Becoming wealthy is something that many people want to achieve in life. It enables you to live comfortably, become financially free, and retire at a young age. The basis of becoming wealthy is increasing your assets while decreasing liabilities. The following is the equation for net worth (the measurement of how wealthy you are):
Value of your Assets - Value of your Liabilities = Net Worth
Becoming wealthy takes a lot of hard work and practice, but it is by no means unachievable. Even beginners in finance can achieve this ultimate goal with a little education. Even if you are unable to retire at a young age, you can set yourself up for a prosperous retirement. Here are the eleven steps that you can start today to get yourself on track to becoming wealthy and achieve financial freedom:
1. Budget, budget, budget
This is an essential step if you want to get in control of your finances. The wealthy live by creating and following a budget, so there is no reason you should not follow suit. To do this, calculate how much income you expect in the given month and allocate every single dollar to a category.
Start with the basics such as housing, transportation, food, and any obligatory bills you may have. Now, allocate the rest of your income to every other category that you expect to spend your money. It is critical to update your budget with every transaction you make, whether it be an income or an expense.
Within a month, you will see what the power of budgeting can do for your finances. You will know where every dollar you earn ends up going and will start to think differently about how you spend your money. Do you need that $5 coffee from Starbucks when you only have $40 left on your budget for groceries? Maybe, but you might rethink things.
All of a sudden, you will realize that you are saving your money at an exceptional rate and can use it in much more efficient ways. That $5 you saved from not going to Starbucks adds up in the long run. In fact, it adds up a lot. Below is a chart that shows how much money you would save by saving $5 a day in a savings account (0.5% interest) or in the stock market (assuming an 8% return which is around the average):
|Year||Savings (0.5%)||Stock Market (8%)|
Half a million dollars. The numbers show that if you save just a Starbucks a day, you will set yourself up for a much brighter financial future. Also highlighted in the graph above is the power of exponential growth and how more money makes more money. At a 0.5% interest rate, you will only have $80,812.50 in 40 years. The banks take your savings accounts and invest that money for a high return. As a thank you, they give you pennies. It makes sense to do what the banks do and to invest.
One way to create a simple budget is by searching Google for a budgeting template. The best way, however, is through YNAB (You Need A Budget. (Click for an extra free month!). It is a vital tool for setting up your budget. There is also an app for your phone to go along with it. YNAB has an enormous fanbase and is really good about helping the YNAB community. This YouTube video shows how powerful YNAB really is and was invaluable for us getting started.
2. Take control of your debt
Debt has the ability to harm you financially. Go back to the equation on net worth and debt is essentially your liabilities. Liabilities will lower your net worth and wealth. This detriment is why the second thing that we recommend is to eliminate your debt and stay out of it. The best way to do this is by utilizing the snowball effect. This method is raved about by Dave Ramsey along with numerous other financial advisors.
The debt snowball effect is relatively straightforward, has very few steps, and will help you pay off your debts in an efficient manner. This is the snowball effect in one short paragraph:
First, you must order your debts from the smallest dollar amount to the largest. Then, pay the minimum amount due on every debt except the smallest in which you will pay as much as you can every month. (This is where your budget will come in handy.) Last, repeat this process until your debts are paid off.
As time goes on, you will pay off all your smaller debts and have the power to allocate more and more money to the larger debts. This extra money will make each debt easier to pay off than the last and will cause a snowball effect. Congratulations, you are debt-free!
3. Develop automatic ways to save money
The first step we recommend toward making sure you maximize your savings is to open a high yield savings account. High yield savings accounts will pay you interest at a rate that can be over 100 times what any ‘big bank’ will give you. This difference ensures that you are getting the most bang for your buck. Here are the best high-yield savings accounts.
One of the easiest ways to set up an automatic savings method is to enroll in automatic transfers to your savings account based on what you can afford. (Again, this is where your budget will come into play.) Wealthy Whisper recommends that you save at least 20% of your income. If this is not possible, try your best to maximize your savings.
Another clever method that we recommend is the $5 rule. Every time you have a $5 bill in your possession, put it in a place that is hidden from you to spend. Deposit this money into your savings as often as you can so you can earn interest on each $5 bill. You will be amazed by how much money you end up saving. It will also keep you from spending these precious $5 bills on unneeded expenses.
4. Have an emergency fund of at least 3 months of expenses.
With your high yield savings account and different methods of automatic savings, it is time to reach a savings goal. (You will probably need your budget again.) Calculate how much money you truly need to live for three months. This amount is the goal for your emergency fund.
Continue to save, save, and save some more until you have reached this amount.
Do not touch your emergency fund unless it is for a true emergency or large unexpected expenses. These expenses include losing your job, house, getting your car fixed, or any other catastrophic event that may take place. This is for use in emergencies until you can get back on your feet and start earning an income again.
The good news is that once you have this set amount, you will be earning interest on it month after month and it will continue to grow. It is up to you as to whether you want to use this interest for other investment ventures or let it compound in your savings account. We like to watch it compound and eventually add additional months to our emergency savings. Of course, you may need to increase your emergency fund if your lifestyle changes as well. Life events such as having a child will change the amount that you want to have in your emergency fund.
