How to Create Wealth: 7 Tips From Naval Ravikant

This article is an excerpt from the Shortform book guide to "The Almanack of Naval Ravikant" by Eric Jorgenson. Shortform has the world's best summaries and analyses of books you should be reading.

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How important are long-term business relationships when it comes to creating wealth? Should you rely on active income or passive income? Should you specialize or generalize?

The Almanack of Naval Ravikant shares Ravikant’s wisdom on creating wealth and achieving financial freedom. He explains the difference between wealth and money, the importance of passive income, three types of leverage, what it means to exercise good judgment in business, and more.

Let’s look at seven pieces of Ravikant’s advice on how to create wealth, along with a practical exercise to get you moving in the right direction.

#1: Focus on Building Wealth, Not Money

If you want to learn how to create wealth, you first have to understand the difference between wealth and money. To Ravikant, wealth is owning assets that grow over time without further inputs from you. Money, by contrast, is merely the means of distributing wealth and time. The equity you own in a growing landscaping company is wealth; the cash people pay you for mowing their lawn is money. According to Ravikant, it’s more important to focus on generating wealth than on generating money.

#2: Generate Passive Income

Ravikant argues that the key to achieving financial freedom is having passive income. This is income that earns money with minimal effort from you. According to Ravikant, the best way to earn this income is by owning assets: For example, selling an easily reproducible product—such as a popular album of original music—is a source of passive income. Similarly, owning equity in a growing company provides passive income: As the company grows, the value of your equity grows. This type of income contrasts with active income, which people typically get as wages for work.

#3: Leverage Your Resources

Leverage is the ability to multiply effort. In the context of building passive income, this is helpful because any investment (effort) you put into an opportunity can be magnified by the leverage applied to it. Ravikant identifies three types of leverage: labor, money, and products that can be replicated without further inputs.

#4: Develop Specific Knowledge

Ravikant believes that, to create products or attract money, you have to specialize in something. Specifically, you should develop specific knowledge (a deep understanding) of something technical or creative. Expertise in these areas is especially useful for developing products.

#5: Exercise Good Judgment

Another important skill for developing products and attracting capital is good judgment. If you develop a reputation for good judgment, investments will follow, both because you’ll be able to identify good investment opportunities and because people will invest in you when they trust your insights.

(Shortform note: Business experts advise that attracting investments involves more than just demonstrating sound judgment. For instance, investors need to see a strong business plan, scrutinize your official documents and your management team, and be convinced that your idea can return a profit. Good judgment certainly can help with all of this, but it’s only one factor among many.)

According to Ravikant, developing good judgment requires seeing reality clearly. Seeing reality clearly enables you to size up situations accurately—this is an invaluable skill for making good business decisions. To see reality clearly, Ravikant believes you have to first get rid of your faulty assumptions about the world. Don’t make assumptions about the way things are and don’t fall back on your preconceptions about people or ideas. If you do, you’ll be prone to confirmation bias—that is, to seeing things the way you want to see them—and you’ll be more likely to misinterpret reality.

(Shortform note: Neuroscientists have found that the brain makes assumptions to save energy—assumptions are hardwired into us. How, then, might we follow Ravikant’s advice to rid ourselves of faulty assumptions? Experts note that one helpful technique is to simply assume that your view of the world may be wrong. By adopting this perspective, you’ll be more open to accepting the world as it actually is—even when it contradicts your assumptions.)

Once you’ve rid yourself of faulty assumptions, Ravikant suggests that you have to continuously work on building a more accurate understanding of the world. The best way to do this is to read a lot and constantly learn. In particular, read about science, philosophy, and basic math. These disciplines are grounded in a rigorous search for truth, so familiarizing yourself with them will help you think independently about the world in general and give you better mental tools for understanding reality clearly.

(Shortform note: Researchers have found that our understanding of reality is significantly affected by far more than just our knowledge: It’s affected by numerous unconscious factors. For example, evidence suggests that our physical fitness and emotional state affect our perceptions of the world and that our political leanings even affect our ability to solve math problems. This indicates, then, that studying math, science, and philosophy has little effect on controlling such important unconscious factors.)

#6: Build Long-Term Business Relationships

Good relationships are invaluable for building wealth because working with people is far more productive and efficient than going solo. For Ravikant, building relationships in business isn’t a matter of short-term networking: It’s a matter of identifying capable and ethical people and building long-term relationships with them. It’s far more effective to simply stick with competent ethical people and deepen your rapport with them than to seek out more people: In business relationships, quality is more important than quantity.

If you’ve built a foundation of trust with someone, and they’ve shown themselves to be consistent, honest, and fair, keep working with them. In this way, your business relationship will grow more efficient over time as you both come to know each other better.

(Shortform note: Some business professionals offer a more nuanced perspective on this point. Quality relationships take time to establish. Because of this, they suggest that it’s simply not always possible to form strong relationships—it’s more important to maintain a balance of relationships. In their opinion, the strength of your business relationships should depend on the context: Industries that require a foundation of trust, such as consulting or sales, may entail having deeper relationships than industries such as event promotion or entertainment.)

#7: Be Patient

The above principles are critical to building wealth, but wealth creation doesn’t happen overnight: Be patient. Ravikant encourages you to simply stick to the practices of developing and leveraging your skills and cultivating deep, trusting relationships with good people. If you give it enough time, these things will pay off.

If your ideas for a product fail at first, just keep generating more ideas. If you make a mistake in judgment, own it and learn from it, then carry on. Stay focused on your specialization, stay attuned to up-and-coming companies, and stick to the work: Achieving wealth is worth it.

(Shortform note: Other financial experts agree that patience is critical to building wealth. They suggest the most reliable way to build wealth is to simply start saving money as soon as you can, never spend more than 90% of what you earn, and invest. Patience is key to this strategy because it helps you delay gratification, stick to your goals, and plan for the long-term.)

Exercise: Prepare to Build Wealth

Ravikant offers several practical tips for building wealth. In this exercise, you’ll consider how you can take steps toward financial success.

Ravikant considers passive income to be one of the most effective ways to build wealth. If you don’t yet have any passive income streams established, consider what opportunities you may have to establish such a stream of income. Typically, experts recommend a few different avenues of passive income, such as traditional investments that pay dividends, owning real estate, selling products, and so on. Identify at least three potential passive income opportunities you might pursue over the course of this year.
Now consider what steps you might take in the next month to make one of those passive income opportunities a reality (for example, if your goal is to buy property to rent out, you could start touring houses for sale). Write a brief plan.

How to Create Wealth: 7 Tips From Naval Ravikant