I often find myself approached by people looking for advice on how to invest their assets and if they should invest in certain stocks, bonds, real estate, and more.

My recipe for building wealth is contrarian: for people under 50 with less than $3 million in assets, it is usually best to junk the stock portfolio and focus on investing in yourself.

In general, building your long-term assets is a two-step process:
1. Invest in yourself so that you can increase your revenues (or salary)
2. Watch your expenses

Investing in Yourself

“Go confidently in the direction of your dreams.  Live the life you have imagined.”
– Henry David Thoreau

Whether it’s taking out loans for medical school or buying your first unicycle (for the kid who has always dreamed of being a world-class unicyclist), an investment is the first step towards your dreams.

But investing in yourself doesn’t just mean following your dreams. It means making yourself better.  For example, if you’re a whitewater rafting guide, it could mean investing time and money to get certified by the Wilderness Medical Association.  Making yourself a little more qualified for your job could get you a 10% raise rather than a 3% raise and a higher base on which to get a raise next year.  On a $50k salary, that’s an instant difference of $3500 that compounds fast.

This is the same calculus that justifies going to Law or Business School, where students assume that a great deal of money invested and lost income opportunity in the short term will yield greater returns down the road.  You can make this same assumption on a smaller scale (and with a much higher potential for return).

Of course, you can always start a side-business.  Most people can earn more money by starting a money-making hobby (like selling cool scarves that you knit) than investing their money wisely.  That’s because percentage growth on small assets is still small.  Very few Americans can earn another $5000/year through investing but most can earn that through a side hobby.  

One thing you might want to do in the short-term is to buy time. One Rapleaf employee outsourced a small percentage of his job to a team in the Philippines for $3/hr.  That enabled him to be more efficient and concentrate more on his key goals.  While Rapleaf ended up picking up the tab on this, the investment in your time may be worthwhile even if your employer is not receptive to you becoming more efficient. 

Some dreams require nothing more than time and sweat, while others require tremendous sums of capital.  But all dreams require significant investment.  And that initial investment is paramount. 

Decreasing Your Expenses

With almost no time invested, most people could decrease their yearly expenses by $1500/year.  For example, the odds are pretty good that you’re paying more than is necessary on both your cell phone and your credit card bill.  Take the time to shop around, and prune services from your contract that you don’t ever use. Sites like RetailMeNot.com offer an abundance of online coupons for all sorts of E-tailers.

For most people, the biggest expense – and the biggest opportunity to save – is housing.  If you’re willing to do a little work around the house, many landlords are amenable to hefty rent-reductions in exchange for the occasional odd job.  By spending a Sunday afternoon helping your landlord build a shed or insulate an attic, you double the return on your time invested: not only is your rent reduced, but your living situation is improved.  And even if you’re not handy, you can often reduce your rent significantly by just asking for a reduction.  The worst thing your landlord can do is say no.

With a concentrated effort of 100 hours, most people could save over $5000 per year – and that is often recurring savings. While this may not be a worthwhile investment for people making over $150k per year, saving $5k per year for most people is a big deal.  If you have $100k in liquid assets, you’ve just increased your annual return by 5% for the year with zero risk.  That’s a pretty good investment.

And remember, saving money is also very tax efficient.  You don’t get taxed on what you save (only on what you earn).  

When Investing Elsewhere

If you have time after investing in yourself and decreasing your expenses, then invest your money wisely.  My suggestion is to start off investing conservatively (like a simple money market account or a bond fund) so you don’t lose anything first. If you are increasing your profits every year by increasing your revenues and decreasing your expenses – even if you earn 0% — you are coming out ahead.  Focus on getting the best return you can that is safe.

I personally would recommend only putting a small percentage of your portfolio in the stock market.  Even if you invest conservatively (like the Vanguard S&P 500 fund), you might be disappointed in the results.  Since I started investing actively in the market in 1999, stocks have basically been flat. The stock market game is rigged for people with sophisticated systems and proprietary information. 

Summation: when thinking of investing, first concentrate on growing your personal revenues and next on decreasing your expenses.

(Special thanks to Jake Kring and Michael Hsu for their help and edits)