Building wealth is a very touchy topic, considering there are numerous “quick riches” schemes, which people still fall for, unfortunately. But it’s important first to note that there are no shortcuts when it comes to building wealth.
There are three basic steps you need to follow when you want to build wealth. While these basic steps seem simple in theory, implementing them poses quite a challenge to many individuals.
What are these simple steps? Well, to build wealth, you must;
- Earn money
- Save some money
Step 1: Making Money
Saving and investing money will not happen without this first step, making money. And it’s not as easy, and it may seem. You might be employed, running a business or working as a freelancer or consultant, and earning some regular incomes. The question, though, is whether you are making enough money.
If you are employed, that means you are earning a regular income. The same applies to anyone self-employed or working as a consultant or freelancer. As long as you have a particular source of income, you’re at least assured of some income.
You can try to lower your expenses as much as possible to ensure you have some money left after paying your bills.
But there’s always a limit to how much you can cut in costs. There’s no need to cut every expense and live a miserable life in a bid to save money.
What you can do, in this case, is try to earn some passive income, either through investments or other side hustles. Most wealthy people have multiple revenue streams to ensure they are covered if one income source doesn’t pan out.
Step 2: Saving Money
If you are making enough money, you need to start saving. The first step to winning this step is using a budget. You might be making enough money, but at the end of the month, you’re still behind on some bills, or you’re swimming in debts trying to keep up with a particular lifestyle.
With a budget, you will know how much you need to cater to your monthly expenses and what needs to be cut out for you to save some money. If you are starting to budget, here’s how to go about it:
- Start to track your everyday spending for more than a month.
- Have a breakdown of needs and wants, then find ways to trim the money spent on wants. Needs are the necessities like rent, food, transport, power, water, and clothing. Your wants are other extra expenses like cable bill, dining, entertainment and vacation.
- Keep adjusting your budget to suit your situation. If you’ve over or under-budgeted, keep revising, but don’t trim your expenses to the extent of hurting your everyday life.
- Build an emergency fund for at least six months. An emergency fund will cover you during emergencies like sickness or loss of the source of income. It’s best to have your emergency fund in a high yield savings account where it’s highly liquid but still earns you some return.
If you can manage to trim your expenses, you can use that money to build your emergency fund. You can also use other pitfall money, like bonus payments to build your emergency fund or save in another savings account, rather than spend that money.
Step 3: Investing
The third and final step to building wealth is investing. If you are earning enough money and have some savings, especially an emergency fund, it’s time you try investing.
Savings accounts are a sort of investment since they earn you a small return. But savings account are more of a conservative approach to investing. No one ever became wealthy from putting all their money in a bank.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen
If you want to build wealth, you need to be ready for some risk and build an investment portfolio with other assets like stocks and bonds.
To start, you first need to set your goal, risk, and return objective as well as your investment horizon. Are you ready to take minimal or higher risk, and are you looking for high returns? How long are you ready to invest before withdrawing your capital?
By answering these questions, you are better positioned to piece together an Investment Policy Statement (IPS), which should also guide how your investment manager should manage your investment if you are using an investment firm.
The investment policy will also help in asset allocation, where you determine what percentage of each asset class to have in your investment portfolio. While doing asset allocation, ensure your portfolio is highly diversified.
Even if you are focusing on stocks only, ensure you don’t invest in one stock. Let your portfolio have stocks from various industries like health, technology, and energy. You can diversify further to different sectors.