We all want to be wealthy… however, we’ve been duped into believing that the only way to get there is through savings.
In this post, I’ll give you some pointers that teach you how to build wealth that extends beyond pinching pennies, how to start investing, and how to switch to conscious spending. Oh, and don’t worry about the $3 daily coffee – you’ll have plenty leftover for them too.
How to Build Wealth in Three Easy Steps
If you think that you need to earn more to build wealth, you’re probably right (by the way, I can help you with that by teaching you how to ask for a raise). But it goes so much deeper than your earnings; you also need to know how to spend well. It starts with getting your money to work for you. Here are three tools to do just that:
Step 1: The Ladder of Personal Finance – Investing Money for Beginners
Who would have thought that boosting your savings account until the day you retire wasn’t enough? Turns out the banks only use your savings to fund their lending. They’re not going to pay you an interest rate that beats inflation, because they won’t make money. Those accounts are good for emergencies and short-term savings. That’s it.
For the rest, you need an investment strategy. If you’re a beginner investor, my Ladder of Personal Finance can provide valuable insights into making the most of your cash.
Rung 1: Your 401(k)
Your salary can be one of your biggest investment assets if used right. This is especially true for those who have employers who match pension contributions.
You want to make sure you max out that matching because they’re literally funding your retirement at the rate you are. So if they match up to 4.5%, you want to take your contributions up to at least 4.5%. It’s that simple.
Rung 2: Get rid of debt
You don’t need to cling to debt. Sure, there are instances where debt helps, like buying a house or funding a startup. But then when it’s done, try to stay away from it!
Get into the habit of squaring off your credit card debt every month. Imagine all the investing you could do if part of your paycheck wasn’t going to repay loans.
Rung 3: Roth IRA
e’re back at retirement. Yes seriously! Do you know how quickly you get to retiring age? You want to make sure that you’re doing all you can to maximize your retirement savings.
Roth IRAs hold certain tax advantages that can’t be ignored. There are income restrictions (up to $140,000) and maximum contributions (between $700 and $7,000) that need to be considered. Set up a meeting with a trusted financial advisor to discuss your financial goals and get sound investment advice.
Rung 4: Max out your 401(k)
Yep. We’re still talking retirement. And for good reason! Max out the allowable contributions for your 401(k) according to your age and current Roth IRA contributions. Be sure to stick to those limits though, as the IRS can hit you with a 6% excessive contribution penalty. It sucks, but better to play by the rules and avoid that.
Rung 5: Other investments
You’ve finally reached the end of the retirement contributions line and you’re up high enough to see other types of investments, such as the stock market or mutual funds.
This is also a chance to pay extra into debt to get those numbers down or to invest in your best rich life. Maybe that’s further education or studies, signing up with a personal trainer, or heck, saving up for that sabbatical to India.
So, what happens if you do this all correctly?
Well, you could end up like Rob and Adrienne, who I spoke to on my podcast recently. Despite them worrying about their retirement spending, I found if they kept their expenses where they were, they’d amassed such a fortune (almost $2m!) that they’d still have $1.2m by the age of 90:
[00:39:27] Ramit: Assuming you stop working this year, you keep your expenses where they are, at 4,900 a month, no wiggle room. You continue to travel for coaching retreats, etc. $30,000 a year, and you live until 95. We’re assuming that because you’re in good health. And again, you don’t want to run out of money before you die. What do you notice on screen, Rob?
[00:39:57] Rob: When I’m 90 years old, I’m still going to have $1.2 million.
[00:40:01] Ramit: Mm-hmm.
[00:40:57] Rob: At the end of life, we end up with over a million dollars doing it that way.
[00:41:02] Ramit: Yeah. And remember, that’s if you live until 94, 97. It continues to grow. It grew last year, but I felt like because the market was doing so well last year, that was the only reason it grew last year. For the next seven years or eight years, it has the balance growing as opposed to leveling off so early.
[00:41:30] Adrienne: It seems more relaxing to know that everything is going to be okay, I guess.
[00:41:40] Ramit: Okay. I love that comment. How do you know this chart is more relaxing?
[00:41:48] Adrienne: Because there’s not a negative sign on it.
Rob and Adrienne are a great example of how you can build your dream retirement by following the Ladder of Finance. If you’re worried about how much effort saving like that will take, well fret not because you can…
Step 2: Automate Your Finances
If you were around in the 90s or early 2000s, you’ll remember the tedious nature of payments. Envelopes that got lost in the mail, check fraud, and even taking time off work to make an urgent payment. If you didn’t have a cool checkbook with its own folder, you had to pop into the bank and brave the queue for cash.
But it’s not like that anymore, so why are you still taking an admin day to sort out your payments and transfers? It’s the 21st century, people! We now have the internet and secure payments. Best of all though, is automated payments.
You can automate anything from bill payments to savings. Just set it up on your checking accounts, either through direct debits or payment instructions.
Investments are equally easy to automate, whether you’re opting for index funds, mutual funds, ETFs, forex, whatever your investment portfolio looks like. Robo advisors do all the hard work such as asset allocation, you just make sure you diligently invest every month. Best part is you can start from as little as $1!
