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As anyone who is rich knows it is often not something that just happens. Instead, getting rich is usually the result of years of financial discipline, investing, and following principles of money and wealth building. However, as you might know, what works today might not have worked twenty years ago.
Similarly, what worked twenty years ago might be outdated today. Because specific financial strategies might fluctuate, it is best to identify those principles of wealth building that remain the same, month after month or year after year. These types of strategies are critical to becoming rich because they help you avoid getting caught up with mob investment mentality or so-called market razzmatazz.
One of the key components in the principle of ensuring you, yourself, are paid before anyone else is the idea of automation. Specifically, you should establish some sort of automatic savings system that debits a predefined amount from your paycheck and deposits it into some sort of savings account.
The savings account can be a standard savings account, or it can be a 401k or IRA. In terms of following this step, the specific type of account does not matter. What matters is that you automate that which is most important and do so at a minimal rate of approximately 10 percent. Once you do, everything else that by definition is less important can then be taken care of.
In the modern era, automatic deductions can, of course, be setup at your place of employment. However, even if you own your own business or work on gigs, you can use an app to automatically transfer money from your primary account to some type of savings vehicle.
In most societies, the primary drive is to earn and purchase. Media communicates to the masses and spread the message to buy what we need and more--now. Often what we end up buying, we ultimately cannot afford. Even if you can afford it, so to speak, you might end up living paycheck to paycheck.
Successfully living below one's means is a multi-faceted piece of advice. First, and most obvious, it means living in such a manner that you do not necessarily buy every single item you can manage to buy. You might have the means to buy something, but you should not buy everything within your means because doing so will exhaust your funds, your savings, and your future.
Instead, the common practice, after you have automated your savings, is to calculate your buying power at 20 percent to 30 percent less than your actual net income. Doing so will ensure that you slowly build a buffer between you and insolvency. This buffer can later be transferred to savings. Additionally, if emergencies arise, and they always do, this buffer provides you the means to absorb the impact without dipping into your savings.
However, living below your means is only possible if you manage your money and know what you are spending your money on. A variety of financial apps are available to help you do this, and they help you identify individual expenses, and they help you track essential and non-essential expenses across various categories.
When you follow this advice, you will find, over the years, that you buy less expensive items than you could have managed to purchase, but the trade off is a growing net wealth because emergencies are typically outliers rather than the rule of thumb.
One of the foremost principles of money is to look for ways to invest your money such that your money earns on its own. This is done through your money earning interest, and wealth, itself, gradually grows as a result of compound interest.
Interest, of course, is money paid to your money as a result of leaving it in some sort of financial vehicle, such as a savings account or CD. Compound interest is the process of automatically reinvesting that interest such that it, too, earns money on its own. This compounding effect eventually snowballs, often growing your money in a fashion that exceeds your own earning capability.
Types of investment opportunities that help your money earn on its own include the following opportunities.
- small businesses
- online business that generate passive income
Other ways to help your money work for you is by investing it in a vehicle that earns dividends or even some sort of fund that continues to increase in value. The key to accomplishing this step is due diligence, which involves reading an opportunity's investment prospectus and familiarizing yourself with a variety of financial basics, such as historic returns, price-to-earning ratio, and fees.
Although the specific vehicle might vary, the principle of allowing your money to work for itself holds true in any era, making it much more profitable than sticking your money in a shoe box.
Your first asset is that big wad of cash you want to spend. However, once you invest it into various instruments, you then have multiple assets. It goes without saying that you should insure that first asset and any subsequent other assets from loss. Putting this principle into practice can be accomplished via a variety of ways.
First and foremost, you should look for investment opportunities with a low or reasonable risk-to-payout ratio. Second, you should minimize fees, both upfront and on the trading end, because fees are a form of loss. Other ways to minimize loss include looking for such protections as FDIC insurance, which protects accounts against theft or fraud. Finally, spreading out your investments across multiple assets instead of dumping all your money into one opportunity can help minimize loss because if one opportunity falls flat, you still have your other assets to help you absorb the loss.
As the old adage goes, you should always look for the best future but plan for the worst.
The key phrase here is "when it is profitable." This might mean waiting to buy a house until the market drops a little and home prices, in general, decline. For instance, it might be better to buy a home in the winter than in the spring. However, the moment of profitability might mean when interest rates drop significantly, which decreases the amount of interest you pay each month.
Finally, the moment of profitability might be house specific. For instance, if you find a fixer or some other house that is, in itself, affordable or available below market rate, even if the housing market might be generally expensive and interest rates are not terribly low, it might be profitable for you buy.
