No matter what kind of work you do, which stream of work you are involved in, creating wealth must be a crucial goal of your life. Not only does wealth creation help you live your life more prosperously, it helps secure the future for your next generation as well. When you create wealth, it benefits the people around you, and the people who will be there after you are gone. If financial independence, future security and a comfortable retirement are your goals in life, you must start building wealth now. We will discuss about the various ways in which you can start your journey towards wealth building and set up a solid financial foundation for the future.
How to build wealth
Most discussions about building wealth revolve around using different types of financial tools such as stocks, investing, savings, trading, and budgeting. However, behind all of those tools, the fundamental principle of wealth building is: You should end up with more money than you started out with.
But building wealth isn’t just about having a few extra thousand dollars sitting around for your next vacation or even for something more serious, like a potential medical emergency. It also doesn’t necessarily mean becoming a multi-millionaire and owning multiple penthouses and yachts. Building wealth is about the rest of your life. It’s about creating a financial foundation that will ensure your financial comfort for life, including amassing enough wealth to live comfortably and happily through retirement.
Now, you must be wondering, how do I start building wealth? There’s no single formula that will work for everyone in the world. However, there are some fundamental tips which can be used independently or in combination with each other to help set you on the path of wealth building.
Here are some ways to help you build wealth:
#1. Make a budget
Having an understanding of how you spend your money and where you can cut back is essential for saving it and building your wealth. Making a budget might sound like a boring and tedious activity which finance ministers do. However, it boils down to identifying two simple numbers: what’s coming in and what’s going out. Once you have those numbers in hand, you can start budgeting. List out your fixed expenses (rent, utilities, mortgage payments, health insurance, etc.) and start cutting down from your variable costs (bar tabs, restaurant food deliveries and takeaway, expensive dog grooming etc.). Another great rule to remember for budgeting is the 50/30/20 rule. As per this rule, you should spend about 50% of your income on fixed items like rent, utilities, transport etc. 30% on variable expenses. The remaining 20% should be used for saving and investment. You can increase the amount you save by keeping your variable expenses down.
#2. Pay any high-interest debt off
Debt destroys budgets of entire nations, so of course you can’t be immune from its destructive power. Not only does it grow exponentially if it isn’t paid off, it’ll also eat away at any gains you make, ruin your credit, and delay your path towards building wealth. So paying off any high-interest debt (such as credit card debt) is an absolute priority and should be factored into your budget. Create a payment plan and stick to it. As far as possible, stay away from using credit cards. Only use them for emergencies and ensure that you pay the sum back immediately.
#3. Make an emergency fund for yourself
Life is quite unpredictable. Even if you have the most mundane and routine lifestyle, stuff happens. Someone gets sick. You lose your job. Your basement floods because of a hurricane. For situations like these, there’s the emergency fund. Your emergency fund should ideally cover about 3-6 months of living expenses. Also, you must exercise enough restraint to never touch the emergency fund for any situation except emergencies. An appropriate place for an emergency fund might be a savings account or a savings investment account.
#4. Invest a large portion of your income (or at least as much as you can)
Once you have an emergency fund set up, it’s time to start investing with any additional money you have. Remember the 50/30/20 rule mentioned earlier? If saving 20% of your income seems too arduous and unappealing, think of it as a way of paying your future self. By putting money into long-term investments, it will work harder than it would be just sitting in a savings account, and you’ll also be benefiting from the magic of compounding. The money that you invest should go towards a long-term saving strategy, like retirement or your child’s college fund. Look for investment providers that have low fees and low barriers of entry to get started as soon as possible. You can take the help of certain robo-advisors while opening the account.
#5. Cut down your living expenses where its possible
This point builds on the budgeting tip. Once you start trimming your variable costs, reducing your fixed costs can have a huge impact on the money you can save. Can you reduce your rent by moving to a cheaper neighbourhood? Can you live in a smaller house? Can you split the bills of your Netflix/Amazon Prime/Spotify/Hulu accounts with someone else? Can you start cooking your food so you don’t have to order in every time?
You get the idea of what you have to do, right?
#6. Stay away from “lifestyle creep”
Millionaires don’t retain their status by just splurging all their wealth. A lot of them still clip coupons for the grocery store. NBA superstar Kawhi Leonard is famous for using coupons for his groceries. You must do everything in your power to avoid lifestyle creep. It’s a terrible condition in which you automatically adjust your lifestyle up a notch in line with your new financial realities. A real life example of lifestyle creep would be getting a raise and then upgrading to a luxury apartment and buying a Jacuzzi, taking your significant others to the most expensive restaurants and driving them in a brand new European luxury car. Avoid falling into this trap. Try to maintain the lifestyle you had before the influx of new cash. Instead, put the money away and try to maintain a lifestyle where you reduce as many unnecessary costs as possible. Next time you get a raise, tax refund or bonus: invest it on something fruitful or just add it to your savings.
#7. Become smarter with salary negotiations
This is a part where you need to be really proactive from your end. Go through online data to see what others in your position and industry are being paid. Do some bedtime reading, make a list of all your work achievements and approach your boss with a request for a raise. Don’t just go and ask for a raise without any specific examples or evidence of your raise-deserving work. In case you are not satisfied with your pay or work in general, you can also try looking for another job. Most people who switch jobs tend to get a significant salary boost.
#8. How to build wealth from nothing
Is it easier to start building wealth when your parents already had an investment fund set up for you before you could even pronounce “diversified portfolio”? Yes, it was a rhetorical question. Of course it is. But just because you’re starting from zero (because your parents didn’t leave you a trust fund) doesn’t mean that you can’t develop and grow a strong financial foundation. Such a strong foundation will let you be financially independent and live comfortably in retirement (even if you want to retire as early as 50). You will need to be a lot stricter than the trust fund kids when it comes to things like budgeting and saving.
You should also work towards building additional sources of income. Is there a particular skill you have? Do you love crocheting weird things you could sell on Etsy? Do you draw well enough to teach others? Can you teach a musical instrument like a guitar, piano, xylophone or theremin? Can you coach a little league baseball team? Do you have a collection of aggressively flared jeans you don’t want to wear anymore but could sell online to someone who’ll actually appreciate them? Do you have shoulder pad jacket which you don’t want anymore but an 80s nostalgia junkie will? With a little bit of effort and ingenuity, you can always find ways to build up additional streams of income.
Another tip would be to start a second job, if you can handle the time commitment. You can take up weekend jobs in an electronics showroom or a fast food chain. If you have a car which you don’t use much, you can drive it for some time for Uber or Lyft.
Take the incredible story of Oprah Winfrey’s rise. The famous talk show host and media mogul who’s now worth $2.5 billion actually came from a very humble background. She began working at a tender age of 15. However, she wasn’t afraid to stand up for herself and demand proper compensation for her hard work. That point is particularly relevant to her rise later in life. She demanded ownership of her show (and got it), and that went on to make a household name all over the world. Oprah Winfrey also maintained several sources of income while focusing on her education and ensuring that she spent the time and energy developing her skills to excel in the brutally competitive world of media and entertainment.