The concept of wealth creation, which is simply a focus on building wealth, is a familiar notion for most of us. In fact, it’s something the majority of people strive to do throughout their lives, although very few properly prioritize in a way that enables them to achieve this goal in a steadfast manner.
What is wealth creation and is it still possible?
It’s unfortunate that so many people in today’s world, particularly in America, find making enough money to live comfortably a challenge. In fact, CNBC found that only 29% of Americans are financially healthy.
There are countless things that factor into this economic climate, but mindset and financial education still play a major role. The only way a person can succeed in their journey to wealth creation is through continuously educating themselves about the best practices of spending, saving, and investing.
Fortunately, you’re already in a better position than most because you have taken the time to start the research process by reading this guide. So, in the following sections, let’s talk about wealth creation as a concept and get you started down the right path.
Why is wealth creation important?
With more than half of America “coping” financially and a staggering 17% labelled financially vulnerable, wealth creation is more important than ever before. In addition, considering all of the uncertainty that 2020 has brought about, the concept of wealth creation is on everyone’s minds.
As they say, “better late than never.” It’s never too late to begin creating wealth and, if you haven’t started before, now is the absolute best time to begin. Don’t put it off.
The wealth creation equation
Ultimately, there’s a simple equation behind wealth creation, and it goes like this: To build wealth, one must earn, save, and invest more than they spend in a given time period.
You can start creating wealth just by making sure you have money left in your bank account at the end of every month once all your bills are paid. A lot of people would refer to that extra money as “discretionary spending money,” and that’s a big clue as to how the average person’s mindset prevents them from creating wealth.
If you see every leftover dollar in your bank account as potential “spending money” for a fun night out or a new shiny gadget, you’re never going to get on the fast-track to wealth creation.
While you should certainly invest in yourself by enjoying nice things and good experiences, you also need to invest in financial instruments that will offer you financial security (and even profit) in the years to come. Let’s delve deeper into this concept.
Getting Started with Wealth Creation
Let’s go through the step-by-step so that you can start creating wealth.
Step 1: Do A Budget
If you haven’t already done so, take 10 minutes to sit down with pen and paper and write down where your money is currently going using an operating budget.
At the top of the page write down all the money you bring in over a month’s time. If you’re a freelancer or contractor and your monthly income varies, produce an average based on your typical income.
Then list out all of your expenses and loan repayments. These are the things you absolutely must pay, like your car payment or minimum credit card payment. Your rent, utilities, and other bills are also examples of these monthly expenses. Obviously you could cut some out, but if you are in an agreement to pay it, put it on this list for now.
After you do that, list out your assets. These are anything you own outright that you could potentially sell and get cash for, like a car you don’t have a loan on or a collection of silver dollars.
Now, below that, list out all of your debts and liabilities.
Change Your Money Mindset
Once you have all those numbers on paper, it’s time to add and subtract and see just how much you’re left with at the end of the month. Here are the calculations you should run through:
Gross Income: Add up every dollar you make each month and don’t deduct anything. This is how much you bring in before any expenses.
Net Income: Subtract your monthly expenses from your income to see how much income you really have to work with each month.
Total Expenses: Add your monthly debts/liabilities to the discretionary spending you estimate for a month (i.e., food and clothing + rent).
Total Debts: Do you have loan balances? Credit card balances? Add up all your balances to get your total debt.
Net Worth: Add up your assets (including cash savings) and subtract your total debts to get your net worth.
By looking at these numbers, you’ll quickly begin to gain a better understanding of where your money is going, and that’s exactly what you need to do. Now, we need to work on your money mindset! The first thing you need to change is saving what’s left over. Instead “pay yourself first” This might be hard, so make it one of your goals.
Before we make any changes to your current financial situation, let’s think about where you want to be in 3 months, 6 months, a year, 5 years, 10 years and retirement age. By making both short-term and longer term goals, you’ll find yourself staying on track with less effort.
So, where do you want to be in six months? Do you want to pay off your credit card balance? Would you like to have $1k saved in your bank account? Set realistic goals. You can check if a goal is realistic by considering your monthly net income.
