Everyone is searching for the formula to building wealth and unfortunately, there is no one formula on how to do it. As mentioned in our previous blog "What is wealth", wealth means different things to different people and to unlock the secret of building wealth you first have to define what wealth means to you. Building wealth is important to having a secure and better financial future. But it also means more than just having money.
"There are no secrets to success. It is the result of preparation, hard work, and learning from failure."-Colin Powel
Before we go any further, we have to clear up the misconception of "having money" and "building wealth" being the same thing, they are NOT!. Having money is as a result of having an income. And it's good because it allows you to pay for bills and have money in your pockets. However, building wealth is as a result of your money working for you.
Now, there are things you can do to put you on the path of starting to build your wealth over time. Wealth building is not something that happens overnight, it is a gradual accumulation of assets over time driven by taking financial actions and decisions to grow your wealth. To accumulate wealth over time, you can adopt these habits:
Get out of debt (and try to stay out of it)
Even though some may argue that there is good debt and bad debt (which I should probably write a follow-up blog to explain this), it's generally a good idea to pay off your debt. Remember, your house that is still under a bond will only become an asset and increase wealth once it's paid off. If it's not paid off, then it's still debt. So try focus on getting out of debt, even if it means increasing monthly payments to pay it off sooner. And smaller debts (like store accounts, credit cards) try to settle those as soon as possible.
Pay yourself first
Paying yourself first is so important. Paying yourself means saving a percentage of your monthly salary. This keeps you focused on your savings and investing goals and takes the temptation of spending all your money away. And to effectively do this, you have to BUDGET!
Invest your money
Building wealth by just saving money in your bank account is great (and probably very secure), but it can take quite a long time to build wealth. You need to put that money to work for you thus with the savings you've accumulated, you should not be afraid to start investing your money. With investing, we do need to remember the risk-return trade-off principle, that is "The risk-return trade-off states that the potential return rises with an increase in risk". Using this principle, individuals associate low levels of risk with low potential returns, and high levels of risk with high potential returns." If you approach investing methodically by having a plan, doing your research and assessing your risk tolerance (how much risk do you want to take), you’ll be on your way to building wealth.
These habits seem simple enough but are a lot harder to do and put into practice. You have to discipline yourself to make wealth-building a long-term strategy. If you do, you’ll keep getting better at it and you're well on your way to building wealth.