Aside from trying to win the lottery or having a multi-million dollar skill, wealth-building is more the product of habits and practices that consolidate wealth than it is how much money you make (since if you spend more than you earn, you will be broke).
Although we might not all make it onto the Forbes list of wealthiest people alive, increasing one’s personal wealth is not rocket science. Meticulous evaluation of your spending and earning habits can help to refine and enhance your asset management practices, allowing you to enhance your income stream and achieve the stages of wealth of your dreams.
What are the stages of wealth?
Wealth building is different, as people take a different road in building wealth, but here are some common stages that are often associated with building wealth:
- Survival stage: This is the stage where you are struggling to make ends meet and cover your basic needs, such as food, shelter, and clothing. At this stage, you may not have any savings or investments and live paycheck to paycheck.
- Stability stage: In this stage, you have established stability in your finances and can cover your basic expenses without worry. You may have some savings, a small emergency fund, and some retirement savings. However, you may still be in debt and have limited resources for investing.
- Growth stage: At this stage, you have built up a significant amount of savings and may have started investing in stocks, real estate, or other assets. You may also have paid off most of your debt and have a solid emergency fund. You are focused on building wealth and increasing your net worth.
- Independence stage: In this stage, you have achieved financial independence and no longer need to rely on a job or traditional income streams to maintain your lifestyle. You may have built significant passive income streams from investments, rental properties, or other sources. You can enjoy financial freedom and have the ability to pursue your passions and interests without worry.
- Legacy stage: This stage is characterized by a desire to leave a lasting impact and contribute to society. You may have built significant wealth and are focused on giving back through philanthropy or other means. You may also be focused on preserving your wealth for future generations and leaving a legacy that will outlast you.
What is the first step in building wealth?
The first step in wealth building is to establish a financial plan that considers your current financial situation, income, expenses, and long-term financial goals. This plan should include a budget that prioritizes saving and investing and strategies for reducing debt and managing risk. Additionally, it’s important to educate yourself about personal finance, including topics like saving, investing, and building good credit. You can build wealth over time with a solid financial plan and the right knowledge.
Refine your spending habits.
What most people don’t understand is that money is more of a tool than a resource. Just like a hammer, a washing machine, or a golf club, there’s a proper way to use this tool so that you can maximize performance while using this tool.
Knowing the techniques of how to spend and use money are essential to enhancing money’s role in your life (which generally leads to greater wealth). When you look at how many people spend their money and time, it’s not surprising that many people are not as wealthy as they could be when they spend their money on activities that either generate little emotional return on the investment or have much greater costs than expected.
Some examples include shopping for food without a budget and when you’re hungry, spending money on delivery apps rather than cooking, buying high-end clothing and constantly updating your wardrobe, and forgetting to pay bills on time. When you pay more for something than you don’t have to, and especially if you use credit to do so, then you expend financial resources that can be invested in more fruitful endeavors.
Likewise, since time is often equated with money, how people spend their time can directly impact one’s finances. Let’s say you invest in a nice HD tv. You come home from work and for about 3 hours a day, 6 days a week, you’re watching the tube: news, sports, movies, etc.
You sit around (maybe you order some delivery!), you check your phone and you try and relax. After a while, you notice you’re putting on some weight, bills and other needed issues have been put off and you may even pay for a cleaning service to take care of the mess in your home.
The problem is that when you spend on services that you can do yourself or when you ignore issues (such as cooking, bill payment, and exercise) that can incur greater costs down the road, you end up spending more money in the end. Does this mean you don’t buy new clothes or watch tv? No! It just means that if your goal is to increase your wealth, you need to spend your time and money strategically.
If you give yourself an hour a day to watch tv, then you will probably watch content that you genuinely find interesting while spending your other time productively (for those who really aren’t motivated, rewarding yourself after you’ve completed your tasks is a great compromise).
If you want new clothes, then restrict yourself to a yearly purchase and set a budget. Most importantly, when you have a bill to pay, pay it on time so you don’t have to pay exorbitant interest rates.
Ultimately, having a budget and spending plan, whether for food shopping, clothing, home-related purchases, and recreational expenses, allows you to visualize and itemize what you need, how you use what you buy, and how efficient you are so that you’re spending money on what’s important without wasting it on what isn’t.
Increase your revenue stream.
The first step, to budget your finances and spend better, is the most important step for the simple reason that it allows you to invest in the next step: increasing your revenue stream. When you have more money at your disposal, you can then invest it in important areas of personal development that can help you earn more money.
A simple example could be investing in a car or investing in a better place to live. If your skill set is one that requires commuting and you’re restricted to ride-shares or public transportation, you may be missing out on valuable economic opportunities to increase your income.
Likewise, investing in a better place to live, whether it’s a place you own, a nicer accommodation, or somewhere closer to where you work, can have a variety of improvements on your economic standing: decreased commute and associated expenses, a better quality of life, and, if you own your own home, increased equity. These are some simple investments in your lifestyle that can not only improve your life but also your earning capacity, all through refining your finances.
