Building wealth is a topic that many people discuss, but few really act on. As a community, we always talk about building generational wealth to counter racism and white supremacy, but we lack the blueprint to get us there. In this article, I will outline four simple steps we need to take to build wealth which we hope will transform into generational wealth. But are these “four simple steps to building wealth” a misleading concept?
The answer is no. But while the basic steps are simple to understand, they’re much harder to follow. I believe that the key to any successful endeavor starts with commitment. Without commitment and consistency, nothing will get accomplished, especially a long-term goal such as building wealth.
To build wealth over a long period of time you need to do these four things:
1. Make a commitment – if there is no true commitment, there will be no wealth. Commitment starts with your thoughts and actions.
2. Make money – Before you can begin to save money or invest, you need to have a source of income that’s sufficient to have some leftover after you’ve covered your necessities and debts. In some cases, you may not have this with just one job, you may have to get a second job or create a side hustle. Remember, the key is to have extra cash after your expenses are paid. Without having that extra cash, building wealth is virtually impossible.
3. Save money – Once you have a monthly income that supersedes your monthly bills, you need to develop a saving plan.
4. Invest money – Once you’ve created that monthly savings nest egg, start to invest it wisely.
- There is a basic formula for building wealth: make more money than you spend, avoid debt, and invest your savings prudently.
- The first step is to make a real commitment to yourself and your family (if applicable) to build wealth.
- The second step is to make enough money, which is a lot easier if you’re doing work you enjoy, are good at, and pays well.
- The third step is to save enough money to invest, which can require disciplined budgeting and planning.
- According to this basic method of wealth-building, taking on a bit of risk and making prudent investments is the fourth step. These investments can be in any area – such as starting your own business, real estate, the stock market, or whatever you are knowledgeable and comfortable investing in.
UNDERSTANDING THE FOUR SIMPLE STEPS TO BUILDING WEALTH
STEP 1: Make A Commitment
This is step number one. Without buying into this step, you will not be successful. Making a commitment is about changing your thoughts and habits. “Watch your thoughts, they become your words; watch your words, they become your actions; watch your actions, they become your habits; watch your habits, they become your character; watch your character, it becomes your destiny.” – by Lao-tzu. Making a commitment really boils down to creating new habits.
STEP 2: Make More Money
This step may seem like common sense, but for those just starting out or in transition, this is the most fundamental step. The big question is, “Are you making enough to save in the first place?” It’s impossible to budget if you don’t make enough to cover your expenses.
Remember, there’s only so much you can cut in costs. If your costs are already cut down to the bone, you should investigate ways to increase your income. There are two basic types of income—earned and passive. Earned income comes from what you “do for a living,” while passive income is derived from investments.
Those beginning their careers or in a career change can start with four considerations to decide how to derive their earned income:
- Do what you love – You will perform better and be more likely to succeed financially by doing something you enjoy.
- Do what are you good at – Look at what you do well and how you can use those talents to earn a living.
- Do something people will pay you for – Look at careers using what you love and do well that will meet your financial expectations.
- How to get there – Determine the education, training, and experience requirements needed to pursue your options.
Make sure that you evaluate your income situation at least once per year to ensure you’re on track for success.
STEP 3: Save Enough Money
You make enough money, but you’re not saving enough. What’s the problem? The main reason this occurs is that your wants exceed your budget. Try these steps to develop a budget or to get your existing budget on track:
- Track your spending for at least a month. You may want to use a financial software package like quicken.com to help you do this. Make sure to categorize your expenditures. Sometimes being aware of how much you spend is enlightening and can help you control your spending habits. When I started tracking how much money I was spending on breakfast and lunch each month it made me realize how much I was wasting on eating out.
- Get rid of the fat. Break down your wants and needs. The need for food, shelter, and clothing are obvious, but also address less obvious needs. For instance, you may realize you’re going out to eat too much, or that you’re spending too much money on entertainment.
- Adjust according to your needs. As you go along, you probably will find that you’ve over or under-budgeted a particular item and need to adjust.
- Build your cushion. You never really know what emergencies are going to come up. Try to save around three to six months’ worth of expenses. This prepares you for financial setbacks, such as a job loss or health problem. If saving this cushion seems daunting, start small.
- Get matched! If you have access to a retirement plan at work, make sure you contribute to your employer’s 401(K) or 403(B), and try to get the maximum your employer is matching.
The most important step is to distinguish between what you really need and what you want. Finding ways to save a few extra dollars here and there can make a big difference. Things such as reducing your cable bill or cell phone plan, programming your thermostat to turn itself down when you’re not home, and buying used furniture. This doesn’t mean you have to be thrifty 100% the time. If you’re meeting savings goals, reward yourself and splurge (an appropriate amount) once in a while. You’ll feel better and be motivated to make more money.
STEP 4: Invest Your Money Appropriately
Okay, now you’re making enough money and saving enough, but you’re putting it all in conservative investments like the regular savings account at your local bank. That’s fine, right? Wrong! If you want to build a sizable portfolio, you have to take on some risk, which means you may have to invest in securities and other types of investment.
Let’s look at some other investment options. Make sure you consult your financial advisor and your accountant before you do anything too crazy. Remember, the objective is to accumulate assets – and some assets take time to appreciate such as land and real estate. Here are some other investment options in addition to a savings account:
∙ Individual stocks
∙ Mutual funds
∙ Exchange-traded funds (ETFs)
∙ Buying a home
∙ Buying an investment property (residential, multi-use, commercial)
∙ Real estate investment trusts (REITs)
∙ Real estate crowdfunding
∙ Starting a business
∙ Buying an existing business (with positive cash flow)
∙ Precious metals
∙ Cryptocurrency (make sure you consult with an expert before you invest your money)
*NOTE*If you are looking for a way to supplement or increase your income by starting a business, make sure you consider my “Pinpoint & Monetize Your Genius” online training program to help you make enough money to build wealth. Here’s the link: https://jay-s-school.thinkific.com/courses/pinpoint-and-monetize-your-genius