Updated: Aug 30, 2022
We all dreamed of being wealthy at some point in our lives. But most of us may believe that achieving this goal is impossible, given the growing wealth disparity between the rich and poor. However, it’s helpful to understand that there are steps you can take to begin accumulating wealth and ensuring a prosperous financial future.
You can find many get-rich-fast schemes almost everywhere, especially on the internet. These include flipping penny stocks and the latest crypto memecoin. However, don’t easily get waylaid by these mediums if you don’t know how they work. Instead, you should spend more time researching financial literacy and how you can build wealth.
For example, you can look up terms like "what is an outstanding debt and how to manage it," "how to create a financial plan," "how to make appropriate investments," or any other topic that can help you reach your financial goals.
You can also use an asset management template to manage your finances and keep your assets organized.
You can also consider the following steps to help secure a financial future:
Whether you’re on your way or just starting, having many different income sources is fundamental in building your wealth. Earning more money means you can save more and invest more in the future.
Active vs. Passive Income
When it comes to making money, there are two concepts that you should know about. First is earned income, which is also known as active income. This type of income is the amount of cash you earn from working a full-time job, side-hustling, freelancing, or any other activity that will require you to participate actively.
On the other hand, the second concept is called passive income. This is the money you earn from investments that usually require little to no maintenance to earn money. Examples of this concept include book royalties, investments in real estate, or passively held stock investments.
Income vs. Expenses
When it comes to income vs. expenses, it is vital to mind the gap. The “gap” means the difference between your income (active and passive) and your expenses (the amount you spend). Also, the greater the gap between the two means you’ll have more extra money to save and invest.
To achieve this, you need to find ways to increase your income. For example, you can get a side hustle or a freelance job. In addition, you can also reduce your expenses by considering every dollar you spend. Lastly, you can also invest extra money in assets that can earn passive income.
Long-Term Money Making
It is a good idea to have an active income that provides secure tenure. Ideally, it’s best to focus on a job that you’re good at, enjoy working on, and that pays you well (enough to help you with your expenses and future investments). That way, it will feel like you’re not working but just living with passion, making it easier to build your wealth over time.
One of the steps you should take to save money is to track your monthly expenses. You can do this the old-fashioned way, on paper, or through an app or spreadsheet. Also, your main goal in tracking your expenses is to understand your financial situation in a month and take steps to manage them.
It’s essential to know that your expenses are divided into two categories: fixed and variable. Fixed expenses are the things you can’t avoid spending money on. This includes transportation, utilities, and rent.
On the other hand, variable expenses are those you can try to reduce or modify monthly. This includes money you spend on entertainment, restaurants, shopping, etc.
It’s best to evaluate your expenses monthly. Doing so can help determine what expense you can cut off or minimize. In turn, your extra money for the month intended for savings or investments will increase.
Building an emergency fund is also a significant advantage in securing your financial future. For most people, having an emergency fund covering three to six months of monthly expenses is a worthy goal.
If you have two sources of income and a high degree of stability, having an emergency fund that covers your 3-month expenses is recommended. However, if you are a one-income earner and have a low degree of stability, it would be best to prepare an emergency fund that can cover your six months expenses.
Paying off your debts is also worth considering. Effectively managing your debts and eliminating them eventually can help you have more room for savings and investment. Otherwise, it would be challenging to build wealth if there are debts holding you back from reaching your financial goals.
If you have overdue debts, you must be thinking, “should I pay a charge off in full or settle?” That depends on your situation. While settling can help you pay less than your original debt, it also can incur more costs, damage your credit report, and lower your credit score. Hence, it’s best to consider this carefully first to avoid financial trouble in the future.
Investing your money is critical to building your wealth. A wise investment, such as investing in a stock market, can help you earn a lot of cash over time. However, misguided speculations and careless planning concerning investments can be your downfall.
You need to assess your risk tolerance to begin the step of investing your money. Most risk-tolerant investors choose to invest in assets like cryptocurrency and stocks. However, risk-averse investors prefer more cash and bonds.
There are a lot of ways you can invest your money. It might help if you research and look for investments that can give you the best returns. In addition, you can also educate yourself by attending investment seminars and lectures to expand your knowledge regarding the matter.
To Sum It Up
Building your wealth requires you to follow certain steps that usually provide many different strategies. First, you’ll have to earn more money through having an active and passive income. Next, you have to save money through budgeting. And lastly, you’ll need to invest wisely.