“Spend each day trying to be a little wiser than you were when you woke up”– Charlie Munger –
How do people become wealthy? Well, I’m about to go over five methods that you can apply towards building wealth that are used by people already where you want to be. It’s not enough to just manage your money like the rich, you need to have methods in place to get there in the first place.
- Establish a money tracking system.
If I were to ask you where did you spend your money last month, do you have an exact answer? Without having an understanding of how you spend the money you have now, it becomes difficult to make and manage more.
Developing the skill of overseeing money will not only help you manage the money you have now, but when the time comes to manage more money you will have the skills in place to make intelligent decisions.
The best way to keep track of your money transactions is to place them into three main categories:
- Income: Everything that generated you money for the month. This includes your job, any side hustles and/or business income.
- Living expenses: These are recurring expenses such as rent/mortgage, monthly bills and food. The basic necessities that you need to survive.
- Other expenses: These are things that are considered luxuries such as a streaming account, daily cups of coffee from places like starbucks, fast food and other expenses that are not necessary.
2. Develop the discipline of saving money.
It’s not shocking to know that the wealthy are very dedicated to putting money away. It doesn’t matter how much money a person makes if they spend it all as quickly as they earn it. The key to building wealth isn’t about how much you make, but how much of it that you keep.
As you might know, I’m a huge advocate of the richest man in babylon mindset of “A part of what I earn is mine to keep” and the pay yourself first philosophy.
Saving money is the foundation to building long term wealth. Especially for when unexpected expenses arise… you should have something put away in case of an emergency.
Statistics show that 57% of Americans have less that $1000 in their savings accounts and 39% have no savings at all.
Saving money can be challenging, but there are a few ways to do it.
The first way is to automate your savings. Many savings accounts allow you to schedule transfers from your main bank account to your savings account as soon as your paycheck arrives. Become a (richest man in babylon) fanatic like myself about paying yourself first before any of your other expenses.
Another method is to have your savings account with a completely different financial institution than your main bank. Not a checking account with a debit card, but just a savings account, preferably one that pays the highest interest on your savings that you can find. Those type of savings accounts are typically online banks.
The purpose of this is that it makes accessing your savings more challenging and makes it easier for you to keep it. It usually takes 2-3 business days for an electronic money transfer to take place so you’re less tempted to tap into your savings for an immediate purchase.
Just to be clear, having money saved doesn’t make you wealthy, even if it’s a large amount. Saving money is just the first step. There’s a difference between having cash and having equity.
Here’s another question for you. Would you rather have a million dollars in cash or a million dollars in real estate and/or good companies? The rich prefer that latter.
Cash is just that… cash. If you save a million dollars and don’t spend any of it, ten years later you’ll still have a million dollars. And when you factor in inflation, that million dollars loses purchasing power over time.
But chances are that a million dollars in equity of real estate and/or good companies in ten years will be worth much more than it currently is today.
3. The wealthy invest their capital into money-generating assets.
As I previously mentioned, saving is just the first step. The rich don’t save just for the sake of saving, they use that money to build long term wealth. So once you have a system set up to consistently save money, it becomes time to use this system to multiply the money. Money working for you to make more money is the goal.
Think of the game Monopoly. The game is about who owns the board, not who has the most money. You don’t win the game just by holding cash. The goal is to spend the cash to own the property that generates income. In the end, the one who owns the board ends up with all the cash anyway.
So which would you rather have? Money saved earning a minute percentage that looses value over time or a money-generating machine? The rich use money to build or purchase a money-generating machine that creates passive income.
This is why the wealthy don’t have to work for money. They understand that creating passive income allows them the benefit of putting their time to better use by not having to work for an income.
4. Most wealthy people live below their means.
Contrary to popular belief, most people with real wealth live below what they earn. This is especially true at the beginning when they haven’t amassed their wealth yet.
Research shows that wealthy people have a history of being quite frugal with their money. Many did not buy the expensive cars and mansions even when they were making a decent amount of money.
There are people who make six and seven figure incomes annually who buy all the luxuries and spend most of their money. However, the people who actually get wealthy have a bigger picture in mind. They aren’t looking to make a couple million, they are focused on accumulating massive wealth. So many of them continue to spend money like the average person.
The idea is to get used to not needing much in order to build long term wealth, even as your income grows. This is a very powerful strategy to employ as business and economic cycles go up and down.
So, as we begin to track our finances, build a savings and invest that saving into money-generating assets, there is one more thing the rich do so that they never run out of money.
5. Spend the residual, never the principal.
Most people start off with active income, the money we spend time to make. Once you start investing into income-generating assets, you then start earning passive income which is the cash flow that your assets produce.
The difference between the wealthy and the rest is that those building real wealth only spend the cash flow their assets produce, not their hard earned money.
it’s like planting a fruit tree, most people eat the seeds before planting the tree. Whereas the wealthy plant the tree first and only eat what the tree produces. Many wealthy people still maintain earning an active income, the difference is that they use their hard earned money only to invest and only buy luxuries with the money that their investments have produced.
That is how they make sure that they never run out of money, even when buying expensive luxuries.
So, what is a good practical step to take on your journey to building wealth?
As mentioned above, in order to begin investing, you need to save. In order to save, you must lower your expenses or increase your income.
These strategies may seem simple, but simple means nothing without discipline. As I’ve mentioned in previous posts, discipline is a key principal to achieving financial freedom.
As I like to say… “the journey begins with the first step”.
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I’ll see you in the next post. Until next time… be sure to comment below and let’s get some dialogue going. I’m curious to know, what’s your opinion on wealth building strategies?
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