Wealth is a term that can be defined in a number of ways for different people, depending on what’s important to you. For the purpose of this article, I’m going to be talking about monetary wealth. I’ll be discussing the top 5 strategies you can easily implement to start building wealth.
I’m no authority, and no puppet master economist. I do hold a recognised qualification as a financial planner in the UK, so I can confidently say that I’m in a better position to provide some financial guidance compared to Barry down the pub who knows exactly what the market is going to do and where you should put your money.
To keep things straightforward, I’m just going to be touching on a couple of basic topics. There are more books and articles written about personal finance and economics than there are rice farmers in China, so I don’t plan on covering every subject under the sun.
It’s worth bearing in mind that you can scuba dive as deep as you like into any of these areas, but I just want to give some general guidance, like a scaled-down version of a wealth treasure map.
1) Living within your means
This first point, “living within your means”, is the foundation to maintaining or building any kind of wealth. If you live pay check to pay check, it’s simply impossible to grow your net worth. From personal experience, I’m also well aware that living within your means isn’t as easy as it sounds and it really takes effort and discipline. My motivation for living below my salary has always been the opportunity to travel. Whenever I’ve been working, I’ve tried to put aside as much money as possible to allow me to then take a significant amount of time off work to travel around the world.
Creating a fulfilling lifestyle that falls below your salary can take time to develop. But it is something you absolutely need to master. If you spend months or years breaking even, or worse falling into more debt, you’ll struggle to create the life you deserve and something needs to change. That something is your mindset. Feel free to make arguments or excuses for why you can’t do this, but it’s that attitude that has kept you broke and treading water for years.
Look online, read articles or books, watch Youtube videos. Take your pick. Plenty of people out there have provided a ridiculous amount of free information detailing ways you can minimise your finances to live within your means. Some of this information won’t be applicable to your individual situation, but that’s okay.
Like Bruce Lee said, “Absorb what is useful. Discard what is not. Add uniquely what is your own.”
2) Automate your savings
This is sometimes referred to as “paying yourself first” and is a technique I wish I’d taken more seriously early on. Instead of relying on your own discipline to set money aside or waiting to see what you have left at the end of the month, set up automatic direct debits so that as soon as you're paid, a chunk of that money goes to work.
Having this money automatically go where it needs to go will prevent that feeling of loss when putting what’s left of your pay into savings. It’s much easier (and far less painful) to pay your savings first, and then see what disposable income you have left over. If you’re anything like me, whatever your account balance is, equals disposable income. So it’s important you get that money out of sight. If I don’t put that money aside straight away and leave it sitting in my account to look at, the result is always inevitable. I’ll make any excuse possible to spend it. Or I trick myself into a false sense of security, thinking that I won’t touch that money. Then surprise surprise it disappears like a rubbish magic trick.
Just try automation for a couple of months. I guarantee you’ll see your savings grow. Also you won’t even notice or miss that money going into your savings account. It will help to get rid of that feeling at the end of the month, you know the one. That sinking feeling when you look at your bank account balance and weep to the heavens “where the hell did all my money go!?”.
Another simple way to apply this tactic is to make sure you’re maximising any pension contributions organised through your employer. Doing this means that money will be removed from your gross salary before you can think about touching it, and before the government try and tax the crap out of your pay.
3) Pay off your debt
Paying off your debt whilst making sure you don’t take on any new debt is crucial when building wealth. How can you be wealthy when someone else has a chokehold on your wallet?
Two popular methods for attacking that suffocating debt:
- The Snowball Method - Grab a pen and paper (or your laptop or phone for any scriptophobes), list out all of your debts from smallest to largest. Set about paying off the smallest first and work your way up the list. The theory being that you will build momentum in your debt-smashing efforts and don’t get overwhelmed at the first hurdle.
- The Avalanche Method - Write out all of your debts in descending order from the highest interest rate (the one costing the most) to the lowest. Work your way through. This is the most economical way to attack debt, but takes more discipline.
4) Build an emergency fund
Delve into any form of financial advice from any source, and more often than not people will recommend an emergency fund, or a “rainy day” fund.
This is hugely important step on your road to building wealth. As much as you might try to be responsible, save and budget, life is beautifully unpredictable. It’s hard to anticipate when your car might break down. Or unexpectedly having to fork out for medicine. Or whatever else cost might hit you when you least expect it. It’s important to have an emergency fund so that you’re able to cover these ugly emergencies without having to borrow money or disrupting your savings plan.
Having this set aside will not only provide you peace of mind, but also a cushion of flexibility. If you’re able to save up an emergency fund equivalent to six months of expenses, imagine the freedom that can buy you. Instead of spending time miserable in a job and unable to leave, you can walk away and have the resources to find something more meaningful; or travel, or spend some time with your family, or whatever you choose!
There’s also the very real possibility that you might lose your job, or your financial circumstances drastically change. Having this money set aside in an easily accessible account will take a lot of weight off your shoulders and also put you back in the driving seat of your life and your finances.
5) Save and invest
Everyone has their own opinion on the best way to invest money, and there are plenty of ways to do it. The most common mistake for most people is that they make it unnecessarily complicated. Another pitfall is that they get too overwhelmed and scare themselves into state of stagnation. But you’re not going to be one of these people!
The easiest way to invest money and build wealth is through low-cost index funds. This is a passive form of investment, meaning you just keep investing over a long period, regardless of what the market is doing. Investing in an index fund provides you with the unique ability to own shares in heaps of companies across countless industries. Doing this provides you with a comfortable amount of diversification and also relieves you of the stress and research required trying to pick individual stocks and companies.
There are plenty of smarter people (and machines) than you and I who try and pick and choose individual companies to invest in, or predict what the market will do. Of those smart minds, algorithms, and superstar hedge fund managers, less than 40% beat the market.
So you have better odds betting on the whole economy rather than cherry picking. An index fund can give you exposure to the best performing companies on the planet (or in a single country). You don’t need to be a financial whizz, you’re essentially just betting on the best horses.
Investing in low-cost index funds is also a cheap way to invest. Of those few money managers who are able to beat the market, for the privilege of their expertise and knowledge you will pay. Unsurprisingly, they are often not the charitable kind of folk. The fees you pay for their services and tips can often wipe out (or at least mitigate) any gains they might or might not make for you.
I’d also like to point out that it is good to invest in what you know, and this is something I’ve done over the years. If you have a great understanding of property, invest in that. If your company is in a great financial position and offering a share scheme, invest in that. You get the idea, but just make sure that you don’t leave all your eggs in one basket. Even if you know every weave and crevice of that basket, a bird can still fly past and poop all over your eggs without you seeing it coming!