Contrary to popular belief, you don’t need to come from money to become wealthy.
No matter what your starting point is, you can (and will, with the proper habits, strategy, and diligence) become wealthy. To begin your journey, you just need to put a few simple steps in place.
As long as you stick with this plan over the long term, you (and anyone else) will be able to climb your personal finance mountain and achieve financial independence. Keep reading to learn the best way to start accumulating wealth.
1. Change toward a Money Mindset
The first thing you’ll need to do is change your mindset and approach towards money. There are a few components to this. First, you will need to commit to reading and learning more about how money works. Sadly, this is something that isn’t taught in schools. According to a study from the TIAA Institute and George Washington University, 25 percent of Americans don’t have a basic knowledge of financial concepts.
Sites like The Financial Basecamp are a good place to learn more about financial concepts and how you can apply them to your life. You can also use other financial resources to learn and help define terms.
It’s also a good idea to re-examine your approach to spending. Many people are falsely attracted to status symbols like Lamborghinis and dining at expensive restaurants. While these might look good on social media, they won’t be contributing to your financial journey. That’s why many of the wealthiest people in the world prefer to spend big on investments or real estate than wasting money in frivolous ways.
2. Come Up With a Budget
It’s important to understand your starting position. The best way of doing this is by working out your budget. For some people, this can seem like an intimidating task. But it doesn’t have to be complicated. You just need to determine how much you are making vs how much you are spending.
To create a simplified budget, here are the steps you need to follow:
- Calculate net income. Think about the amount that you are currently making. This is your total take-home pay. If you are on a salary, take away any tax deductions or contributions to health or education programs. If you are a freelancer with irregular pay, use an average fortnightly pay.
- Calculate monthly expenses. This includes things like rent, food, and entertainment expenses. You can use your bank records to help you keep track of these expenses.
- Determine fixed and flexible expenses. Once you know all the things you are spending money on, you can break them down further. There are two types of expenses. Fixed are things that you can’t (or are harder to) change. This includes things like rent or mortgage payments, car payments, and childcare expenses. Flexible expenses are expenses that you can more easily adjust. These include things like entertainment, eating out, gifts, and groceries.
For some people, seeing these figures in black and white can highlight a sobering reality. You might find that you are in a worse financial position than you would have expected. You may realize that you’re losing money each month.
But the important thing is to make sure that you don’t panic. You can take control of the situation with the knowledge that you’ve gained. Take a look at your flexible expenses. These are some of the areas that you can cut back immediately. Can you cook at home, instead of eating out? Can you cancel a subscription service? From there, you can begin creating a plan to cut down on the big three – food, transportation, and housing, to really set your budget up for success.
It’s important to keep track of your budget. Over time, you’ll be able to see the benefits of your hard work, as your disposable income starts to grow. Mastering this basic principle will help you begin to accumulate wealth.
3. Live Below Your Means
Once you have your budget in tact, it’s time to put it into practice: get into the habit of living below your means. The concept is simple. Don’t spend more than you make. This leaves you with a little extra income at the end of each month, which you can save.
Though it sounds easy, this can be a struggle for many people. It will require a change to your financial mindset. You may need to get used to living a more frugal lifestyle, cutting back on the amount of money you are spending going out to restaurants, etc. You can also try to purchase more second-hand items, rather than buying things new. You can become a responsible consumer – not buying things without a proper need. You can wait until there is a sale before you buy, or use discount codes to reduce the cost.
You might be surprised to learn that many millionaires are known for being frugal, opting to save money instead of spend it. For example, Warren Buffet lives in a modest home and spends less than $4 on his breakfast each day.
This doesn’t mean that you have to stop going out or enjoying yourself. But you will need to be more conscious and deliberate about the way that you are using your money. Set a budget for the shopping trip, and stick to it. This might be a little uncomfortable at first, but it will get easier over time. Learn to spend on things that make you happy. Spend luxurious, but only if you’re properly beginning to accumulate wealth. If you want to learn more about this concept, check out this post.
4. Start Paying Down Debt
The next thing to consider is the amount of debt you have. Before you can start accumulating wealth, you’ll need to clear those debts. You can’t have positive wealth with negative debts.
To get started, write down the value of your debts. Beside each one put the interest rate. Then, begin to work on clearing them. There are two common methods you can approach this:
- Snowball method. The debt snowball recommends that you start with the lowest debt first. This will be the easiest to pay off. This will motivate you, as you move to progressively larger debts.
- Avalanche method. In this approach, you should start with the debt that has the highest interest rate.
You might also want to try consolidating debts into a payment plan, so you just have one monthly repayment to make. Or you can try approaching creditors directly if you are unable to make payments. They might be willing to negotiate a lower monthly rate or pause repayments altogether.