One of the keys to wealth creation is time. That is why it’s important to work out how much income you want in retirement and when you want to retire. With these numbers we can work out how much wealth you need to have created by then. There’s lots of calculators out there and heaps of variables, but a rule of thumb is that if you want to retire by 60-65, then multiple the annual income you want by 20-25. For example, if you want a $100,000 annual income in retirement, you would need $2,000,000 to $2,500,000.
So now you know how much you are currently worth, and how much you’d like to be worth in X years. From here on in, it’s about developing a savings and investment strategy to bridge that gap. A good place to start is looking at your current expenses to see what you can start saving.
With goals in front of you, it’s time to get to the fun part! One of the easiest ways to boost the speed of your wealth creation is to reduce your expenses or, in other words, increase your net income.
There are always ways to reduce your expenses, whether it means being more budget conscious when you buy food, using coupons whenever you shop, negotiating interest rates on your debt (i.e., refinancing your car loan), and so on.
It’s easiest to start with your discretionary spending and work from there. So, what areas do you find where you can reduce your spending? If you eat out a lot, that’s one common category where you can rack up thousands of dollars in receipts while hardly realizing it throughout the year. Sticking to a budget can be hard, and some people find using a certain payment method works best for them.
Increase Your Income
Once you have reduced your expenses as much as possible, the next thing you have to do is directly increase your overall income by earning more. There are many creative ways to go about this, and some more traditional means of doing this.
If you have time, picking up a job, part-time job that you can do from home, or contract labor would be a good way to start out, and it’s especially for meeting your short-term goals (like paying down or off a credit card).
However, you shouldn’t have to work multiple jobs in the long-term. To create real wealth you will need investments to do the heavy lifting. This might take a few years while you’re building the invest-able wealth, and that’s why it takes patience and a realistic budget to achieve.
Instead, you should be considering ways to invest in yourself personally and professionally so that you can do things like request more compensation for the work you already do and perhaps work towards other goals you may have, like launching a home business like affiliate marketing.
Learn About Investing
There is a common saying that goes: The poor spend their money, the middle class saves their money, and the rich invest their money. If you want to get serious about wealth creation, you have to realize that money from your savings account has to get invested at some point.
However, investing may not be the right choose straight out of the gate. On the contrary, if you don’t already have an emergency fund (which could ideally cover your expenses for 3-6 months), you need to work on saving a nest egg before you invest a cent.
Only after you’ve hit your basic savings goals should you begin investing. You should also wait to invest if you are trying to pay down consumer debt (e.g credit cards), as the interest rate(s) you’re paying on those balances will surely cost you more than most any investment will earn you.
In other words, your money is best spent paying down consumer debt first, then saving up an emergency fund (hopefully in a high-interest savings account), and finally you can begin investing the additional money you have to work with in the future.
Compound Interest is THE Key
Albert Einstein described it as the 8th wonder of the world, and for good reason. Compound interest will do the majority of your wealth creation work. You just need to have the discipline and patience to let it do it’s thing and not raid your savings. The best way to illustrate just how powerful compound interest is in your wealth creation is by example.
You may have heard of this tale before about a King and Peasant.
The Peasant has created the game of Chess and shows it to the King. The King loves it and wants to reward the peasant for his brilliance. The Peasant says my wish is simple, today I which for one grain of rice for the first square on the board. Tomorrow, I wish for 2 grains for the second square and so on.
The King laughs and grants his wish.
How many grains of rice does the peasant receive on the 64th square?
That’s 18 million trillion.
Real World Example
Ok, now doubling your money year on year for 64 years is impossible so let’s look at a more realistic scenario to create your wealth.
You start with $5,000. And you achieve your goal and invest a $500 per month. At 8% p.a return how much would you have in 20 years? (let’s ignore the tax man for the time being).
How much would it be in 30 years instead of 20?
Start Your Wealth Creation Today
As you can see, there’s no better time than now to begin on your journey of wealth creation. It can certainly be daunting, but if you choose the right tools (like the right payment type) and you really sit down and take the time to set realistic goals with a plan to meet them, you can begin building wealth at great speed. So now it’s time to get it done.