Many people believe that wealth building is a complex process and hard to achieve. It is a common misconception about wealth and the financial markets. Additionally the belief that you need to study finance or that it is necessary to have a lot of money to build wealth is wrong; Morgan Housel, in his book “Psychology of the Money” asks himself the below:
“In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections?”
You will indeed meet persons with education and training in finance with a worse financial position than others with no financial education. In this article, we will see a few suggestions that can help everyone improve their financial situation.
Keep track of income and expenses. Keep expenses low and save the rest.
Many individuals do not receive high incomes nowadays. Most people earn a moderate income. However, many of them have put aside money in the bank. It doesn’t matter how much money you receive. What matters is how much of them you spend. It is exceptional if you’re pulling in $1 million a year. But if you are spending every cent of it, you are not in a better position than a person who earns much less and lives below their means. If you get $30,000 a year, spend 60%–75% of your income and save the difference, you’re more prepared to build wealth. What you need to see the benefits of this action are time and patience. You will not understand the benefits of savings in two months. You will be able to identify those benefits if you manage to do that for a long time.
Commit to saving and investing.
We have already seen the importance of keeping an eye on income and expenses. By doing this, you can save a part of your income and not spend it all on things you might not necessarily need. Most nutritionists and dietitians tell you that “you are what you eat”, right? A similar mindset can be helpful to financial topics as well. Most people will translate that into “you are what you consume”, but this is wrong. The most appropriate translation would be “you are what you invest”.
No one will force you to save or invest. It is up to you to understand the benefits of both savings and investing. You can read all kinds of books and articles about these topics. However, you will not appreciate the benefits of saving or investing if you lack real-world experience. We all know a few people that will spend all of their income to buy things. This category of people did not figure out how to save yet. They think that they can start saving later or that they do not need to save at all. We have talked about the importance of taking care of your expenses. Now we will focus on the importance of investing.
Furthermore, many people I know figured out how to save, but they do not know how to introduce investing to their lives. When you asked them about investing, their responses are like “Stocks are risky and”, “Finance is very complex.” “I do not want to risk or lose my money.” or “I cannot afford it.”. These responses are not the real reasons for not investing. Nowadays, brokerage fees are low, and information is abundant. The main reason most of these people are not investing is that they do not have a plan. If you manage to follow the first suggestion from above, you can introduce investing in your life.
After creating a budget to track your income and expenses, you can put aside an amount every month. If you want to remove any friction from the process, you can automate this step. Nowadays, most banks give you the ability to manage your finances either from your computer or from your smartphone. You can easily create an additional savings account and set monthly recurring payments. By applying this, you remove any emotional barrier that could derail your saving plan. This step is crucial, as wealth building is about the ability to invest by spending less than you earn.
Be prepared for the unexpected.
People are afraid to invest their money because they do not want to lose their capital. They fear that if something happens and you need cash, you will have to sell your investments, and you will probably lose money. This thought is a bad scenario that might occur. However, this should not be a reason for not investing. In contrast, you should start investing, and at the same time, you should start building your emergency fund. An emergency fund is the savings that you have for adverse occasions that you might face. In most articles that I read about emergency funds, they suggest that you should have an emergency fund that covers your living expenses for at least six months.
Each person is different, so the “six-month” rule of thumb is not for everyone. It is a good start, but if you prefer to have more cash in your emergency fund, you can always do it. The goal of the emergency fund is to keep you on course for the long-term success of your investment. By maintaining your plan during adverse conditions, you will be feeling more comfortable with your investing choices overall.
Over the long term, the stock market is the most efficient way to build wealth. However, most of us do not take action. Investing is not about education or salary. Investing is about being able to develop a plan and maintain it for the long term.
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