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How to Build Wealth
Building Personal Wealth
Proven Strategies for Building Personal Wealth - Part I
The hardest part of building personal wealth for me was getting started. There are so many unknowns and things to do, but if you follow these tried and true strategies you will be on the way to wealth and better yet you will be attracting wealth into your life.
Let me explain...When you start building wealth you will slowly start getting access to more opportunities to increase your personal wealth. You will have compound interest working for you, you will have access to credit that you can use to build more wealth and, more importantly, you will set off a wealth attraction snowball in your life.
When you have educated yourself enough on personal finance and building personal wealth, like I have, you start recognizing patterns and most importantly the fundamental principles of building personal wealth. You will not find any AHA! moments here, just sound, proven ways to that you can use for building personal wealth.
(You can pretty much summarize 80% of all the books on personal finance out there with the principles for building personal wealth explained in The Richest Man in Babylon by George S. Clason )
Don’t Live Below Your Means; Live Within Your Means
Other than debt, nothing will derail you faster from the way to wealth than living above your means i.e. spending more than you make. Although this seems basic to many, from personal experience I know that this can happen to you unexpectedly.
You can have a good month where your expenses were controlled and you even had money left over at the end of the month…but then the car breaks. You just did not have $1,200 in car repairs budgeted for that. A surprise like that can easily set you back 3, 4 or more months back in your household budget.
Because it is a fact that Murphy is just around the corner, living within your means, includes setting money aside regularly for an emergency fund, budgeting money for investing and only buying things that you have the money for.
Creating a personal budget
, planning your family finances
and diligent money management are tools available to anybody that can help with this aspect of building personal wealth.
Notice I did not say invest in the stock market. Investing in the stock market should be part of your strategy for building personal wealth but it is not the only type of investing available.
You can invest in stocks, bonds, mutual funds, exchange traded funds, residential real estate investing , start-up businesses, tax liens, notes and on and on.
The important thing is that you do it; you have to put your money to work for you in one or more types of investments.
| Building Personal Wealth-Compound Interest:
If you invest $100 at 10 percent interest,
you will earn $10 interest in a year and have $110 at year-end. If you take the $10 in interest out of the account and leave the $100 invested, you will earn another $10 the next year. If you take that interest, you’ll earn another $10 in the third year, or a total of $30 over the three years.
On the other hand, if you keep the interest invested, you will earn $10 the first year on $100, $11 the second year on the $110 and $12.10 the third year on the $121. The extra dollars come from earning interest on your interest as well as on your original investment. Compounding annually at 10 percent adds an extra $3.10 in three years—not a huge deal. But in just over seven years, your $100 investment would double, to $200. In another seven years, the $200 would double again to $400—
a pretty big deal.
Investing helps you in building personal wealth mostly due to the power of compound interest
(see sidebar). But in order to make this work you HAVE to do two things:
Start Early: time is a requirement when using compound interest plus the longer you invest the more money you will be able to invest. Even if it is only $50 a month that you put into an IRA for a high-schooler, it is better than waiting “until you or they have the money”.
Make it Automatic: One of the reasons why 401(k) plans are a good investment is because the money gets deducted from your paycheck automatically and deposited into your investment.
Many years ago I set up an automatic withdrawal from my paycheck into my investments. I didn’t see it, feel it or have to write a check for it. After a while you get so used to it you almost forget about it. But in time it accumulated heavily and was responsible for great part of my current portofolio.
Increase Your Income
It sounds fundamental but many people want to increase their income so they can buy more “stuff”. If you say you can’t invest or save now because you don’t have enough money, it is possible that would not change even if you had more money. People increase their spending in proportion to their income. That strategy allows them to have more things but does nothing to increase their wealth.
When building personal wealth you want to increase your income so you can keep more and more. This approach goes hand in hand to living within your means. The more money you make the more you should be putting into savings and investing. Aim for a MINIMUM of 10% of your income to go into your savings/investments .
Two approaches for increasing income that are available to most of us are to increase your salary and build a side business.
Find out what you need to do to increase your salary whether in your current position/company or with a new one. There are too many approaches to doing this to discuss here but the basis is to increase the skills for which you were hired (or acquire new ones) and increase the value you add to your company and to the bottom line (for great information on how to do this see #7 in references).
Constantly improve yourself professionally, find out who gets paid the most in your company and figure out what you need to do to get there. Come in earlier, stay later. Find out what you are worth and always be on the lookout for something better when it comes to your career.
Building a side business
This is something everyone should do regardless of how secure you think your job is, for two reasons: one, you never know when the company will not need you anymore.
