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5 Crucial Steps on the Path to Building Wealth

Personal Finance Jul 9, 2020

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. It is different for everybody. And yes, be ready for surprises because you’d meet many of them (They come in different packs and boxes).

This should be straightforward as specific results are expected, everything being equal.

BUDGET

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 and your credit card reports, look at your receipts and see what you have 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.

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With a budget, you are armed to take full charge. Remember, there are people out there having it worse than you.

Take full responsibility for your past actions and their results (desirable and otherwise)and move forward.

You always return to your budget to assess, compare and restrategize at every point or step.

SAVE

This probably got you thinking. Isn’t this so obvious? Yes, that is because it is. This is the most fundamental of your journey, yet people fail at it. Here is the catch: when you save, how consistent are you because that’s what is more important? Do you save every month or whenever you feel like it?

Saving should be a habit you should engrain in your life. When you save, you can save for two broad categories — saving for the rainy 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. If you can do three months of your monthly expenses plus six months of your monthly income, that is a plus. Emergency funds serve as a safety net, a buffer for a soft landing. When you lose your job (think COVID-19), the 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 is 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, and the business you want to start all start to get accomplished by saving for them.

Always know why and what you are saving for

DEBT REPAYMENT

Please don’t give me that look. You indeed 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 pay off the debt with the highest amount/interest rate first, or start from the lowest amount/ interest rate.

The latter is called the snowball method. As you pay off the smaller debts, you gain momentum, then 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 most significant 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.

INVEST

The elephant in the room. You know the saying, you can’t save your way to wealth, it’s true. The interest you get from the money saved in banks is nothing to write about. Interest rates are higher than what the banks are paying, so in the true sense, you are losing money. Read about the 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 is reducing, and to prevent your money from losing value is to have it give a return more than the interest rate.

This is where we break the sweat. It is the same old advice for the 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 is 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 accomplish the goals.

So be happy; investment is where we beat inflation.

Investment 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:

  • Stocks
  • Bonds and Government Treasuries
  • Real estate
  • Mutual and Index Funds
  • Commodities or Instruments like gold, silver
  • Cryptocurrencies and Forex

These vehicles differ, each with its peculiarity and complexity, pros and cons, and how much it prints out — money-making machine.

DIVERSIFY AND PROTECT YOUR ASSETS

You 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 yourself when one of your money-machine spoils.

Don’t put all your eggs in one basket.

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