What is wealth building? It’s very simple, its called discipline, you must be discipline enough to wait for you wants, while keeping your needs to a manageable amount. Wealth building is something that is long term, not an overnight get rich scheme.
Wants and Needs:
The difference between wants and needs is a need is something you must have to survive, like food and shelter. A want is something you really would like to have (buy) but could get by without it or could wait until you save to pay cash for it, like a new pair of shoes or the latest TV.
How do you build wealth? It all begins with a budget of your expenses, you must sit down and determine how you spend every penny and then make a budget of those expenses and determine what you actually spend on needs and what you spend on the wants. The goal is to create a budget that you can afford and be able to save 20% of your income. Look for ways to save money your spending on your needs and then make sure you pay yourself first (20%) before spending anything on the wants.
When we say pay yourself first, we mean you need to take 20% of all your income and begin to save it, forget you ever had it and put it into a wealth building savings plan. Now your saying I don’t make enough to save 20%, YES you do, find the things you can cut from your budget, you will never find your way out unless you begin to build wealth today!
Three Steps to Building Wealth:
1. Open a checking account (keep your monthly expenses there)
2. Open a savings account (keep your 20% there, save 6 months of your living expenses there as an emergency fund)
3. Open a long term investment account (i.e. Mutual fund, Roth IRA)
Your need to have the idea that any money I have needs to be making money (your money should be making money) Once you have your emergency fund built, look for long term investments (Mutual Funds) to gain the most earned interest on your money. When your money begins to compound (interest making interest) you begin the wealth building process and soon you will value your money and how you spend it.
The Time Value of Money:
There is a huge advantage to investing early. Having your principal and interest making money (compounding) early can build bigger wealth then someone who starts later; even if they invested more in the later years your early investment will create more wealth.
Example: You invest $2,000 a year (7% interest) when your 18 years old for 10 years ($20,000 total investment) and never invest another dime. The next person begins investing at the age of 31 and invest $2000 per year (7% interest) ($70,000 total investment) for the next 35 years. At age 65 who has more money?
Person who begins at 18 years old ($20,000 total investment ) has $361,418.00
Person who begins at 31 years old ($70,000 total investment) has $276,474.00
That’s a difference of $84,944.00 just for investing at a younger age, even though they invested less they come out with more.