If you want to secure your future, you’ll probably want to build wealth. After all, building wealth is the only way to secure your future and make sure that you can retire early.
But this got me thinking, what are the best ways to generate and begin building wealth, regardless of your age. However, the younger you start, the earlier you can retire, or the better retirement you can live.
What is Wealth?
Before we can try to understand how you can build wealth, we first need to define the term “wealth”. After all, there are several ways you can define “wealth”.
Is it being featured on the Forbes 400? Is it having a fleet of private jets and luxury yachts at your disposal? Is it being having a massive house and car? Is it being able to retire early? Is it able to choose your future?
Technically, it can be all of them. Technically, it can be none of them. For the purposes of this article, I’m going to be using the latter two as my starting point.
Before you set off on this journey, you’ll also need to decide which of them it is. Is being wealthy just having a flashy car and big house? Or is it being the richest man in the world? Or is it sitting on a beach from the age of 45 until you die?
You have to decide. I can’t do that for you.
How to Build Wealth
If you follow the next steps, you stand the best chance of building wealth!
Make Money
In order to build wealth, you first need to make money.
Job
Most people make their money from a job that they work. For most people, its their only source of income. Regardless of what your company is paying you, it isn’t enough.
The price of just about everything increases by 3% a year, in recent years, your salary probably hasn’t. As such, you need to try to get that extra 3% by working hard and asking for it- they aren’t giving it out for free anymore.
Over the year, you should make a list of your accomplishments, and how you have made the company you work for, more profitable. Then, once a year, you should talk to your boss about a raise, highlighting these accomplishments.
They should then be able to see that you deserve a raise, and promptly give it to you. By getting a raise each year, you are attempting to keep up with inflation, so you don’t have to delve into your savings or investments just to live.
Side Hustle
When your friends and colleagues go home, the vast majority of them sit and watch TV in the evening. Instead of doing what they do, you could decide to do something different that also makes you money.
This side hustle can be just about anything, ranging from blogging to selling things on Amazon and/or eBay, to photography. This allows you to further your current income, without relying solely on your day job.
For most people, their side hustle isn’t seen so much as a job (even though they are making money from it), but as a hobby. Take this blog for instance, yes, I make money through ads, but I love writing it, so it isn’t really a job!
Who knows, maybe one day your side hustle will make so much it does actually become your day job? After all, many successful people started their businesses as a side hustle!
Inheritances
In your life, you will likely experience the loss of some of the closest people around you. This is very sad, I admit. However, their passing does often present something that will help you build wealth: inheritance.
I’m going to assume that you don’t have Jeff Bezos or Bill Gates for parents or people with you as their next of kin. So chances are, that you won’t receive an unexpected windfall worth millions of dollars (although it is possible).
A recently released study by MoneyWise states that the average inheritance (in the UK) is £11,000 ($14,000). Whilst it isn’t very nice to think of it as “profiting off the dead” it does give you an extra £11,000 that you wouldn’t have otherwise.
However, this is widely dependent on who your parents are, and how much they’re willing to give you. After all, people like Bill Gates and Jeff Bezos aren’t giving their children anything! Plus, it might be a while until that happens.
Save Money
From the money that you make, you should save some of that money. Most of this money should be put towards an emergency fund, rather than a savings account (because they yield less than other types of investments).
This emergency fund will protect you and your wealth in the event of an unexpected expense. By most estimates, an emergency fund should be enough to cover five months of living expenses.
By doing this, you create a buffer in the case that you lose your job, make a bad investment, or if your side hustle fails. It also makes it so that you don’t have to worry about selling some of your investment portfolio.
If you do end up selling part of your investment portfolio, it make takes years for you to build your wealth back up to the point it was before. An emergency fund simply makes sure that doesn’t happen.
This money should be easy to access, yet hard enough to access in order to prevent getting too tempted to use the money. An appropriate place for storing this money should be a savings account with a bank you don’t normally use.
Live Well
In order to build wealth, you also need to live well.
Budgeting
Budgeting is perhaps the most important step if you want to build wealth. You need to take everything you earn per month and subtract everything that you spend. If you don’t use something, what’s the point of paying for it?
As a part of you budgeting, you should also try to reduce living expenses year on year, so that you aren’t wasting money. For me, I like to make it a game, that I play with my wife.
We tend to ask ourselves things like “How can I reduce this grocery bill?” or “How can we have a fun day out without spending more than $50?” We have got it down to such a fine art that it comes down to pennies at the end of each month!
By doing this, you are essentially increasing the amount of money you can spend each month. As this money isn’t going towards bills, it can be used in other ways- mainly investing (more on that later!)
Debt
Debt is the largest reason why most people never build wealth. Some people simply have too much debt to pay off, and not enough time to pay it off (before they are forced into retirement or are no longer with us).
If that sounds like you, you are not alone. If you have a lot of debt, the best way to start trying to build wealth is to start paying that debt off. Debt such as mortgages are generally low interest, but the most common debt- credit card debt is high interest.
