There is no secret formula for building wealth. Simply put, you build wealth by spending less than you make. Then save and invest the difference. Follow these steps and you’ll become rich over time.
Building wealth is like filling a bucket with money. Wealth is generated when the bucket fills up, and there are two levers that control the inflow and outflow of the bucket.
Pulling the ‘spend less’ lever slows the flow of money out of your money bucket. This is the defensive approach to building wealth.
Pulling the ‘make more’ lever dumps more money into your money bucket. Earning more money is the offensive way to create wealth.
Building Wealth: How to start
If you’re new to building wealth or early on your path to becoming rich, start with defense. Without defense or pulling the spend less lever, all of your money will flow out. Worse yet, you may have more money going out than coming in. This is how people accumulate debt.
Track your spending to learn where your money is going. Most people have no idea where they actually spend their money. I use the free Personal Capital app to track my spending and investments.
Create a budget if you don’t have one. You will not become rich doing this, however you will learn if you are saving money or are spending more than you make. Cut out excess spending; odds are some of your spending doesn’t make you happy. Consider changing your spending habits on cable and internet.
Also see: 6 Steps to Saving a 6-figure Net Worth
Offensively Building Wealth by Earning More
Earning more income is the offensive way to create wealth. By earning more, you can save more if you don’t increase your spending. You can save your way to wealth and become rich over time. However, this may take years.
Increasing your earning power improves your ability to save. Investing saved money is like throwing fuel on a burning fire.
Time is another meaningful factor for building wealth. Most do not reach millionaire status until after the age of 50. According to a Business Insider article – it takes the typical self-made millionaire at least 32 years to get rich. Planning, bold actions, and dedication will make you a millionaire in 10 years or less. Grant from Millennial Money became a millionaire in 5 years
In my early years I focused on spending less to save more. This worked and I saw results. However, I didn’t get the results I wanted. The balance of my bank account went up every month, but not at a large enough rate.
The following example will show why just saving my way to wealth was too slow. Let’s look at three people who all make the same amount of money but have different money habits.
Jake – Makes $50k a year. He doesn’t track his spending or have a budget. As a result, he spends every penny he earns. This life style will not build wealth.
Tom – Makes $50k a year. Tom budgets and lives on $30k/year. This allows him to save $20k every year.
Sally – Makes $50k a year. She also budgets and lives on $30k/year. However, she invests $20k a year.
Overtime, Tom and Sally will become rich. With enough time Tom and Sally will both become millionaires. Tom’s wealth will steadily grow. Sally will build wealth exponentially faster than Tom because she invests her money.
The graph below shows Jake, Tom, and Sally’s wealth over the next 50 years:
Tom builds wealth by saving. He will slowly become rich and be a millionaire in 50 years. Not bad, but why would anyone want to wait 50 years?
Sally builds wealth by investing. She invests in a low cost index fund and earns 8.0% a year. Sally will be a millionaire in 20 years which is 30 years before Tom. During the 20 years it took Sally to become a millionaire she invested the SAME amount Tom saved.
As you can see, Jake will never become rich. Don’t be Jake. Make a budget and save money. Better yet – invest money. The best time to start was 20 years ago. The next best time is today.
My offensive wealth building plan
I am on an all out offensive like the allies invading the beaches of Normandy. Moving forward, my main focus will be building wealth by earning more income and investing. I can only reduced my spending so much; a life of deprivation doesn’t appeal to me.
How will I earn more? And what will I invest in?
I accepted a new job offer earlier this year. The pay is considerably more than my last job. The new job came with a large signing bonus too. The extra income allows me to invest more. I am buying low cost index funds every week while continuing to max out my 401k every year.
At the end of last year, I bought rental property #4. This property has three units and needed renovating. The building will provide great passive income once I find tenants. The income from my new rental property will go towards saving and investing.
I also started a few new side hustles. My hope is that at least one of the side hustles turns into a new source of income. I like diversifying my income streams and do not want to rely on any one income to fund my life.
What is wealth?
But what is wealth? And why do we chase it? Wealth means something different to everyone. I seek wealth and financial independence because I want to buy back my time, focus on what matters, and leave Corporate America in the dust. I want to travel and volunteer more. I want to check items off my bucket list and spend more time with loved ones.
Building wealth from nothing is possible but, it will take hard work and dedication. I started my twenties in debt. Through side hustling, hard work and investing, I was able to tackle my debt and build a net worth of over $500,000 in 4 years. My focus on earning and investing more will allow me to become financially indepdent before I turn 30.
Are you focusing on earning more or spending less? Have you ever thought about side hustling, improving your skill set or another cool way to earn more? Spending can only be cut so much. Get out there and earn more.