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Why Entrepreneurship is the Third Pillar of Wealth

Michael Reynolds, CSRICĀ® | February 18, 2020

As you may know, my target market is entrepreneurs. I love to serve people who are starting and growing small businesses. I'm not talking about the SBA's definition of small business but rather owners of micro-businesses like solo business owners or entrepreneurs with a handful of team members.

As we think about building wealth, I want to encourage people to think about diversifying their paths to wealth. When we think about increasing our income potential and our net worth, many people consider the primary tools to be investment accounts and real estate. Investments often take the form of securities like mutual funds made up of stocks and bonds. These are often inside of retirement vehicles like an IRA, Roth IRA or 401(k).

The other big wealth-building tool that people think of is real estate. Investing in real estate and purchasing investment properties can be a powerful way to diversify and build wealth.

Both strategies make a lot of sense and can be powerful anchors in a wealth-building plan. However, there is another path and I would argue has some distinct advantages and is worthy of consideration as a complement: entrepreneurship.

Starting and growing businesses is in my DNA. I didn't start out doing it for money. Well, maybe somewhat for the money but mostly for the thrill and the fulfillment of creating something out of nothing. Turning my resource of time (and some money) into a (metaphorical) machine that creates value and generates income. In the over two decades that I've been doing this, I've come to see entrepreneurship as more than a pursuit of passion or a way to make money. It's truly a pillar of building wealth.

If we consider investments, real estate and business ownership as three pillars of building wealth, two of these pillars have either a pretty high barrier to entry or a long timeline to success (or both). Investing in mutual funds has a fairly low barrier to entry but a long timeline. You don't build wealth overnight by investing in your Roth IRA. Real estate has a higher barrier to entry. It's difficult to build up enough capital to buy your first investment property.

Starting a business, however, can be done in a weekend and can start to generate income almost immediately.

This is not to downplay the the difficulties that come with entrepreneurship. It takes long hours, creative thinking, mental and emotional resilience and lots of patience to start and grow a business. But it can be done with very little capital and very little overhead.

This is an amazing time to start a business. Technology has matured to the point that many businesses can be started with a laptop and an internet connection. Period. Think of how many ventures can be launched with almost no overhead: travel agency, consulting firm, financial planning firm, marketing agency, software development, lawn care, membership community, media company, design firm, photography business, recruiting firm, retail arbitrage, IT company and the list goes on and on.

To re-iterate: business is hard. However, while you're waiting for compound interest to grow your investments and while you're saving up capital for your first real estate investment, you can also be starting a business that can generate income right away.

A business has more than one way of building wealth. One way is income. If your business is a side hustle, it can be a great supplement to your primary income. Long-term, a business can generate passive income, which means it requires less of your time and is treated more like a stream of income, rather than a job (more on this in another discussion).

In addition to becoming a stream of income, a business can also have inherent worth. If your business is built to have value, it can be eventually sold as an asset, much like your house or other tangible assets. This is why I generally encourage my clients to list their businesses on their statements of net worth as we do financial planning. Even if it's worth nothing at the time, it keep us focused on raising that valuation so that the business earns its place on the personal balance sheet as an asset alongside property and investments.

Perhaps more importantly, entrepreneurship is one of the best ways to increase your income and in many case, remove the income ceiling from your life. While I'm not saying that starting a business is for everyone, for many it can be a way to unlock the potential for increased income and freedom. Many people feel stuck, underemployed and frustrated that they have very little control over how much money they make. Starting a business is one potential path to break free of this limitation.

We all take different paths in life and entrepreneurship is only one path. I happen to think it's one of the strongest ways to generate wealth and deserves a seat at the table as the third pillar of wealth.