5. Create an Emergency Fund
Life is full of unexpected curveballs. You might be involved in a car accident or lose your job. If you face one of these hardships, you’ll be able to turn to your emergency fund. This money is designed to get you through these difficult times, so you don’t need to go into debt. Plus, a fully-funded emergency savings account will give you peace of mind. You’ll know that you are financially prepared for anything.
Sadly, many Americans don’t have an emergency fund. According to a new study, 25 percent of people don’t have any savings at all. 51 percent don’t have enough to cover more than three months’ worth of expenses.
It’s estimated that you should aim to have three to six months of expenses in your emergency fund. This is one of the most important steps on your journey to financial independence.
6. Develop More Income Streams
Once you have the basics in place to control how you spend your money, it’s time to focus on boosting the amount of disposable income you have. One of the best ways of doing this is by starting a side hustle.
There are lots of options that you can explore, depending on what you are passionate about. Ideas include:
- Pet sitting
- Dog walking
- Becoming a freelance writer
- Taking surveys
- House cleaning
- Housing cleaning
- Starting a blog
If you are interested in this topic, check out this blog post on the topic. These side hustles aren’t going to get you rich. But they will help you save money and boost your net wealth.
7. Increase Your Income
While having a side hustle is important, you should still be trying to increase the income from your job. There are a few ways that you can do this:
- Learning new skills to increase your effectiveness
- Asking for promotional opportunities
- Ask for a raise
- Making yourself invaluable in your role
- Working additional hours
Many employers will offer a three percent pay rise each year. If you have been working for your company for a few years, and haven’t seen a pay increase yet, it’s time to ask your boss. If they are unsure, you can try giving them a few weeks to think about it. If they refuse, you can start to look for new employment that offers a more competitive rate.
8. Invest Your Money
To become wealthy, you need to make sure that your money is working for you. This means that you start to invest money wisely. You need to choose an asset that will grow in value over time and will provide you with a source of income.
There are a few examples of assets that will do this, including:
- Dividend-paying shares
- Income from rental properties
- Buying bonds
If you aren’t confident investing, you might want to get an ETF like SPY. This tracks the top 500 companies on the market. It’s one of the largest ETFs in the world. Though it might be passive, it will often beat actively managed funds. For example, in 2021, 80 percent of fund managers underperformed.
Remember to diversify your investments. Don’t put everything into stocks. Keep some in bonds, according to how aggressive you set your asset allocation. This ensures that you are protected against a market downturn.
You can also talk to an accountant or wealth advisor. They will be able to discuss your current financial situation and provide some hints on how you can invest for future growth.
9. Use Dollar Cost Averaging to Your Advantage
Once you have the basics of an investment portfolio, it’s time to help it grow. The best way to do this is with dollar-cost averaging. This simply means that you will add a small amount to your portfolio each month, regardless of the price of the stock.
This reduces the risk of purchasing a peak in price. It will also work well, even during times of poor market performance, as it helps to reduce the volatility in share price performance. It also means that you can start investing immediately, without the need to start timing the market.
This is more effective than trying to buy the dip. Plus, it is a good passive strategy, so you don’t need to follow the movements of the financial markets too closely. Doing so will keep you sane, and steadily help you grow your wealth.
Remember that you will need to hold these investments for the long term to see the benefits. Expect to hold for a minimum of five to ten years. This will average out poor market conditions.
10. Set Achievable Financial Goals
By now, we should have the basics in place. Now it’s just a matter of working towards achieving these goals. At first, the wealth-building process can seem so slow, and financial independence can seem far away.
But it’s important to take it in stages:
- Clearing debt
- Building Savings
- Grow and Invest
To keep you on track, you need to maintain and set achievable goals. Make sure to give yourself a clear deadline. Here are some examples:
- Saving $2,500 over the next three months
- Creating a fully-funded retirement fund over the next six months
- Making regular deposits into your investment account every month
Have a vision of your financial mountain and what the peak of it is. From there, create actionable steps to begin your climb.
11. Stick to the Plan
Remember, it’s a marathon, not a sprint. It can take several years before you start to see results begin to compound. But it is possible. You just need to make sure that you have the patience to stick to the plan.
Thanks to compound interest, your net worth will grow exponentially. Though it will be slow at first, it won’t be long before you are sitting on a nice nest egg.
The truth is that anyone is capable of becoming a millionaire. There are lots of stories of people who have gone from deep in debt, to building lasting wealth. All you need to do is remain committed to this process over the long term.
We’ll be with you every step of the way.
Climb on, FinBase.