5. Seek a financial education.
You can’t build a house without laying down a foundation. The same thing goes for wealth. It is incredibly hard to gain and keep wealth without the foundation of financial education. It is dangerous to throw money into the stock market unless you have done some research. Education is essential in everything we do in life, why shouldn’t we learn about personal finance as well?
Nobody achieves great wealth without knowing what they are doing. Think of the richest people in the world and understand that they have put thousands and thousands of hours into their financial education. Financial education is not taught in schools, and most parents don’t teach their children about it.
How do you invest in your financial education?
- Reading books, articles, magazines, etc
- Listening to podcasts, YouTube videos, and wealthy people.
- Practicing your investment skills and honing your craft.
6. Focus on becoming wealthy.
For those of you that have read or seen The Secret by Rhonda Bryne, you can see how powerful the Law of Attraction is. Our basic understanding of the Law of Attraction is that what you focus on becomes reality.
In order to become a millionaire, wouldn’t you want a millionaire mindset? The term millionaire mindset gets thrown around a lot and that is for good reason. If you think like a millionaire, your chances of becoming a millionaire probably increase.
So how do you develop a wealthy mindset?
- Focus on your financial education
- Practice visualizing about what you want and how you would feel to have that. Imagine you already have it.
- Read books. A lot of them.
- Pursue personal growth
- There are many more
7. Invest and diversify.
The money that you allocated to your emergency savings account every month can now be used in other ways. Maybe you want to start a separate savings account and save for a down payment on a house. Great, do that. However, you should also try investing in other ways.
Do your research on what investment platforms interest you most; this could be stocks, real estate, businesses, lending (loans), buying gold, or countless others. In the beginning, it is a good idea to diversify your platforms while continuously learning and figuring out what you excel at.
The best way to start is to open a Robinhood account. This is a completely free platform that allows you to buy and sell stocks without paying a brokerage commission. It is a beginner investing staple and is the first place you should invest a little money.
In fact, if you click here, you will get a random stock for free which could be a stock like Apple, Facebook, or even Berkshire Hathaway.
8. Find a side hustle you are passionate about.
There are so many different ways to make money in this world, and it is easier than ever to find something that you enjoy. If you are not passionate about the work you do, you are never going to give it 100% and will never reach your max potential. One of the best ways to do this is through blogging or starting your own side business.
Make a list of things you are passionate about and get to work. There are hundreds of free online courses that teach you how to get a blog or business up and running. If that is not your jam, there are hundreds of other ways to make a little extra side money.
Having a side hustle will not only give you extra income but will also be the ultimate learning experience. Are you going to have time to sit on your couch on Sunday and watch Netflix for 8 hours? Probably not. A side hustle will always keep you going and can even become your full-time gig. Stay productive, and good things will come.
9. Assets, assets, assets.
We talked earlier about debts being able to ruin your finances. Well, assets are the opposite. These are the things that bring you positive cash flow and the opportunity to become extremely wealthy. Assets could be real estate, stocks, commodities, or anything else that makes you money.
Your car is not an asset. Usually, your own home is not an asset. These two things are not making you any money. Your car is decreasing in value, and you are paying a mortgage on your house every month. These are two things that many people think are assets. However, in order to be classified as an asset, it has to bring in a positive cash flow, not a negative one. When you sell your car or house, then it becomes an asset.
A Coca-Cola stock is an asset. Every fiscal quarter, Coca-Cola is paying a dividend; according to dividend.com, this dividend has increased every year for the last 56 years. Although the payout is not much, this stock is the definition of an asset. Imagine if you were Warren Buffet and owned roughly 400,000,000 shares of Coca-Cola; you, your children, and your grandchildren could live off those dividends alone for the rest of time.
Assets slowly add up. Becoming financially free means that your cash flow has surpassed your expenses, one asset at a time.
10. Find your investment platform.
Most great investors have a specific go-to platform. For Warren Buffet, it is the stock market. For Donald Bren it is real estate. For Jeff Bezos it is e-commerce. For Mark Cuban it is businesses.
At first, it is okay to diversify and try multiple different platforms before you realize what you are good at and passionate about. Once you discover your favorite platform, it pays off to try and become an expert. Continue to build that financial education at every level.
The wealthiest people in the world are experts in their fields. Does Warren Buffet know how to become a billionaire real estate investor? Maybe, but probably not. He knows the stock market better than anyone that has ever lived.
11. Double down on your investment platform.
Now that you are an expert in a specific investment platform, it is time to double down. Don’t even look at other investment options as a method of building wealth. If you want to dabble in a few different ventures for fun, be our guest, but you should always try to put your investment money and focus on your area of expertise.
“You are not going to get anywhere by being mediocre at everything, but you will by being an expert in something.”-wealthywhisper.com
Over time, you will see your investments and assets explode.
- Budget, budget, budget.
- Take control of your debt.
- Develop automatic ways to save money.
- Have an emergency fund of at least three months of expenses.
- Seek a financial education.
- Focus on becoming wealthy.
- Invest and diversify.
- Find a side hustle you are passionate about.
- Assets, assets, assets.
- Find your investment platform
- Double down on your investment platform.
Congratulations, you are financially free and can call yourself wealthy.