This is a guide to flesh out the obvious, a couple of simple steps to help you be on your path to wealth.
Wealth is an abundance of valuable material possessions or resources. For the sake of this article, wealth refers to financial wealth.
Building wealth is a long journey, simple but not easy. There are ups and downs, events, and milestones. They come in different shapes and sizes. And yes, be ready for surprises because you'd meet a lot of them (They come in different packs and boxes).
This should be straight forward as certain results are expected everything being equal.
Isn’t this too obvious? Well, we most times skip the obvious looking for the hidden extraordinary. Budgeting isn't just a step it is a habit. Do you plan? That is what the budget is for? With a budget, you know your financial standing.
Your budget is the key to your financial self awareness.
Get your bank statements, your credit card reports, look at your receipts, and see what have you been spending on. How many times have you skipped loan payments? How much loan do you owe? How do you plan your income? Do you have a list of expenses? Your budget is your fundamental document on your drawing table. With a budget you have a map and compass what remains is to spot where you want to sail to and the path you'd take.
With a budget, you are armed to take full charge, remember there are people out there having it worse than you.
Take full responsibility of your past actions and their results (desirable and otherwise)and move forward.
At every point or step, you always return back to your budget to asses, compare, and restrategize.
This probably got you thinking isn't this so obvious? Yes, that is because it is. This is the most basic and fundamental of your journey, yet people fail at it. Here is the catch though, when you save, how consistent are you because that's what is more important? Do you save every month or whenever you feel like?
Saving should be a habit you should engrain in your life. Now, when you save you can save for two broad categories — saving for the raining day aka emergency funds or saving for investments.
Emergency funds are money you save up for necessary and urgent expenses. They should be at least 3–6 months of your monthly expenses. Personally, if you can do 3 months of your monthly expenses plus 6 months of your monthly. Emergency funds are to serve as a safety net, a buffer for a soft landing. When you lose your job (think COVID-19) and rent payment is next week. You had an accident and you got hospitalized. These are emergencies and these are what you need emergency funds for.
Emergency expenses come up unannounced that's why they are called emergency right!
The second category, saving for investments. Think of it as you planting seeds today to reap fruits from a fully grown tree in the future. You save as preparation for opportunities that might come or the goals you might pursue. The university you want to pay for, that tour with your friends, the business you want to start, they all start to get accomplished by saving for them.
Always know why and what you are saving for
Don't give me that look, it’s true you have to pay back those loans. Here it is, loans are money/expenses brought forward, you have to pay them back at a later time. There is nothing wrong with debts, the only problem is when you start skipping payments. The repercussions include higher interest rates and other penalties for late payment. It would also affect your credit score which would further affect the options of loans, mortgages, and even rent you get.
A Lannister always pays his debt
I do not recommend getting debts for consumer goods or getting debit cards for the sake of having them. Don't get me wrong, debts are not inherently bad but you've got to be careful.
Regardless of how much one has to pay back, there are generally two ways to go about it. Either you pay off the debt with the highest amount / highest interest rate first or you start from the smallest amount/ interest rate.
The later is called the snowball method. As you pay off the smaller debts, you begin to gain momentum then you go for the next smallest until all the debts are paid off.
The former is referred to as the ladder method or the avalanche method. When you pay the largest debt- which usually is the longest to pay off, the rest take a shorter time as the amount you paid off is less than the previous debt.
The elephant in the room. You know the saying, you can’t save your way to wealth, it’s true. Interest you get from the money saved in banks are nothing to write home about. Interest rates are higher than what the banks are paying so in true sense you are losing money. Read about time value of money. The value of money i.e the purchasing power of money reduces every year. What a dollar could buy in 1990 is more than what a dollar would buy today. In essence, the value of a dollar has reduced and to prevent your money from losing value is to have it give a return more than interest rate.
This is where we break the sweat. It is same old advice for same old problems.
Before you start thinking of what and how to invest, I do have a checklist I’d also love to go over:
- Pay off high-interest loans
- Develop the habit of saving
- Evaluate your risk appetite
- Consider the appropriate mix of investment options
- What milestones and time horizons are you looking at.
When you've gone through this you should know
- The type of investment you would choose from based on your risk appetite.
- How much you would be able to invest periodically.
- The goals you aim to achieve ( in numbers) and how long you've got to achieve the goals.
So be happy, investment is where we beat inflation
Investment simply means having money in assets/vehicles that makes you more money. Think of it as buying a money-making machine. Here are some popular vehicles:
- Bonds and Government Treasuries
- Real estate
- Mutual and Index Funds
- Commodities or Instruments like gold, silver
- Cryptocurrencies and Forex
These vehicles differ from one another, each with its peculiarity and complexity, pros and cons, and how much it prints out — money-making machine.
DIVERSIFY AND PROTECT YOUR ASSETS
You definitely don’t want to have only one type of money-making machine. Let’s have three, four, five all if you will. The reason to diversify is to protect you when one of your money-machine spoils.
Don't put all your eggs in one basket.
When you have different types of investment, you have what is called a diversified portfolio. It combines different types and sections of investment types. However, it is also important to notice that too much diversification isn't good, it is just as bad as not diversifying at all if not worse.
Imagine having 10 eggs to diversify, you can put the eggs in 2 or 3 baskets such that when anything happens to one basket, you don't lose all your eggs. This is diversification. When you decide to have a basket for each egg, you know that's too much. How do you hold the baskets??- I’m also searching for answers.
Protecting your money-making machine transcends just diversification. Your assets should also be insured. Insurance means transferring or sharing the burden of risk on anything. Your capital, properties such as arts, building, and even yourself should have insurance. There are different types and forms of insurance. Shop around and go for the best deals.
YOU ARE ALSO AN ASSET- FOR YOURSELF.
This is what I believe to be the epitome, apex of wealth creation. Here you solidify your legacy. The Rothschilds? The Vanderbilt?The Astor Family? and lately The Rockefellers. These families have transferred wealth from one generation to another.
This, creating wealth for the next generation is a mark of selflessness. You help the unborn by planting a tree you know you would not live to sit under its shade.
You set up trust funds, hold assets through the ups and downs, teach them how money works, let them learn, and experiment. You provide them with a safety net.
You can create a dynasty and you can start now.