Ask anybody if he or she wants to be wealthy, and you will get a nod accompanied by a big YES in a split second. Yet, most people do not know what it takes to create wealth.
Wealth creation is a topic that can drive people to do things they might otherwise never consider.
If you scour the internet right now, you will find thousands of articles on how to create wealth. But from my experience, the books I have read, and the wealthy people I know, I’ve seen that to accumulate wealth over time, you need to do three things:
- Make money. Before you can begin to save or invest, you first need to have a sufficient constant source of income that’s sufficient
- 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.
Understanding the 3 Simple Steps to Building Wealth
Make Enough Money
The basic formula for building wealth is to make more money than you spend, then avoid debt, and invest wisely.
When you earn enough money, make sure to save enough, although this will require discipline in budgeting and planning. But this primary method of wealth-building will empower you to take on a bit of risk and make prudent investments.
There are two basic types of income, namely—earned and passive. Earned income comes from what you do for a living,” while passive income proceeds from investments.
Save Enough Money
You make enough money, you live pretty well, but you’re not saving enough. What’s wrong? You’ve probably been exceeding your budget every month. So what do you do 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.
- Trim the fat. Break down your wants and needs. The need for food, shelter, and clothing are obvious, but also address less apparent needs. For instance, you may realize you’re eating lunch at a restaurant every day. Bringing your 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 keeping this cushion seems daunting, start small.
This doesn’t mean you have to be thrifty all the time, but meeting your savings goals is critical. When you do hit these 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.
Invest Money Wisely.
When you’re making enough money and saving enough, stop putting it all in the regular savings account at your bank. It’s wrong!
If you want to create wealth and have a sizable investment portfolio, you have to take on some risk, which means you’ll have to invest in properties, stocks, and businesses. But how do you determine what’s the right level of investment for you?
Begin with an assessment of your situation. Quantify all 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 investment plan for you. Most likely, you will need to meet with an investment coach or a mentor who knows enough to help you. Finally, diversify your investments for multiple streams of income because another may outperform the others.
Taking these considerations into account will not only put you on the right path, but it will also help you grow your income and create wealth.
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