With this simple transition, that admin day turns into a personal day. Go to the spa or take a day trip to a nearby town; never waste time on manual payments and transfers again.
Step 3: Focus on the Big Wins – $30,000 Questions, Not the $3 Ones
It may sound apathetic but it should be your default when you come across those “I need to cut down on my daily $3 flat white from Starbucks. Why? Because it doesn’t matter.
Sure, maybe if you save that $3 every day for the next 50 years, you might be able to afford a Volkswagen. Just be sure to save that $3 in an account that keeps up with inflation. But 50 years of no coffee? That’s not worth it.
While the premise of saving money is great, the problem is the low rate of return a savings account provides. Don’t get me wrong, a savings account can be helpful if you’re looking to protect your capital for say, an emergency fund or short-term saving goals.
However… you’ll never build wealth at this rate. One of the most surprising things that people don’t realize about money is that saving just isn’t enough. In fact, your money is losing its value.
For example, if you have a $250,000 mortgage at an APR of 4.5% over a term of 15 years, you’re looking at paying an installment of $1912.48 per month and total interest of around $94,246.98. Now, get that rate down to 3.5% and you’re looking at a monthly installment of $1787.21 and total interest of $71,697.14. That saves you around $22,500! It’s worth it, make the call.
Harness yourthat savings prowess and focus on big-ticket items instead. For instance, work on boosting your credit rating so you can ask for better interest rates on your mortgage and other financial products.
You also don’t want to obsess over saving every last penny you can. Take the example of Ron, who I spoke with recently – he was terrified of spending money on anything. Even after we talked about hitting his financial goals, he’d still be having that same fear of spending:
[00:12:15] Ramit: Is there a time when you spend money where you don’t think about the cost?
[00:12:20] Ron: Me? No.
[00:12:22] Ramit: You like spending money on anything?
[00:12:27] Ron: No, because I don’t really have any hobbies or anything that I’m interested that I want to actually spend it on.
[00:12:36] Ramit: Okay. What would you say your feeling is toward money, if you had to describe it in a word or two?
[00:12:40] Ron: One word? Afraid.
[00:12:43] Ramit: Do you like money?
[00:12:49] Ron: I like it. I wish I had more of it.
[00:12:51] Ramit: How much?
[00:12:55] Ron: You mean to earn a year or in savings and stuff?
[00:12:58] Ramit: Let’s go with both. Let’s start with earning per year.
[00:13:02] Ron: I’d at least like to make 150 a year.
[00:13:08] Ramit: Do you make the higher income out of the two of you?
[00:13:11] Cristina: Right now, yeah.
[00:13:11] Ron: Right now, yeah.
[00:13:12] Ramit: So that’s basically like, you’d like to make about 30k more than you make. Right?
[00:13:16] Ron: Yeah.
[00:13:16] Ramit: Yeah. It’s always the same number. People always have a very similar number of how much more they want to make. And how much you’d like to have in savings?
[00:13:27] Ron: Eventually, probably like to have at least a 100.
[00:13:32] Ramit: 100k in a savings account. Okay. And what would happen one day when you have that? I feel actually very confident you will have that. What will happen on that day?
[00:13:45] Ron: Probably nothing. I’m sure I’ll still be pretty nervous, or I know it’s just–
[00:13:50] Ramit: That’s so crazy. So in other words, you could spend your whole life trying to get to this arbitrary number, and then one day when you reach it, which you actually will, then you realize the entire life that I spent agonizing over $5, $10, $50 actually meant nothing because my feelings are highly uncorrelated with the numbers in my bank account.
Saving and investing is great, but only if you’re still spending enough to enjoy life. Reaching some arbitrary figure in your bank won’t inherently make you happy — you need to find the balance that works for you and avoid overspending or oversaving.
Building Wealth Is Simpler Than You Think
When you think of building wealth, it’s the small incremental changes over a period of time that will get you the numbers. Waiting to win big at the track or to win the lottery is not a great strategy.
Building wealth is a long-term game that requires discipline and the ability to prioritize your spending. With proper financial planning, you will be able to save and invest intentionally.
Through my Conscious Spending Plan, you will have the means to prioritize your spending which will not only help you build wealth, but also grow your spending power now. You don’t want to only start living when you retire, after all — even if it does help to have a healthy bank balance when you’re ready for the golden handshake.
My Conscious Spending Plan will help you plan for:
- Fixed costs such as your accommodation
- Important investments like the ones we discussed here
- Savings goals for big-ticket items such as a home down payment for a wedding
- Guilt-free spending, in other words, your ‘Oh Yeah!’ budget
The bottom line is this: whether you work damn hard for your money or not, you don’t want to wait until you’re too old to enjoy life. In the same breath, you want to create space to build wealth. We need to be fiscally responsible, right? But that doesn’t mean we should forego the things we love.
Skip the tedious budgeting and take control of your finances. Through proper management, you can enjoy the little things in life while building wealth for the future; you don’t need to compromise. Get the first chapter of my NYT Bestselling Book below, and take the first steps towards financial freedom.
