As many financial planners will tell you, building wealth is a process made of many small actions that add up over time. So if you want to see your bank account grow, adopting new money and lifestyle habits is a smart way to start.
There are many paths to building wealth like, starting your own business or timing the share market or, just getting lucky (against astronomical odds) and winning the lottery. But if you want to take control of your financial future and give yourself the best chance to make real wealth in your life, there are a few things you need to do
1. Understand good debt and avoid bad debt.
While not all debt is inherently bad, it's a good general principle to avoid debt where you can, and pay off the ones you do have as quickly as possible. A debt for your home is OK, you have to live somewhere but do what you can to limit how much you borrow. Investment debt is generally good because it helps you grow your assets and your income and usually has some tax benefit. Consumer debts like credit cards are sometimes unavoidable but if you don't handle them correctly, or keep limits to a manageable level, your debts can end up costing you many times more than the items or services you originally purchased.
You also need to understand the fundamentals of budgeting. The simplest way to do this is become a zealot and track every cent you spend for thirty days. At the end, review where your money went and you'll be surprised at what you find. Your main goal here is to identify overspending in areas where you can cut back. To get ahead you should be spending less than you earn; ensuring that you have enough money for all your needs and also cover unexpected emergencies, with some left over for savings and investments. Cutting unnecessary expenses and reducing your costs will be vital.
3. Pay yourself first
Now that you know where your money is going, set up an automatic transfer every pay cycle so that you get paid before anyone else. It's your money, your earned it and you should keep a little of it. Also, you're the boss of it so you should be the first person to get paid. We're not talking about putting money into a transaction account so you can spend it later. We're talking money you keep as an investment. The more money you have in savings the more options you have to make money.
4. Set goals.
If you want to build wealth, you should also understand how to set and achieve both short-term and long-term goals. Your long-term goals should drive and dictate your short term goals; think of them as stepping stones, getting you to your ultimate destination. Regardless of what specific goals you set, the power of setting goals will help motivate you, and keep you on a solid path toward success.
5. Invest in yourself.
You also need to understand the power of investing in yourself, rather than only investing in external assets and enterprises. If you spend time and money furthering your own personal development and education (human capital) and developing a rich network of professional contacts (social capital), you'll have a much bigger foundation on which to build your business than if you started from scratch. Obviously, there's a balance to strike here, but you are your own greatest asset. Invest in yourself, you own all the shares.
6. Diversify your assets.
Ideally you'll have multiple streams of income fueling your upward momentum. That could mean a full-time job and a side gig, a portfolio of different shares, exchange traded funds, or investing in property and collecting rental income. Diversification is important because every type of investment, job, or gig will be prone to unexpected fluctuations. Being able to fall back on other assets will give you confidence and allow you to bounce back swiftly.
7. Understand risk and reward.
Finally, you should be aware of the balance that exists between risk and reward. In general terms, the riskier a venture is, the more potential is its value but the downside is it could be potentially devastating. Different circumstances will dictate where you fall on the spectrum of risk. While younger people can afford to take more risks, older people need to be more conservative because of their respective stages in life. What's important is understanding the risks and rewards before making any final decisions.
You might not become a millionaire by following these rules alone, but you'll certainly have mastery over your own financial future. You'll also benefit from a much more stable, less stressful and comfortable lifestyle as a result.