Despite what we are sometimes led to believe, building wealth is rarely a rapid, flashy process. It doesn’t require luck, exceptional intellectual power or a network of elite connections. In fact, the truth behind how to build wealth can be explained in just one sentence – Spend less than you make and invest the difference wisely. The simplicity of that statement is likely quite disappointing. Unfortunately, there just aren’t any tricks or secrets that are going to produce overnight breakthrough results. Accumulating wealth is most often a slow, steady process that takes years. After decades of experience working as an investment advisor with people from different backgrounds, income levels and life stages, I can tell you that this pattern is not only evident, it is unmistakable.
There are endless variations on how to create a positive difference between how much you earn and how much you spend. Basically, you can reduce spending, increase income, or do alterations of both. Most folks focus intensely on the income side of the equation. This is likely because there is theoretically no limitation on your wealth accumulation because your earning capacity is unlimited. While maximizing income is important, if you don’t master the spending side of the equation, you can still run the risk of failure by allowing the common pattern of letting spending rise as fast as income. For most people, living on less results in a feeling of sacrifice and deprivation that makes it difficult to succeed. Fortunately, there are ways to make saving easier.
Know where your money is going
Unfortunately most people underestimate how much money they really spend. The best way to be sure is to review all your account statements over at least a full year and categorize your expenses. Evaluating these will help determine whether they can be reduced or if they are even needed. Regularly reviewing will help identify when changes can be made and will help keep more of your hard-earned money to use toward savings goals. Most people avoid managing expenses because they think it requires lots of time, paperwork, math, etc. In short, it's a hassle. However, these days it's quite easy to capture and analyze the data nearly effortlessly using tools like WealthyStreet.
Establish goals
Whether your objectives include shorter-term goals like having a well-stocked emergency fund or getting out of debt, or longer-term goals like planning for early retirement, funding kids’ education or providing a legacy, it’s important to identify what they are. Without a purpose in mind for your savings, it’s very easy to justify using that money for something else – something more instantly gratifying. Once you have figured out your goals, give priority to each of them in order of importance and determine how long you have to save. Then, you need to have an idea of how much money you’ll need to reach them. Giving your goals a timeline and an estimated price tag will help you determine how long and how much money to be putting away.
Pick the right tools
401(k), 403(b), IRA, 529 Plan, HSA, FSA, SEP, SIMPLE, taxable, etc … it can be overwhelming to understand the differences between the types of accounts and which ones you should open. Investment accounts come in a variety of types, including retirement accounts, education accounts, employer sponsored accounts and taxable accounts. Each one offers different benefits and restrictions, and you should understand how and when to use each type of account.
Pay yourself first
It’s a familiar refrain in the world of personal finance. While it sounds simple and trite, this method has proven roots in behavioral economics and can make an extraordinary difference in the amount of net worth you accumulate. It requires you to treat your savings as bills that have to be paid before any other bills can be paid. This method is based on the fact that money, like water, expands to fill the container in which it is placed. No matter how much cash tumbles into our coffers, it never seems to stick around. Humans have a tendency to adapt to circumstances with incredible aptitude. By being out of sight, out of mind, you are likely not to miss what you don’t see. Warren Buffet said it best, "Don't save what’s left after spending, spend what’s left after saving."
Make it a habit
The vast majority of actions we take on a daily basis are habitual … tying our shoes, brushing our teeth, walking down the street. Without habits, we’d have to expend way too much mental energy thinking about the things we have to do every day. Habits free us up to put our time and energy into other important pursuits. Luckily, creating a new savings habit is actually much easier than creating new diet or exercise habits. That’s because it’s really simple to automate your savings. It is almost effortless to implement, usually costs nothing and requires no willpower. By not relying on yourself to take the time and energy to invest regularly will keep you from falling victim to laziness or panic if the market is down.
Draw up a financial plan and track your progress
Successful savers usually have a road map so they can follow their progress. By putting saving goals in writing and knowing where you are in relation to those goals, you can recognize when changes are necessary. Also, it’s essential that you keep track of your progress and constantly re-evaluate why you’re saving and how you’re working towards your goals. Watching your savings creep up will provide positive feedback that will fortify your drive to save.
While building wealth is simple, it is not easy. There is no escaping the fact that we have to manage our human behavior and emotion. Remember to rely less on strategy and more on execution.