As I recently discovered, all it takes is one economic recession, slowing sales and your job is history. There is no such thing as job security so to fool yourself by relying solely on one source of income is ludicrous.
Second, even if you keep your job having a side business allows you to increase your income so you can save/invest more.
Create a side business in something you enjoy - you get to choose - so choose something attractive to you. The possibilities are endless; I chose real estate and this website. Both are activities I enjoy a lot and can easily spend hours doing because of the creativity and fulfillment involved.
You can develop a product, provide a service, sell something that you only do, freelance work as a writer, consultant, photographer, an e-bay store, copy writing, stock trader, blogger, sell and buy notes, pet sitting and on and on…
The bonus is that if you really hit on something you enjoy and makes money you could end up leaving your J-O-B to pursue it on a full time basis. Many, many successful businesses have been started this way. Or, it could provide a source for a second career when you are done with the first.
Have a Plan
Building personal wealth, like any other complicated undertaking, requires a plan. I have discussed the process I used to plan for personal financial planning and how it has helped me. Although you should tailor such a plan for your unique conditions and circumstances the most important thing is that you have a plan. If you are looking for a great reference on financial planning I recommend you read Die Broke by Pollan and Levine .
A plan will give you focus and allow you to more clearly see how you can get to where you want to be. When specifically looking at the financial aspects of your plan I would recommend you include the following:
- this will set the starting stage for your plan. Challenge yourself when goal-setting
, be clear and specific of what you want and when do you want to have it and keep your goals in front of you constantly. Also, make sure your goals are aligned with your values, principles and what you really want out of your life.
- Investment Choices – I already said is not a matter whether to invest or not so you want to choose where to invest. Educate yourself so you can make an informed decision and develop an investment strategy.
- Asset Allocation – Basically this means that you are going to have different pots of money invested in different types of investments. You must decide how much money you are going to be putting in each pot. The number of pots and amount in each will change with your age and/or life conditions but you must manage it.
- Hire Help – successful investing can be as easy or complicated as you want to make it. But financial planning requires time and education. I started investing back in 1996 with a professional financial planner, because I knew I wanted to invest I just did not know how to do it. His services were very helpful to me and although the investment choices I made with that planner were not as good as the ones I have now they were far better than having none.
If you don’t have the time or interest, don’t have the knowledge or have special circumstances I would recommend you consider enlisting the help of a financial planner. There are many types available and you must educate yourself on how to hire one because there are some (a minority) that are just a stone’s throw away from being crooks.
Having said that, many people would benefit from their service when building personal wealth but nevertheless they work for you and as such you must manage them and you should always clearly understand what they recommend and why. After all, it’s your money – you make the decisions, not them.
- Plan an Emergency Fund – You do not want to be relying on credit cards, loans or a home equity line of credit to provide cash for an emergency. Your emergency fund can provide a cushion in case of unemployment or taking the sting out of that expensive and unexpected car repair – an emergency fund is crucial to prevent going into debt. If you don’t have one already plan on how you are going to build one, whether setting aside money from every paycheck, having a garage sale, doing overtime, selling stuff on e-bay, etc. EVERYBODY NEEDS AN EMERGENCY FUND.
If like me, you are a sole provider for a family then I would suggest at least six months of income set aside, nine would be better. A single person or a couple where both work can get away with less but there would be nothing wrong with planning on six months of expenses anyway.
By far the greatest benefit of an emergency fund is that in case of unemployment you don’t have to run out and get the first job you find. Since you will not be desperate you can actually choose the job instead of it choosing you.
There are even more strategies for building personal wealth and attracting wealth that I will cover in the second part of this article The Road to Wealth...>>>
Building Personal Wealth References/Recommended Reading:
1. Banking & Community Perspectives, 4th Quarter 2000: http://www.dallasfed.org/ca/bcp/2000/bcp0004.pdf
2. Bankrate.com, Financial Literacy - Guide to Building Personal Wealth: http://www.bankrate.com/brm/news/Financial_Literacy/Financial_Literacy_toc_a1.asp building personal wealth
3. The Bold Truth by Adam Bold: http://books.google.com/books?id=DI-3pI4_0WYC&printsec=frontcover&dq=building+personal+wealth#v=onepage&q=&f=false
4. Die Broke by Steve M. Pollan and Mark Levine, page 99: http://books.google.com/books?id=1AQ0KhC0zWYC&printsec=frontcover&dq=Die+broke#v=onepage&q=&f=false
5. Richest Man in Babylon by George S. Classon.
6. Why We Want You to Be Rich, Trump and Kiyosaki, page 313.
7. Automatic Wealth by Michael Masterson - http://books.google.com/books?id=aJwqAAAACAAJ&dq=automatic+wealth
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