Building Wealth
Behavioral Finance | Blog | Budgeting | Planning Perspectives
Recently, I had a chance to preview a personal finance book by a best-selling author that focused on how to build and manage your wealth. During the process of reading an early draft of the book, it struck me that it is easy for many to think of wealth building and wealth management as the same thing. However, they are distinctly different and should be considered separately.
Building wealth is a concerted effort to create assets from your excess income on a regular basis. Managing wealth, on the other hand, is the complex process of understanding and managing the variables associated with investments, taxes, insurance, estate planning, and many other financial considerations present in your life.
Building wealth is something anyone can do. It begins with a steady, focused effort in building your professional skills, knowledge, and earnings potential so that you can generate an income that allows you to save and invest, or, if you are a small business owner, build significant equity in your company. But, it must be accompanied by a diligent focus on your personal budget and controlling your spending so that you can save your excess income over many, many years.
For the majority of us, it’s a grind (few get to skip ahead). But, if you are stubbornly persistent in your efforts to build a career, control your spending, and save the rest, building wealth is exactly what you will do. It will feel small and insignificant at first, then slowly begin to feel like you are having moderate success. Then, as time continues to slip by and your saving habits become as routine as getting out of bed in the morning, you’ll find yourself in an envious financial position that you may not have felt would ever arrive.
The core components for those who seek to build wealth include:
An Early Starter Home
The forced savings habit of an inflexible mortgage payment is a great way to build the savings muscles required to build wealth. This, combined with the equity you build in your first home, is critical to your long-term financial success. It’s not easy to get in your first home. Building up for a down payment, itself, is a daunting endeavor, but if it’s your first and primary goal, it will help pave your path towards real wealth
A Career Path With Upside
Life is expensive, with an endless line of people seeking to sell you their products or services. To build a strong financial base, it helps to have a career with solid earnings potential that will generate an income that exceeds your expenses. The time and energy invested in building your career will pay significant dividends in the form of higher salaries, bonuses, equity compensation and equally as important, professional relationships that can help you make significant career gains as your professional knowledge and skills gain more and more recognition.
Disciplined Approach to Budgeting
It doesn’t matter how much you earn; it only matters how much you spend. Managing your personal finances is just like maintaining a fitness routine. We all know that you cannot expect to make progress on your physical health by working out once a month. It’s best done by working out a few times a week, at minimum. This allows you to get into a rhythm and learn what works for you and your body type. This exact same concept applies to your savings and spending habits. If you don’t pay attention to tracking your expenses or think about your budget throughout the week, it will be difficult to stick with it and difficult to make the progress you desire.
Investment Assets w/ Growth and Income Potential
It’s not enough to take your excess earning power and put it in your low-yielding checking account. You need to put that capital to work in an investment that will earn a return over time that outpaces inflation. The sooner you start this process, the more you will benefit from the effects of compound interest. This could mean opening an investment account, buying rental properties, or starting your own business that you can ultimately build equity in. The goal is to get your money working for you, rather than have it eroded away by inflation.
Time, Patience and Resiliency
Most people will not experience a big financial windfall such as selling a business or inheriting a large sum of money. Most people’s wealth will likely come from their consistent efforts to save and invest. It will likely take several decades to achieve the type of wealth that gives you the freedom you desire. It can be a painful journey, with lots of potential pitfalls…. but with time, patience and resiliency, you will be rewarded.