6 Proven Things You Can Do To Build Wealth
Everyone wants to be wealthy. And while the principles to building wealth are easy in concept, it is not always easy for people to change their mindset. This post will lay out, in the simplest terms, 6 proven things people can do to build wealth.
Save for winning the lottery or inheriting a lot of money, there is no magic pill, secret sauce, or quick fix when it comes to building wealth. Building wealth actually takes work. And you must — MUST — have patience. Because it will take time (see: years, decades, etc) for most people to amass enough money to reach financial freedom.
6 Proven Things You Can Do To Build Wealth
Budget
A budget isn’t an essential component for everyone to build wealth, but if money is tight or you have a “keeping up with the Joneses” problem, keeping a budget is absolutely necessary. Another reason to keep a budget is if you want to achieve a very specific outcome in a set amount of time, like paying off your mortgage early or retiring by 40.
A popular method of budgeting is the 50/30/20 rule. It’s really simple to use and doesn’t require complicated spreadsheets. Here are the very basic steps to do it.
- 50% of your income goes towards needs.
30% of your income goes toward wants.
20% of your income to savings or debt repayment.
Now, you can obviously opt to supercharge these numbers and if you’re in a position to save and invest more, you probably should.
Get Out Of Debt
Credit card debt and, to a slightly smaller extent, student loan debt are a plague of the nation. A study from 2015 showed that 80% of American’s are in debt. That is a staggering number, but when you consider that most people don’t have $1000 emergency fund, the number makes a lot of sense.
In order to start your journey on building wealth, you first must begin to eliminate all of your bad debt. The faster you get out from under debt, the sooner you can start focusing on using your excess money to make you more income.
Live On Less Than You Make
Lifestyle Inflation is a term that a lot of people throw around. What is lifestyle inflation? It is when your expenses creep up at the same rate as your salary causing you to spend your excess income rather than use it to pay down debt and save for retirement.
When you just start making money, living on less than you make is often difficult. Taking advantage of automated investing, whether in a brokerage account or a company 401K can help you pay yourself first.
Save Money
When you are just getting started on your wealth building journey, it is important to put some money towards creating a six month emergency fund. There are different schools of thought when it comes to emergency funds, but we like a 50/50 approach. By that we mean, if you have $1,000 per month in excess income, put $500 in a high yield savings account and then deploy the other $500 into an investment vehicle with much better returns. Once your emergency fund is fully funded, invest the full $1,000 every month.
Saving money in a savings account is a great step in the right direction, but in order to build next level wealth, your money must work for you to make more money. Meaning, it’s smart to have an emergency fund, but don’t miss out on the power of compound interest by overfunding it.
Create Passive Income Streams
If compound interest is the 8th wonder of the world then passive income is the 9th. There are many ways to create passive income; some begin as active income that require a small amount of work to maintain (like a blog, an ebook, or affiliate marketing) and there are others that are truly passive, like real estate crowdfunding, dividend investing, and others.
It’s up to each individual to determine how they want to build and maintain their passive income streams. One thing is for sure, the more income streams you have, the better. Not only will diversification make you more money, but you will be more protected if there is a momentary downturn in the real estate market, the stock market or elsewhere.
Invest
As mentioned above, investing in stocks (growth or dividend) is a great way to grow your nest egg. If you’re not interested picking individual stocks, there are ways to build lazy ETF portfolios that take all of the hard work out of investing. Historically, the S&P 500 has returned an average of 11% since its inception in 1926.
You can also opt to invest in physical real estate to generate rental income or use real estate crowdfunding platforms that pay you regular disbursements like CrowdStreet, Fundrise and Realty Mogul.
Before You Do Any Of These Things… Define Your Goals!
What is your freedom number? How quickly do you want to be a millionaire? How much do you need to invest every month to achieve those goals?
These are important questions that everyone who wants to be wealthy needs to ask themselves. Because if you’re not asking yourself these questions it’s like getting in a car and driving without knowing how to get where you’re going. You might get lucky and end up at your destination, but chances are you’ll be lost.