In terms of time to buy, the specifics vary, but for wealth building, you should buy when it is profitable to do so and not for reasons of emotion or convenience.
Of course, buying is not always the profitable option. For instance, renting might not allow you to put money into equity, but it might save you money on property taxes, insurance, and repair bills to make it more profitable than owning. Although property typically appreciates in value, sometimes in the short term, it remains flat, so you have to also determine how long you will live in the area. Basically, to make the determination if you will have more money in your pocket or equity in your property after a few years of renting or owning, respectively, you have to analyze your budget and determine which option seems more likely to produce profits.
All that money you have been saving as a result of following the first five steps should not be destined toward the purchase of a refrigerator, art collection, or boat. Instead, it should be designated for an account that earns enough interest for you to eventually live on when you stop working. That is the way of things: someday, you will no longer work, and when that time comes, you might want money enough to eat. You might also want money enough to enjoy yourself. If so, you probably understand the importance of financial discipline, and you might someday wonder there is a way to earn money automatically.
In today's financial environment, this is often called passive income. It is called passive income because you do not do anything to earn it. It just happens. You can establish the foundation to earning passive income buy launching a business that continues to earn while you are not working. Online, monetized blogs are often profitable once you establish yourself as a subject-matter expert. Affiliate sites work if you can find a niche market that is not saturated.
Finally, to successfully build for retirement, you should brush up on books that clearly outline how to do that. For instance, Retirement Planning: (Most Got it Wrong) Here’s How to do it! hits all the right milestones to help you plan for future savings.
One of the most obvious ways to earn money is to spend it not on things but on ways to increase your expertise or education. For instance, once you know more, you might be able to leverage that knowledge into additional ways to earn money. Spending money on classes to teach you computer programming will be much more profitable than spending that same money on a three-week vacation.
Other ways to invest in yourself include the following.
- joining a group of investors, financial coaches, or mentors
- attending educational seminars
- maintaining your health
In terms of investing in yourself, maintaining your health offers a means to protect against asset loss because you lower your chance of spending money on health bills. Additionally, if you are healthy, you have the ability to work, learn, or generate more income.
You should never enter into any investment blind. For instance, if you are considering purchasing a business, you should understand precisely the business model used to generate revenue. For instance, the business model, itself, should be clear regarding how current products or services meet current customers' needs. However, you should also understand how the business is able to continue to outperform potential rivals and how it maintains its profitability. Moreover, that business model should be able to easily transfer to your situation and capabilities and not rely on one or two specific clients, products, or processes that could be vulnerable to migration, market saturation, or suppliers, respectively. If a business model seems unclear as to how it profitably meets customer need--pass and continue looking for other opportunities.
This is a time-honored bit of advice that you probably already understand and have experienced or heard about in the news. For instance, stories abound about people who have gotten involved in investment schemes promising extraordinary returns. In doing so, money is lost--sometimes fortunes. The trick to knowing when to run is by recognizing some identifiers of a scam.
First, the potential payout for scams is often larger than average.
Second, there is a time lock or deadline for buying into so-called unbelievable opportunities.
Third, the unbelievable opportunity is available only via the person telling you about it.
Fourth, somehow, you--and not many other people--have a rare opportunity to partake in it.
Recognizing these traits of a scam can help you save money. However, one of the most important things to do is to listen to yourself when something seems wrong. Often, people do not listen to themselves and end up much poorer as a result.
Using a loan to secure money for investment purposes is one of the most risky ventures in existence, so before you run off to the bank for a $100,000 loan, you should understand that this tactic is only for experienced investors.
For most people, debt comes in the form of leveraging future earnings for consumables or belongings to be enjoyed now. This type of spending creates a money pit because the consumables are soon gone, requiring you to purchase or go into greater debt to obtain more. Additionally, belongings do not typically earn money, so the ongoing expense in the form of debt payments burdens your ability to make money without increasing your ability to earn.
Because debt is an ongoing obligation for you to give your money to someone else, you should endeavor to avoid it and only purchase something if you can purchase it all at once with cash. Of course, you should purchase it only if doing so allows you to adhere to all the foregoing principles.
Of course, the key to understanding wealth building is to understand and apply the aforementioned principles to your life. However, it is also important to know that these are only 10 important principles of many others included in George Samuel Clason's book, The Richest Man in Babylon. Going forward, you should follow principle seven and discover all the in-depth principles that will help you become rich.
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