- 1 3 Simple Steps to Building Wealth
- 1.1 Step One: Make Enough Money
- 1.2 Step Two: Save Enough Money
- 1.3 Step Three: Invest Money Appropriately
- 2 Conclusion
Wealth is the sum total of assets (things that you own) that give you financial security. This article will widen your knowledge on how to create wealth in order to become one of the prominent people in the society.
Many seem to assume that it’s impossible for the average person to get rich without luck (which isn’t true at all). Others seem to believe it takes wealth to become wealthier (which is sort of true, but not entirely). Still others attribute it to hard work, more than the average person is willing to produce, and to smart work (which is absolutely true). Another common idea is that it’s all about maximizing investment secrets and insider knowledge (not really true).
The truth is that the elements of building significant wealth – enough to live out the rest of your life – are in the hands of every person, but they require a number of ingredients. You need hard work. You need smart work. You need self control. You need patience and time. You need to be responsible for your own choices, good or bad. You need to accept your own faults and the challenges of your current situation, and try to make the best of the hand that you’re dealt.
3 Simple Steps to Building Wealth
Basically, to accumulate wealth over time, you need to do three things:
- Make money. Before you can begin to save or invest, you need to have a long-term source of income that’s sufficient to have some left after you’ve covered your necessities and debts.
- Save money. Once you have an income that’s enough to cover your basics, develop a proactive savings plan.
- Invest money. Once you’ve set aside a monthly savings goal, invest it prudently.
Step One: Make Enough Money
This step may seem elementary, but for those just starting out or in transition, this is the most fundamental step. Most of us have seen tables showing that a small amount regularly saved and compounded over time can eventually add up to substantial wealth. But those tables never cover the other sides of the story. Are you making enough to save in the first place?
Keep in mind that there’s only so much you can cut in costs. If your costs are already cut down to the bone, you should look into ways to increase your income. Also, are you good enough at what you do and do you enjoy it enough that you can do it for 40 or 50 years and save that money?
Those beginning their careers or in a career change can start with four considerations to decide how to derive their earned income:
- What do you enjoy? You will perform better and be more likely to succeed financially doing something you enjoy.
- What are you good at? Look at what you do well and how you can use those talents to earn a living.
- What will pay well? Look at careers using what you enjoy and do well that will meet your financial expectations.
- How to get there? Determine the education, training, and experience requirements needed to pursue your options.
Taking these considerations into account will put you on the right path. The key is to be open-minded and proactive. You should also evaluate your income situation periodically, but at least once a year.
Work hard to maximize personal income.
So, as noted above, one sure way to have money to save and invest for the future is to keep your spending level steady while your income goes up. Thus, it’s unsurprising that the second strategy is to increase your income.
This is the other half of “spend less than you earn” – increasing income. The more you earn, the more resources you have not only to live on but upon which to build wealth and become rich.
So, how do you do that? You can focus on your current career, for starters. Make it a personal goal to become a top performer at your job and move up the career ladder. Don’t just look at your job as “hours for money” unless your current job is not your primary focus for earning income. If it is – give it your focus and give it your all.
At the same time, dabbling in entrepreneurship in your spare hours can end up paying some incredible dividends, too. A side business can earn a lot of money and can, on occasion, wind up supplanting your main job and earn you more than you ever dreamed.
The goal of both of those things is the same: to improve your personal income. If you pair that along with a commitment to not increase your spending as your income goes up, you’re going to have leftover money. It’s that leftover money that will open the door to building wealth, which is what the remaining principles in this article focus on.
Step Two: Save Enough Money
You make enough money, you live pretty well, but you’re not saving enough. What’s wrong? The main reason this occurs is that your wants exceed your budget. To develop a budget or to get your existing budget on track, try these steps:
Track your spending for at least a month
You may want to use a financial software package to help you do this. Make sure to categorize your expenditures. Sometimes being aware of how much you spend can help you control your spending habits.
Break down your wants and needs
The need for food, shelter, and clothing are obvious, but also address less obvious needs. For instance, you may realize you’re eating lunch at a restaurant every day. Bringing your own lunch to work two or more days a week can help you save money.
Adjust according to your changing needs
As you go along, you probably will find that you’ve over- or under-budgeted a particular item and need to adjust.
Build your cushion
You never really know what’s around the corner. Aim to save around three to six months’ worth of expenses. This prepares you for financial setbacks, such as a job loss or health problem. If saving this cushion seems daunting, start small.
This doesn’t mean you have to be thrifty all the time. If you’re meeting savings goals, you should be willing to reward yourself and splurge (an appropriate amount) once in a while. You’ll feel better and be motivated to make more money.
Cut personal spending and control lifestyle inflation
All you need to do is to simply cut back on your spending so that you are spending less than you earn and have some left over with which to build wealth.
Spend less than you earn
It’s the absolute key to every financial success a person will have in life. As long as you’re spending less than you’re bringing in, your finances are going to head in the right direction. The lower your spending is compared to your earnings, the faster it’s going to happen.
Step Three: Invest Money Appropriately
You’re making enough money and saving enough, but you’re putting it all in conservative investments like the regular savings account at your bank. That’s fine, right? Wrong! If you want to build a sizable portfolio, you have to take on some risk, which means you’ll have to invest in securities. So how do you determine what’s the right level of exposure for you?
Begin with an assessment of your situation. The CFA Institute advises investors to build an investment policy statement. To begin, determine your return and risk objectives. Quantify all of the elements affecting your financial life, including household income, your time horizon, tax considerations, cash flow or liquidity needs, and any other factors unique to you.
Next, determine the appropriate asset allocation for you. Most likely you will need to meet with a financial advisor unless you know enough to do this on your own. This allocation should be based on your investment policy statement. Your allocation will most likely include a mixture of cash, fixed income, equities, and alternative investments.
Risk-averse investors should keep in mind that portfolios need at least some equity exposure to protect against inflation. Also, younger investors can afford to allocate more of their portfolios to equities than older investors because they have time on their side.
Invest your equity and fixed-income exposures over a range of classes and styles. Diversification takes the timing element out of the game. A qualified investment advisor can help you develop a prudent diversification strategy.