“How can I build wealth?”
I hear this question (or some variation of it) a lot. And while I’m happy to provide answers and advice, there’s something I’ve noticed about most people who ask this question.
They don’t take action on the answers. They don’t follow the advice.
Very few people actually get proactive with their finances and take initiative and responsibility. Very few focus on what they can control and get in action.
The truth is, growing wealth doesn’t have the be complicated. Wealthy people don’t have some secret you don’t. They just do things that most people aren’t willing to do.
Mastering your money can come down to establishing a few smart habits.
“Habits are the cause of wealth, poverty, happiness, sadness, stress, good relationships, bad relationships, good health, or bad health,” writes Thomas C. Corley in Change Your Habits, Change Your Life,.
What is financial freedom to you? A general desire for it is too vague a goal, so get specific. Write down how much you should have in your bank account, what the lifestyle entails, and at what age this should be achieved. The more specific your goals, the higher the likelihood of achieving them.
Next, count backward to your current age and establish financial mileposts at regular intervals. Write it all down neatly and put the goal sheet at the very beginning of your financial binder.
Tracking Your Spending
Yes, it sounds super basic and simple — and it is. It’s also a fundamental aspect of financial success.
Your cash flow (that is, money coming in and money going out) is a critical component to your financial life. If you can’t master it, you’re not going to be able to increase your net worth.
Start by tracking what you earn and spend. Do you live within your means, or are you in the red each month? If you live within your means, how far below your means do you live?
This is so important, because it’s not enough to live at your means. It’s good that you don’t spend more than you make. But if you break even each month because you spend every available rand, you’ll never have cash available to save and invest.
Saving And Investing
For most people, investing and earning compound returns is the ticket to wealth.
If you want to follow the traditional path of working until you’re almost 70 years old, then retiring for a few years to enjoy some basic comforts before you pass away, you can simply put away about 10 to 15 percent of your income in your retirement account and you’ll likely be okay.
But many people — myself included — want a lot more than that. We want financial independence; we want to be free from the need to earn a paycheck. We want to use our money to accomplish big things like traveling the world or starting businesses.
When your goals look like this, saving and investing 10 percent of your income doesn’t cut it. You need to look at saving 20 percent at a minimum, and saving at least 30 percent to be on target to hit those major wealth-building goals.
Invest in Your Education
Another way that you might be able to make more is to invest in your education. This could be getting your degree, getting an MBA, or getting a specialized designation.
Rich people tend to read. They continue to teach and invest in themselves long after formal education is over. “Walk into a wealthy person’s home and one of the first things you’ll see is an extensive library of books they’ve used to educate themselves on how to become more successful,” Siebold writes.
If it works for the millionaires and billionaires, it could work for you.
You know you deserve more, right?Sometimes, you just need help to reach it.
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Crush your Debt
Being in debt is stressful. It leads us where we can’t do great work. It robs us of a huge chunk of our hard-earned wealth—rands that could be invested to create more rands.
The path to debt is also dead simple: Spend more than you earn.
Our economy and advertisers encourage spending money we don’t have. We finance our cars, TV, and cell phone so that we can enjoy a lifestyle we haven’t earned yet.
But this “be rich now” approach is a faulty mindset that slows down our progress toward our fortune.
Sure, we’re often careful to spend only what we earn, which is called living paycheck to paycheck. But let’s be honest—unexpected expenses come up regularly. Learn to expect the unexpected, budget a safety buffer for these “unexpected emergencies” and you’ll avoid slipping into the red.
If you have debt, make clearing it your first priority.
The 50-30-20 Rule
Having said all that, we know that humans are not purely rational creatures. The best policy might be to crush your debt first, but when you’re R10,000 or R50,000 in the hole, the idea of spending a year or five years ONLY paying debt while stashing away nothing for yourself is depressing.
50% to needs (rent, mortgage, groceries, bills transportation, etc.)
30% to wants (fun and entertainment, dining out)
20% to savings and paying off debt
This system will allow you to clear your debt while creating a modest nest egg that can eventually create more wealth.
Upgrade your Friend Circle
Who you hang out with matters more than you may think. In fact, your net worth tends to mirror that of your closest friends.
“Successful people generally agree that consciousness is contagious, and that exposure to people who are more successful has the potential to expand your thinking and catapult your income,” say Steve Siebold “We become like the people we associate with, and that’s why winners are attracted to winners.”
Ultimately, the majority of people who succeed at growing wealth don’t do it because they hit the lottery or got lucky with one big investment or business deal.
They succeed because they took the time and care to get the little things right… and they did that over and over and over again. People who become wealthy nail the fundamentals and they practice those good habits consistently.