So you want to be wealthy? Welcome to the club. Now, how to get on the road to riches -- especially if you're living paycheck to paycheck.
It's not complicated to find a path to wealth, and nearly anyone can do it over time, with dedication and discipline. Here's the task: Spend less than you earn and invest the difference. This means saving some money and using it to buy assets -- such as stocks -- that produce a good rate of return.
Saving money is essential to building wealth
No matter who you are or how much money you make, you won't become wealthy if you spend all the money you make. It's as simple as that. Consider lottery winners and professional athletes, actors, and musicians, many of whom have become briefly wealthy only to squander their riches and be left in debt.
You can't get wealthy if you spend all you earn because you need money invested to be wealthy. To be wealthy, you need enough money invested to live the way you want without working. Ideally, you'll save and invest enough money that you can live comfortably off the interest from your investments and the initial amount you invested won't ever decline. You're wealthy then because you can enjoy your life, not worry about working, and still leave a legacy to your kids.
This would mean having so much saved that returns produced by your investments give you enough money to meet spending needs for a very comfortable life. If you can do that, then you're wealthy. But, of course, your investment account balance needs to be big to do that. So you need to spend less than you earn, save money, then invest it so your account can grow to the size you need.
Investing as much as you can helps build wealth more quickly
Simply spending less than you earn and saving the difference in a bank account or savings account could eventually help you become wealthy because your bank account balance would slowly grow and might some day get to the point where you can live off the interest. But, if you just save and don't invest, it's going to take a really long time to get to that point -- and you may never be able to save enough to get there.
When you invest, on the other hand, your saved money works for you and helps you build the big investment account balance you need to get wealthy.
Say you have $100 invested and earn 10% annual returns. You'd have $110 at the end of year one. Next year, you have $110 invested so you earn 10% on that $110. So your investments won't just earn you $10, they'll earn you $11. And the next year, you'll have $121 invested, which will earn you $12.10.
This keeps happening over and over when you've invested your money. And the bigger the amount you have invested -- and the greater the returns your investments earn -- the more compound interest helps you. So if you want to build wealth and get to the point where you have a huge investment account, the goal is to invest as much as you can, as quickly as you can.
How can you spend less than you earn?
Once you've committed to spending less than you earn so you have money to invest, the trick is to actually follow through. To do this, you have two choices: increase your income or reduce what you spend.
And you can work on doing both simultaneously. Some tips to help include:
- Negotiate for regular raises -- and save them right away. If your income increases, invest the added money right away before you ever get used to living on it.
- Focus on cutting the big stuff. If you have an expensive car, or your rent or mortgage payment takes up too high a percentage of your income, it's going to be very hard to cut enough to save a meaningful amount. Consider downsizing or getting a roommate, and commit to purchasing inexpensive used cars instead of costlier new models. Audit your subscriptions and cut the cable cord if you haven't already. Cut out bad spending habits and things you spend money on, that aren't necessary.
- Live on a budget. You need to know where your money is going and cap spending in problem areas. To make a viable budget, track spending first. Then decide where you're spending too much and work with the numbers so you can budget to save at least 10% and ideally closer to 20% of your income.
By following these tips, you'll have money to invest instead of spending everything you earn.
How to invest your savings
Once you've started to save, decide where to put the money so you can grow that big investment account balance.
If you're saving for something like retirement and won't need the funds for at least five years or so, the money should be in the stock market. Historically, investing in the market has always been the best way to earn the returns you need to build wealth.
You can research how to pick individual stocks to get your money in the market, or you can build a simple portfolio of ETFs if you want a more hands-off approach. The key is to diversify your investments and not put all your money into one stock or one industry, because that increases your risk of losing big if the company or industry doesn't perform well.
You can start working on becoming wealthy today
Now you know the secret to becoming wealthy. You can start working on the process today. Just make your budget, start spending less than you earn, and begin investing the difference. You'll be well on your way to financial success.