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3 Simple Steps to Building Wealth

To accumulate wealth...

  • You need to make it. You need a long-term source of income that's enough to cover your basics.
  • You need to save it. You need to develop a proactive savings plan.
  • You need to invest it prudently.

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3 Simple Steps to Building Wealth

3 Simple Steps to Building Wealth

https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/

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Key Ideas

To accumulate wealth...

  • You need to make it. You need a long-term source of income that's enough to cover your basics.
  • You need to save it. You need to develop a proactive savings plan.
  • You need to invest it prudently.

Making Enough Earned Money

Earned income comes from what you "do for a living."

  • Consider what you enjoy as you will be more likely to succeed financially.
  • Consider what you're good at and see how you can use those talents to earn a living.
  • Consider what will meet your financial expectations.
  • Consider how to get there. Determine the education requirements, etc.

Evaluate your income situation annually.

Saving Enough of It

To ensure that you save enough money, your wants should not exceed your budget.

  • Track your spending for at least a month.
  • Trim the fat. Break down your wants and needs.
  • Adjust according to your changing needs.
  • Build your cushion. Aim to save around three to six months' worth of living expenses.
  • Contribute to a retirement fund and try to get the maximum your employer is matching.

Investing It Appropriately

Assess your situation. Build an investment policy statement that will provide general investment goals and objectives. 

  • Determine your return and risk objectives.
  • Determine your investment strategy, possibly with a financial advisor, based on your investment policy statement.
  • Invest your equity and fixed-income exposures over a range of classes and styles.

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Create a Spending Plan

The wealthy see money as a resource and a tool to help them build wealth over time.

Know your income, your expenses, how much is earmarked for additional expenses and how much for other f...

Spend Wisely

Learn how to spend on the things that matter to you. 

Consider your values and priorities when you draw up your spending plan. If going on vacation or giving to a charity is important to you, include those items in your spending plan.

Pay Off High-Interest Debt

Pay down your high-interest debt as quickly as possible. 

While some types of low-interest or tax-deductible debt can help you along the way, high-interest debt rarely has a good purpose.

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Frugality

Frugality means resisting the temptation to spend more than you earn.

Discipline

Self-made millionaires choose moderation over extremes. They often buy used cars, don't live in the most expensive houses and don't try to time the investment market.

Hard Work

A defining characteristic of many millionaires are their willingness to work hard and stick it out in high-paying careers until they are financially independent.

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Increase Your Income

Formal education, practical experience in your field and doing a good job is important to earn a high income.

Most professionals see their incomes increase over time. If you can gain high ear...

Save and Invest

You’ll only build wealth if you save a reasonable percentage of those earnings.

  • If your employer offers a 401(k) plan, increase your contribution.
  • Automatically send a portion of your money to your savings or investment accounts before you can spend it.
  • Purchase a home instead of renting. You'll get your house payments back in the form of equity.
  • Pay off anything you owe to avoid paying interest.
  • Maximize the interest earned on your savings.

Cut Wasteful Spending

Periodically evaluate your spending and look for sources of savings.

  • Invest in more sustainable technology for your home. For instance, if you watch cable, buy only the channels you are watching.
  • Improve the insulation of your home to reduce the amount you are spending on electricity and gas.
  • Consider buying in bulk.