Within real estate, money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk is deemed a real estate investment. Real Estate investment is distinct from other forms of economic or financial investment in that a real estate is purchased.

Hopefully, by learning about these different types of investment, you’ll be able to invest in the right things from a financial standpoint.