From my perspective the process of building long term wealth can be simplified down to three critical factors.
- How much you earn (income)
- How much you save (cash flow)
- How fast you compound the growth your savings through investment
Here is a neat, but totally useless graph to illustrate.
Now I am assuming you have no debt. If you do have debt part of the wealth building equation becomes paying down your liabilities over time. There is good debt and bad debt so the decision to pay down your debt as quickly as possible or invest your money else where to build long term wealth is too complex of a topic for this post. That is why I have decided to ignore debt in my three factors to building wealth.
Let’s break my three components to building long term wealth down further.
How much you earn (income)
Increasing the amount of income you earn should always be one of your top priorities when itTOP SALE comes to building
How do you increase your income over time? There are a few things you can do.
- Continue to educate yourself and learn new marketable and specialized skills
- Start your own business full time or on the side
- Reduce the amount of tax that you pay on your gross income
How much you save (cash flow)
If you earn lots of money, but spend it all it won’t do you any good towards building your long term wealth. The key is maximizing your rate of savings (income minus expenses). The more money you are able to save, the more money you’ll have to invest and compound over time.
How do you maximize your savings?
- Reduce your basic living expenses to the extent possible. This includes housing, food, clothing & transportation
- Reduce your discretionary expenses. Do you really need that new big screen TV or latest car model? Are you able to get lower costs for your cell phone, internet or cable?
- Pay down debt. Start with the debt thatInternet JobInternet JobInternet JobInternet Job comes with the highest interest rate
How fast you compound the growth of your savings through investment
Once you have money saved the name of the game becomes how fast can you growth your savings through investing.
There are many options and asset classes to choose from when it comes to investing your money. Some of the popular ones include…
- Mutual Funds
- Real Estate
The optimal strategies to pursue within each of these asset class is a topic for another post, but you can easily find this information with a quick Google search.
In general I have a few suggestions to help you maximize the growth of your savings over time.
- Invest for the long term
- Don’t take unnecessary risks and put all of your eggs in one. Diversify your savings across different asset classes to reduce risk
- Don’t avoid risk at all costs. Storing your savings in 100% GICS or a high interest savings account will not allow you to build your wealth very quickly. Balance of risk and return is the key.
The easy part is knowing what you need to do, the hard part is executing.