Five Principles of Wealth Creation
January 28, 2021
Have you ever wondered how people accumulate wealth? Here are five simple principles to wealth creation that anyone can use to improve their financial life. These are not new ideas, but they are universal. Anyone, regardless of where they come from or what family they were born into, can use these principles to create wealth. While these are simple concepts, they will require sacrifice, risk-taking, and hard work. However, when used properly they are an amazing wealth creation tool.
Spend Less Than You Make
The first principle to creating wealth is to spend less than you make. Your biggest single asset is your income. By spending less than you make, you will harness the wealth-creating power of your income. The challenge is there will always be unlimited demands on your money, so you have to save first and spend second. Thomas C. Corley interviewed 233 millionaires and discovered that 49% of them were average people with modest incomes who consistently saved 20% or more and invested their savings over a period of 32 years. They were able to create millions of dollars of wealth by simply saving and investing over a long period of time. This takes discipline and sacrifice because you have to delay some of today’s desires to build wealth for the future.
Avoid Using Debt
Debt is a major roadblock to wealth creation. When we are in debt, we are enslaved to the lender, and too much debt can be a ball and chain around your neck. Debt payments take priority over all other spendings because the bank will take your home or car if you don’t make your loan payments. It can be very difficult to save if too much of your income goes to paying debts. If you have consumer debt, pay off all your credit cards, car loans, and lines of credit as fast as possible. You can start with the smallest debt or the highest interest debt. Pay the minimum amount on your other debts and pay as much as possible on the first one. Once you have that paid off, apply the amount you were paying on the first debt to the next one, and so on. You may need to reduce expenses or earn extra money to pay off your debts. Cut up the credit cards and close out the loans or you may end up accumulating debt again. Once you get all your consumer debt paid off, you can save more of your income.
Save Money for Emergencies
Principle number three is to save money for emergencies. When financial emergencies arise, it is important to avoid using debt to pay for them. Maybe your car breaks down, or the water heater dies. Without emergency savings, these costs often go on a credit card and cost even more when interest charges accumulate. Having an emergency fund is vital to avoid using debt. It also provides peace of mind knowing that you have money saved when an emergency happens. Start with a small amount like $1,000 and add to it until you have 3-6 months of living expenses in emergency savings. This should be enough to cover most financial emergencies including a job loss. If there are two income earners in your household, you should be ok with 3 months of living expenses in savings. With only one income earner, you probably need 6 months of expenses in savings. You want to have quick and easy access to this money, so it needs to be in a cash or money market account. You won’t earn much interest, but that is ok. The goal is to have it available when an emergency comes up. As time goes on, the amount in your emergency fund should be reviewed and modified as your living expenses change.
Plan Your Spending
To maximize the wealth creation power of your income, you need a spending plan. You want to decide how to spend your money before you spend it. If you spend first and save later, you may never create wealth. Track your expenses for a few months and review your spending. Decide how much you want to spend in each category and make sure to include the discretionary things that are important to you and your family. Total up all your expenses and subtract from your income. Make sure you are spending less than you earn so you can save and invest 15-20% of your income to create wealth. If you can’t do this right away, start small and increase your savings consistently. Track your expenses monthly and review your spending plan each year. Remember there will always be unlimited demands on your income so this principle will help you stay on the road toward wealth creation.
Invest for The Long Term
The last principle is to invest for the long term. While there are different ways to invest, the stock market has been a great wealth creation vehicle over time. Make sure your investments are diversified and the risk you are taking is consistent with your goals and objectives. If you are younger and have many years to accumulate wealth, you should consider being invested mostly in stock funds. As you get older and closer to retirement, you may want to add bond funds to reduce the risk of your portfolio. Make sure you are adding to your investments consistently. The best way to do this is to set up a systematic withdrawal from your bank account into your investments. This will allow you to take advantage of dollar-cost averaging. When the stock market is high, you are buying fewer shares, and when it is low you are buying more shares. Doing this consistently over many years can help reduce risk and lead to better investment returns.
As we begin a new year, now is the perfect time to look at your financial life. Are you spending more than you make? Do you have too much consumer debt? Are you saving and investing enough? Following these five wealth creation principles can help anyone improve their financial life. You won’t get rich quick, but you will create wealth over time. Best of all, you will have more control over your money and more financial peace along the way.
Trinity Wealth Management
At Trinity Wealth Management, our team of fiduciary financial advisors can help you start down the path of wealth creation. Contact us today for more information on how to begin implementing these five principles.
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