Assuming that your debt is high interest, you need to start paying it off as soon as possible. You need to find every last dollar you can each month and pay that high interest debt off.
This is due to the fact that most high interest debt costs more than what you’d make from investing (either in stocks or real estate). Investing before paying off high interest debt is essentially a waste of time- you will get nowhere.
Most stocks average 7% gains year-on-year, compared to the 10% of real estate, with the average credit card interest rate being 18%! Just as your investments compound, so does your debt. It doesn’t take Einstein to realize that 18 is bigger than 7 and 10.
Be Happy
It might sound cliché, but in order to effectively build wealth, you do need to be happy. After all, there’s no point building wealth if you (and potentially your kids and grandkids) can’t enjoy that money.
In order to build wealth, you will need to make sacrifices. You will need to forgo those nice vacations and fancy cars. But here is where I sound like the biggest hypocrite ever- don’t let in get in the way of life.
If you’re in your twenties, you should not expect to never go on vacation, or do nice (but slightly expensive things). Let’s face it, that is probably never going to happen- after all, we all need a break.
However, you can do this in a cost-effective manner. If you want to go abroad, use a low-cost airline and don’t travel to a touristic place, or in the peak tourism months.
If it has been your dream to go parachute diving in the Maldives, go with friends and share the expenses- you’ll all get the same experience (or maybe even a better one!) at a lower cost per person.
Invest
With the money that you make, you shouldn’t just save it, you should also invest some of that money too.
Stocks
Investing in the stock market is perhaps the most common type of investing. With that being said, there are several ways you can go about investing in stocks, the two most common being: using a broker or using a financial adviser.
Using a broker means that you will have to pick your own stocks and decide when you buy them and for how long you own them. Using a financial adviser, however, removes that control, where they do it for you, for a price.
If you decide to use a broker, you can do this very simply- by finding an investment app that you like. Next you will have to find stocks to invest in. However, if you follow rule one investing or value investing, you’ll be just fine!
However, this is time consuming and very risky, which is where trained financial advisers come in handy. They remove all of the risk, and make it so you are almost guaranteed to make a profit each quarter.
With that being said, you will probably want to use something like the Rule of 300 to get out money in retirement, which will prove costly with a financial adviser. At the end of the day though, it’s just a matter of priorities I suppose.
401(k)
I personally don’t like 401(k)s. But then again, I have never had one.
Essentially, a 401(k) is your company’s retirement fund. In most developed countries, each month your employer takes part of your salary and pools it with the rest of the money your company takes from its employees.
Using that money, the company invests in assets that are safe and are likely to continue to grow, regardless of the political and economic climate.
Once you retire, you should then be able to access money from that each month in order to pay for living expenses etc. The more you invest during your working life, the more you’ll be able to access each month in retirement.
401(k) contributions are also tax deductible, as well as counting to your net worth. You can’t, however, pass your 401(k) over to your children or remove your share from the 401(k).
Real Estate
Part of your investment portfolio should also consist of some real estate, as to avoid over diversification. This real estate could consist of office buildings, houses and/or apartment buildings.
If you decide to invest in housing or apartments, you could even try house hacking– where you earn money just by living in your own home. As a kid, my father used to tell me:
Real estate is the biggest source of wealth in the world. Most of the world’s wealth isn’t in gold or stocks, but instead is actually in real estate!
Not only will investing in real estate pay you per month, but also help you to build wealth too! This is because real estate value increases by 10% on year-on-year, on average.
Other Investments
If you really want to build wealth, you’ll leave your 401(k) behind and invest in stocks and real estate. However, they aren’t the only other types of investments you can have.
Other investments include REITs, bonds, mutual funds, index funds, ETFs, gold and cryptocurrencies. With the exception of cryptocurrencies and gold, these other investments will pay you each month/year, just for owning them!
Similarly to stocks, real estate and 401(k)s, these other investments too grow over time, and add to your net worth. However, these other investments are generally seen as more risky and with lower ROIs.
With that being said, you do not really need to have “other investments” such as these in order to build wealth. The main reason you may want to have them is to diversify your portfolio, although a mixture of socks and real estate is plenty.
Conclusion
There are several ways you can build wealth. Just because I have laid out the various different things you need to do in order to build wealth, does not mean you need to follow every step.
Although, following each step is probably advised. If you don’t want to invest for whatever reason, you don’t have to. If you don’t want to save, only invest, you can. Others, you don’t even have to do- investing in “other” investments.
However, it will take you longer to build the amount of wealth you want to. By investing, saving and living a (mostly) financially healthy lifestyle, you will be able to build wealth.
If you start early enough, you might even be able to build up so much wealth that your family doesn’t have to work for the foreseeable future! One day, it may be your family who carries the same weight as “Rockefeller”!
Although, I might be getting ahead of myself.
What do you think is the best way to build wealth? Tell me in the comments!