Unless you’re a rare investor who can manage to accrue millions in a low-paying position, you’re probably going to need to move up the economic ladder to expedite your wealth-building journey. How do you do that? Well, there are 3 strategies. First, you can use the money that you save from your refined spending habits to earn credentials that can improve your work performance or fulfill requirements for advanced positions.
You can take formal, credit-bearing classes (many offered online), you can attend less formal workshops or you can take time off to attend conferences. For those who are very budget-oriented, taking up hobbies in your free time can allow you to learn on your own (which can range from woodworking to computer programming) and many volunteer positions offer opportunities to learn while you contribute.
The second strategy is to work your way into a position with more responsibility, usually involving a mentor. Whether you work for a large company or a small business, there’s a high probability that someone there, particularly someone in charge, has a great deal of knowledge.
Staying later at your job to shadow this person, peppering them with questions about work-related projects, or simply asking them how they got to their position can lead to greater training opportunities, increased job responsibilities, or even managerial roles that can lead to greater earnings.
Lastly, improving your social skills or investing them accordingly can help to improve earnings. That doesn’t mean you have to be a brown nose or chat up a storm. It just means that having honed communication and presentation skills, the ability to negotiate and mediate, and the ability to take direction as well as manage projects will help to develop leadership skills that are highly sought in managerial positions that earn more.
The last, but still important, consideration is whether you should change your job, job title, or career track. While we live in a very mobile economy, it’s worth taking stock of how much time you’ve spent in a specific position, what training you will need in another position, how competitive it may be, and what your actual responsibilities will be to determine if a career change is worth it.
If it is, then the improved earnings and emotional well-being are enough to justify the transitional stresses involved. If it isn’t, you may be able to improve your current work situation and current earnings, by speaking with your manager, asking for more or different responsibilities that suit your skillset, or speaking with your colleagues to improve the work environment collectively.
Start investing appropriately.
While you can become exceptionally frugal and earn as much money as your work ethic and skill set entail the key to earning money while maximizing happiness also has to do with how you invest your money,
as well as your time and resources. Investments, particularly in index funds, create passive income sources that can leverage your liquid (cash) income as well as provide future investment opportunities in and of themselves. Most people think of investing as investing in the stock market, but thanks to a variety of lending agencies, you can enjoy a variety of investment instruments.
Some investment options, such as certificates of deposit or even treasury bills, come with lower rates of return but higher security of return. Others such as bonds, stocks, and mutual funds offer greater returns with less security, and the riskiest options such as options, futures, and even cryptocurrency.
Life insurance policies can also act as lending and investment opportunities depending on the type of policy that you have. Savvy investors can also engage in direct lending options to businesses or consumers, though risks may be higher, while socially conscious investors may engage in community-based lending, which may help to improve large-scale economic outcomes.
Ultimately, knowing your risk tolerance, investing goals and investment contributions can help determine what types of investments you wish to make. One popular investing method for generating wealth is the index fund. An index fund is either a privately or publicly managed fund that chooses a variety of stocks either within one market index (such as mining, technology, or healthcare) or across market indices.
The premise of the index fund ultimately rides on not putting your eggs in one basket, so that when one company doesn’t do well, another’s performance can outweigh it over the long term.
There are a variety of index funds to choose from and you can essentially create your own if you choose enough stocks (generally recommended to be at least 25) across different industries, but diversifying your investments can lead to substantial returns.
The 4 stages of wealth-building.
Diversify and intensify your portfolio.
Once you’ve honed your spending habits, maxed out on your income stream, and have made a decent investment in your investments, the key to managing wealth transitions to finding ways to refine your assets.
One popular method for managing wealth is to invest in real estate. The general premise for real estate investment is based on the limited supply of occupiable space relative to demand. Real estate investment isn’t a walk in the park, though, as one must specialize in commercial or residential real estate, refurbishing, or new construction, rentals, or sellable units.
You should also have a clear idea of how you want to be involved, whether as a property manager, contractor (for any repairs), or buyer/seller. Investing in a REIT, or real estate investment trust can give you a fair share of the real estate market without the intensity of managing properties.
Since minimizing taxation as well as preserving your assets for future generations is of value the larger your worth becomes, it’s also important to consider how to minimize expenses on your wealth-building assets.
For example, one popular method for avoiding taxation is to invest in individual retirement accounts, particularly Roth IRAs that avoid taxation after withdrawing assets. You can also donate to charities and receive a tax deduction. Many investors may also consider becoming part-time owners in other business ventures as a way to manage capital and diversify one’s income stream.
There are a variety of considerations to be made at each stage of wealth management, but becoming wealthy is a lifestyle practice and less a stroke of luck. For those interested, determined, and invested in improving their personal fortune, the above practices are proven wealth-building methods.