I have been studying wealth-building techniques and strategies for some time now (you can check out the books I’ve read on the subject by click here), and although there are some variations, they all pretty much follow the same path.
Aside from winning the lottery, inheriting your fortune, or founding a unicorn company and floating it on the stock market, there’s only really one way to build wealth.
In this post, I’ve stripped away all the technical waffle and broken wealth-building down into four simple steps that anyone can follow.
Ready? Let’s get started.
Step 1 – Earn money
Your very first step is to get paid!
You can do this by getting a job or starting a business, whichever way suits you best.
The important part is that you need the highest-paying role that your current skill-set will enable.
In this step, you’re trading your time and skills for money. It isn’t advisable to do this for the long-term, but it’s an absolute must to get going.
Related Read: The Trading of Time
Most people can do step 1, however, this is also where most people get stuck.
They get a good job and a regular monthly salary and then they stay on the hamster wheel going around and around unable to get off.
Each month they get paid, and each month they spend it.
Don’t let this happen to you!
…which takes me on to the next step.
Step 2 – Live below your means
Next, you need to reduce your monthly outgoings as much as you possibly can to create a chunk of disposable income.
Monthly wage – monthly expenses = disposable income
Go through your bank statements and categorize each payment as a ‘NEED’ (e.g. rent, insurance) or a ‘WANT’ (e.g. Starbucks, Netflix), and be honest!
Then, get rid of all of your ‘want’ purchases and reduce your ‘need’ purchases where possible, for example, you could move to a smaller house with cheaper rent and utility bills.
Step 3 – Invest and buy assets (NOT liabilities)
In this step, you’re going to use your disposable income and invest it in assets, not liabilities.
- An asset is something that can generate you income (e.g. rental properties, stocks and bonds, businesses, create your own products, passive income streams)
- A liability is something that only costs you money (e.g. car, clothes, eating out, your own mortgage)
When you spend on a liability, money is only going to leave your bank account; it’s a one-way street. However, when you spend on an asset, money will flow back into your bank account and eventually repay you with more money than you invested.
In essence, you’re using your money to buy more money. You are creating additional income streams through asset investment.
IMPORTANT: To really kick your wealth-building activities into overdrive, re-invest all the money that your assets create. This will trigger the law of compounding! (Check out The Magic of Compounding to find out how awesome this is!)
Step 4 – Quit your job (optional)
Eventually, your income-generating assets will provide you with enough cash flow to replace your job.
You now have three options:
- You can, of course, continue working and investing your surplus cash into assets.
- You can retire early and live off your new income streams.
- You can quit your job and spend more time working on growing your assets and income streams (for example, creating a property portfolio)
Ideally, you want to stop trading your time for money and go for option 2 or 3. However, maybe you like your job or maybe you get some good company perks that you’d like to keep. This is fine. You can still build your wealth in an employed role.
BONUS #1 – How to build wealth quickly
There are three things that you can do to speed up the rate at which you can build your wealth.
#1 – Make more money
This is pretty self-explanatory, but the more money you make the more you can funnel into your income-producing assets.
This is why it’s very important you get the highest paying job you can when you’re starting out.
Other ways of boosting your income include starting a side hustle and selling unwanted items on eBay.
#2 – Spend less
Similar to above, the less money you spend the more you are able to invest.
The areas where people spend the most money are housing and travel. Take a good look at these areas and see if reductions can be made.
Remember that the house you live in is a liability, not an asset!
#3 – Keep re-investing
Once your investments start to make you money, the best thing to do is re-invest that money. Do not spend it on going out for a meal, on a new pair of jeans, or on any other liability!
Use your money to buy yourself more money!
*This is where the law of compounding comes into play again
Doing any one of those three things will increase the rate at which your wealth builds. However, doing all three of them together will really blast your net worth into hyper-drive!
So much, in fact, that each month you’ll be able to add up the value of your investments, and each month you’ll be pleased to find that your wealth has increased.
BONUS #2 – Why most people fail to build wealth
Reason #1 – They lack patience
You are not going to build wealth overnight. It takes time.
Especially in the early days, you’re going to feel as though you are pulling teeth. After all, a 10% return on $1000 ($100) is nothing to go crazy about…
…but a 10% return on $10,000 ($1000) is a bit more interesting.
Famous investor, Charlie Munger, said that the hardest part is getting to the first $100k. After that, even small percentage increases can make a big difference.
Reason #2 – They lack discipline
Refraining from making unnecessary purchases can be difficult.
A Starbucks coffee here, a meal out there, and the next thing you know, you’ve spent $100 more than you were planning to that week.
A helpful tip is to decide on how much money you need to cover your expenses for that month and then move the rest of the money out of your checking/current account. This way, you’re not tempted to tap your card and spend more than you need to.
Reason #3 – They are worried about what other people think
In other words, you’re trying to keep up with the Joneses and you spend far too much on liabilities.
…Or in the more colorful words of Gary Vaynerchuck, you’re spending money that you don’t have, to buy shit that you don’t need, to impress people that you don’t like!
You want the flash car, the big house, the branded clothing, and the regular nights out in fancy restaurants. You do not want to scale back your lifestyle and live below your means because you are worried about what other people may think of you if you’re not wearing designer clothes, or if you’re driving a Ford instead of a Mercedes.
If this stuff bothers you, you will find it very difficult to follow this 4-step plan. In which case, I’m sorry I wasted your time, but thank you very much for reading this far into my post!
So, there you have it! My 4-step plan to building wealth with a couple of extra bonuses thrown in for good measure.
In essence, if you can discipline yourself to live below your means and invest your surplus cash into income-generating assets, you can increase your wealth.
If you follow these steps diligently, you can have the luxury of both time and money.
P.S. If you want any more posts on this topic, please let me know in the comments below.
- The Richest Man in Babylon by George S. Clason
- Rich Dad Poor Dad by Robert Kiyosaki
- How Reading Can Make You Rich
- How (& Why) To Detach Your Money From Your Time