by Dana George | May 3, 2020
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Want to speed up how quickly your money grows? These three steps can help.
If you're looking to build and grow wealth, you may be under the impression that it's a complicated process. The truth is, these three steps will take you a long way to building long-term wealth.
There are plenty of people who are not raking in the big bucks, including teachers, social workers, and small business owners. And yet, many of them have money put aside for retirement and savings in the bank.
Here's why: It doesn't matter how much money you earn. What matters is the gap between your earnings and expenditures. If you're pulling in $1 million a year, that's awesome. But if you are spending every cent of that $1 million, you're worse off than a person who earns much less and lives below their means. If you earn $50,000 a year, spend 70%–80% of your income and save the difference, you're actually better placed to build wealth.
Financial planner Tom Corley wrote a book called Rich Habits, based on his interviews with 233 wealthy people. According to Corley's findings, a number of wealthy people:
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Corley's book shows that it is possible to build wealth regardless of how much you earn -- unless of course, you're struggling just to keep a roof over your head. What you need is time, patience, and commitment. It also helps to have zero interest in what other people do with their money. If your brother and sister-in-law have a new car every two years or a boat larger than your first home, it shouldn't matter. Wealth building is all about being able to spend less than you earn so that you have money left to invest each month.
Bottom line: Live below your means.
One need only look back to the Great Recession of 2007–2009 to understand what the ultimate rainy day looks like. Around 8.7 million American jobs were lost. Those job losses, combined with the consequences of the subprime mortgage crisis, ultimately led to millions of bankruptcies, foreclosures, and short sales. But it's not just recessions that usher in rainy days; illness, divorce, and natural disasters can all drain a bank account as well.
Let's say you have a really tough summer. You break your wrist and are off work for several weeks, your central air goes on the fritz in the middle of a heatwave, and your dryer sounds like a dying triceratops.
If you have an emergency fund that's large enough to cover three to six months' worth of expenses, there's no reason that any of these events will slow your wealth building.
In the event that you lose your job or face a medical emergency, those savings should ensure you don't have to divert money from your investments or take on debt. That's also why it makes sense to keep your emergency fund in an easy-to-access savings account.
Raiding your long-term investments is better than taking on high-interest debt, but there are still several problems. Chief among them is that, depending on what kind of investments you have, you may have to pay a hefty fee to take money out early. And if you invest in stocks and shares, you may be forced to sell them at a lower price than you'd planned. In addition, the power of compound interest is that you earn money on your earnings -- that's how small monthly savings can grow so significantly over time. But if you dip into those earnings, you'll be back at square one.
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Bottom line: Before you do anything else, build an emergency fund.
No one can coerce you to read a classic novel rather than a supermarket tabloid. Or to push away from the table after eating just one piece of fabulous chocolate cake. And no one can make you save or invest money. It's all up to you.
Like any discipline, it's about doing the right thing so often that it becomes a habit. Here are a few ways to make it easier on yourself:
Bottom line: You are in charge.
Wealth accumulation is not only for those who've "made it." No matter how much money you earn or what you've been taught about finances, these three simple steps can help you build wealth.
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