Wealth Building 101
It can be overwhelming to learn how to build wealth with all the available resources we have in our grasp. So, we decided to make a simple step-by-step guide for all of you who want to change your lives forever.
In the next few minutes, please remove distractions around you and read this blueprint at least twice.
It will look pretty basic for now but once you start building wealth, it will make more sense.
Like every other financially successful person, the secret to wealth building is pretty simple. There are 3 things that rich people do to build more wealth. These are:
- Building MORE income
- Cutting MORE expense
- Investing THE money
So, if we plot the formula on how to save money. This is how it looks like:
Savings (Wealth) = Income – Spending
But you might ask, “But how do I get more money?”
“What’s this formula you’re talking about?”
“That’s obvious!”
“Right?”
For the people who thought that way, what we’re talking about IS obvious. What is also apparent is that you have time to read this post because you knew that this formula was obvious and you’re still
NOT RICH.
Back on Topic
Let’s now break down the basic formula to further explain wealth building.
Savings (Wealth) = Income – Spending
So how do you get more savings in? There are 3 possible solutions here.
One: Increase income and maintain spending habits
↑Savings (Wealth) = ↑Income – Spending
Two: Maintain income and decrease spending
↑Savings (Wealth) = Income – ↓Spending
Three: Increase income and decrease spending
↑Savings (Wealth) = ↑Income – ↓Spending
This is basic, just follow #3 right?
It’s better.
Do both things at the same time!
Partly RIGHT, Partly WRONG
People have different ways of doing things. You can achieve financial wealth by doing 1, 2, or 3. In paper #3 makes the most sense but some people are just wired differently.
So who does 1 or 2?
1 – People who don’t have enough income and are already spending the least amount of money they can.
2 – People who are generating enough income but aren’t keen on monitoring their expenses.
Sometimes, you get so rich that you really don’t bother with price tags. You’ll still have more than enough for savings. This is a relatively good place to be in.
To accumulate money over time you should:
- Make MORE Money – A single stream of income is usually not enough especially if you have too much debt.
- Save MORE Money – Once debt if full paid off, it’s best to set aside money in investments and savings. But of these two, savings is the easiest and most safe way to put aside money.
- Invest THE Money – Once you have a comfortable stash of savings for emergency, then it’s time looking into investing money. Most financial guru would say 6 months of monthly salary is enough to cover you. It would depend from person to person of course but that’s a great rule of thumb.
Let’s discuss each further:
Step 1: Make MORE Money
The potential to make more money is unlimited. Hustle here, hustle there, hustle everywhere. With hard work and a little bit of luck, you might get double, triple or 10x your income. Work two jobs, find a side hustle, do buy and sell, look for a higher paying job, it doesn’t matter as long as you can put more money in you bank account than you usually do.
One can only save on expenses so much. In the modern world, you can’t make spending to zero unless you live in a mountain and live off the land. Sooner or later, you’re going to have to buy something.
Of the two, you should focus first on building more income streams, and then you can decide on saving on expenses or not.
Two Kinds of Income Stream
Earned income – Work and then get a salary. If you have a manufacturing company, product goods, sell and then reap the profits (less taxes of course!).
Passive income – Income derived from investments you made. This is money you get from past purchases or services incurred that continuously bring an inflow of income without you doing anything.
This can come from royalties if you’re an artist and sell your music on Spotify or iTunes. You get a cut every time some purchases your music. The same is true for writers when someone buys their book. Another good example of this are investments from the stock market. You may get dividends from the stocks you bought. You also get interest from stock value appreciation. Passive income can also be taken from rental income from apartments you bought. These are all income-generating.
Step 2: Save MORE Money
There are so many ways to save money. It can be in the form of cashback apps, suing credit card points to buy stuff, coupons or just literally not buying/consuming more than anything you need.
You can stash this money in a number of options too. Traditional savings accounts, time deposits, etc.
Once you have that it’s time to…
Step 3: Invest THE Money
Though building a huge amount of savings is respectable, investing your money to let it earn more is the faster way of building wealth. Of course, this comes with certain risks. The age-old formula that the bigger risk gets you more reward and that the lower the risk gets you lower reward still holds true in general. Of course there are exceptions to this rule.
Let’s first divide the investment prospects into three options.
Low Reward
Medium Reward
High Reward
It is generally accepted that an average person should diversify his or her investments.
A younger person can focus on high risk/high reward investments because he still has time if his investments fail.
While an old person should go for low risk/low reward investments because he/she can afford to fail.
You can talk to a certified financial advisor for this or you can practically assess your own investment appetite and decide what kinds of ratios to diversify your pool of investments go.
But what if you don’t trust financial advisors?
That’s okay.
Just read up on our blog, read other financial freedom websites, do your own research, and then decide what financial instruments to take.
After all, it’s your money. And the only person you can trust 100% with your money is you.
How about for starters? Where should I put my money in?
Good question.
For starters, one of the easiest most surefire ways of earning money is investing in index funds. These cost the least amount of annual fees and the best chances of appreciating long-term. Index funds have an average growth of 7% annually. That’s pretty hard to beat for doing almost nothing at all.
Great! Can you please explain what an index fund is?
Sure! But that’s the topic for our next blog post.