You can invest a small amount of money (and a lot of hard work and well-spent time) in a small business and see it grow into a business that is worth a million in seven years. I’ve done it many times. I’ve coached people who have done it. Stories are published in magazines every month about people who have done it.

But let’s be frank. With only $18,000 to $25,000 to invest, it won’t be easy. That’s why I like to encourage Early to Rise readers who are at this first wealth-building stage to focus most of their time and efforts on building their income. Doubling your income in a year or two is entirely possible if you follow the advice I gave you in previous posts. And if you double your income and don’t double your lifestyle, you’ll have a lot more money left over to ensure the success of your small side business.

Here are five things I recommend if you are in this situation:

1. Find a way to radically increase your salary by making yourself radically more valuable at work.
2. Resist the temptation to spend more money as your income rises.
3. Put some of your savings down on an undervalued, small, single-family house, fix it up fast, and sell it for a profit.
4. Reinvest that original capital plus the profit in another buyand-flip deal. Keep doing this until it becomes a very pleasant habit.
5. Invest another portion of your savings in a part-time, weekend business. Sell a product or service you know and understand.

Make sure you are not a pioneer. Unless there are others actively selling the same thing, you don’t want to be in the market. The idea is to enter an active market with a better/cleverer/cheaper version of what others are selling. Sell only by direct response—print, mail, and Internet. Go carefully and learn from your mistakes.

I’m bullish on entrepreneurship. And I’m at least as bullish on real estate. Stocks are much riskier than real estate—to me—because (1) I’ve lost money investing in stocks and/or stock funds time and again and (2) I’ve seen so many others lose money. Again, I do believe that the stock market has been and will continue to be a pretty good long-term investment. But long term as far as the market goes is a 10- to 20-year time frame. Since we are concerned with getting wealthy in 7 to 15 years (and since the market is currently overvalued, from a fundamentalist’s point of view), I don’t feel confident in stocks.

Nevertheless, since I began actively investing in real estate—about 11 years ago—I have never lost money on a single transaction. The worst two deals I’ve been in since my first big lesson (i.e., disaster) produced yields of 7 percent and 12 percent annually. And that’s not including tax benefits—which were significant. Most of the real estate investments I’ve made have been good to great.

You can reduce the risk in starting your own small business by sticking closely to what you already know. By “what you know,” I mean (1) the product or service you are selling and (2) the primary method by which you are going to sell it.

Serially successful entrepreneurs follow this formula. They spend thousands of hours figuring out how a particular business works—and once they understand it, they seldom jump into something entirely different.

My own rule for starting a new business is this: One baby step at a time. By that, I mean that I’m willing to try something new—but just a little new. If, for example, I’ve learned how to sell cat food with banner ads on the Internet, I might consider setting up a business that sells cat food with small ads in magazines. (That’s one baby step. If I can’t figure out magazine advertising, I can get out quickly and safely.) But I wouldn’t let myself get into a business that sold cat health-care products through direct mail—even if I could convince myself that I’m an expert in selling cat products. Selling cat health-care products through direct mail is simply too many steps away from my core competence.

If you develop expertise in a particular business and don’t stray too far from it, you’ll always feel confident that you can create a new business without taking a lot of risk.

Muni funds can also play with the value of your shares to your disadvantage. Muni issues are rarely traded. Muni managers can use any reasonable value for fund assets. Though credit quality may have deteriorated, managers often refrain from writing down asset values for fear of losing shareholders. However, at some point asset values must be marked to market to avoid outright fraud and jail time for the fund managers. If you buy fund shares at a high valuation of assets and later have to redeem when assets are written down to realistic levels, you will justifiably feel betrayed.

Fund managers can also turn tax-free munis into taxable bonds. Capital gains from selling appreciated muni bonds are taxable. Individual savers typically hold munis until maturity so there are no capital gains. Muni fund managers trade bonds. This creates capital gains, often short-term capital gains, which are taxed at the highest rate. Muni funds are outside the comfort zone of most savers.

Munis have tremendous tax advantages. Interest paid is not subject to federal, state, or local taxes. However, many savers will find the tax advantage caused them to invest outside their comfort zone. Calls, volatility, and insecure principal may be more than you can handle.

Trust issues are worse for muni funds than for other bond funds. Muni funds offer the advantage of diversification and professional management.

Unfortunately, the fees eat up as much as 25 percent of your interest. This is seldom worthwhile. Muni fund managers rarely outperform a list of unmanaged bonds. Many also try to rev up returns with lower credit issues, including junk munis, and borrow against the fund to increase investments in an attempt to time the market. These tactics are not likely to improve your sleep.

Municipal bonds also have call provisions that allow the issuer to redeem bonds before their term expires. For example, a 30-year bond will typically have a seven-year call. If interest rates have declined over the seven-year period, the state will redeem the bonds and then issue loweryielding securities. Obviously, this is not in your favor, and you may find it irritating.

Munis are also subject to wide swings in value. State economies are more volatile than the national economy. When a state economy is booming, state tax revenues are high and there is little need to issue munis. At the same time, state residents’ incomes are high. They want munis, which pay tax-free interest. The combination of low supply and high demand leads to overpriced, scarce bonds. When a state is in recession, tax revenues decline.

The state issues a hoard of bonds to keep going just at the time when it can least afford to make interest and principal payments. Muni interest rates rise to compensate for the reduced security. Older munis lose value.

Consider how you react to wide price swings.

Unmanageability is a big issue with municipal bonds (munis). (Munis are bonds issued by states and local governments.) State and local government bonds are less secure than federal government bonds. The federal government can print money to pay bond interest and principal. With munis, defaults are possible, because state and local governments do not have the power to print money. Although defaults are rare, they occur. Many munis are secured by specific projects. If the project is bad, the muni could default.

Other munis are secured by a general fund. However, mismanagement of the general fund can endanger your muni. For example, the Orange County (California) general fund in 1993 and 1994 was run like a hedge fund. The fund manager invested in derivatives and leveraged up the fund just when interest rates rose dramatically, bankrupting the county. This type of mismanagement can lead to feelings of outrage among bondholders.

Munis are sometimes insured, but the insurer needs to be solid for the insurance to be any help. State and local governments sometimes establish a fund, known as a sinking fund, to be used to pay off specific bonds when they come due. These bonds are known as prerefunded bonds. Prerefunded bonds are more secure as long as the sinking fund is never attached.