I hear this question (or some variation of it) almost every day. And while I'm happy to provide answers and advice, there's something I've noticed about most people who ask this question. "How can I grow wealth?"
They don't take action on the answers. They don't follow the advice.
Very few people actually get proactive with their finances and take initiative and responsibility. Very few focus on what they can control and get in action.
The truth is, growing wealth doesn't have the be complicated. Wealthy people don't have some secret you don't. They just do things that most people aren't willing to do.
If you want to get serious about improving your financial situation, being better with money, and enjoying more of it, here's what you need to start doing:
1. Tracking Your Spending And Sticking To A Budget
Yes, it sounds super basic and simple -- and it is. It's also a fundamental aspect of financial success.
Your cash flow (that is, money coming in and money going out) is a critical component to your financial life. If you can't master it, you're not going to be able to increase your net worth.
Start by tracking what you earn and spend. Do you live within your means, or are you in the red each month? If you live within your means, how far below your means do you live?
This is so important, because it's not enough to live at your means. It's good that you don't spend more than you make -- but if you just break even each month because you spend every available dollar, you'll never have cash available to save and invest.
You need to live as far below your means as you can, so you widen the gap between what you earn, and what you actually spend.
A budget is the tool you can use to make sure you keep your spending reasonable over time. It can also help you prioritize your spending according to your values, so you can spend more freely on the things you truly care about -- and skip (or scrimp) on the stuff that doesn't matter as much.
2. Saving And Investing A Large Percentage Of Your Income
For most people, investing and earning compound returns is the ticket to wealth.
If you want to follow the traditional path of working until you're almost 70 years old, then retiring for a few years to enjoy some basic comforts before you pass away, you can simply put away about 10 to 15 percent of your income in your retirement account and you'll likely be okay.
But many people -- myself and most of my clients included -- want a lot more than that. We want financial independence; we want to be free from the need to earn a paycheck; we want to use our money to accomplish big things like traveling the world or starting businesses.
When your goals look like this, saving and investing 10 percent of your income doesn't cut it. You need to look at saving 20 percent at a minimum, and saving at least 30 percent to be on target to hit those major wealth-building goals.
3. Making More Money
Saving and investing money only works when you have money to begin with. You can only reduce expenses so much before you need to look at the other side of the equation: earning more money.
Many people don't even consider this because they feel the numbers on their paycheck are somewhat out of their control. But that's not true. You can play an active role in determining how much you earn every year.
The right tactic for making more money looks different for everyone, and depends on your goals, needs, challenges, and opportunities. That being said, a few ways that might work for you include:
- Negotiating for a raise after taking on more responsibility at work.
- Changing jobs and seeking a higher-paid position (and negotiating your starting salary at the new company).
- Starting a side hustle, or freelancing on the side of your day job.
- Working for yourself.
4. Holding Wealth In Assets -- Not in Stuff
The people that drive the flashy cars, own the biggest houses, have the most stuff -- they're "glittering rich," as Thomas J. Stanley puts it, but they're not actually wealthy.
They may have high incomes, but that money gets spent instead of saved or invested. As a result, they only have the trappings of wealth. But they don't have a significant net worth because all their "wealth" is tied up in their possessions.
Even worse? If that high income somehow dried up, they'd have nothing to fall back on.
If you want to grow wealth, focus on growing wealth -- not spending it to show off how much money you have coming in each month.
5. Accepting Risk
Occasionally, I'll work with people who refuse to take any risks with their money. They refuse to invest in the market because the thought of losing even a single dollar is too much.
The problem is, any investment comes with some degree of risk -- and there's a relationship between risk and return. You have to accept some degree of risk if you hope to earn a return on your money.
Not to mention, even sitting on cash comes with a lot of risks. You risk losing purchasing power to inflation, you risk opportunity costs associated with all the time you spend outside of the market, and you risk not being able to save enough cash on your own to meet your goals.
6. Paying Attention To The Little Things
Ultimately, the majority of people who succeed at growing wealth don't do it because they hit the lottery or got lucky with one big investment or business deal.
(Yes, some people do this -- but if we're talking about how most people make their millions, this isn't it.)
They succeed because they took the time and care to get the little things right... and they did that over and over and over again. People who become wealthy nail the fundamentals and they practice those good habits consistently.
Those little things include actions like:
- Prioritizing their goals and values, so they know what to spend their money on -- and when to say no to spending.
- Paying attention to their finances, from their budget to their investments, and spending a lot of time minding and thinking about their money each month.
- Setting up systems and processes to ensure actions happen, no matter what and despite things like temptation, distraction, and human error (an example of such a system: automating your contributions to savings and investment accounts).
- Acknowledging when they don't know something, and doing research to find the answer.
- Asking for help and support, which often comes in the form of coaching and accountability from an objective financial planner.
Consistency and commitment win over luck every time.
Want to be remarkably successful? Want to get really rich? (While there are many ways to feel "rich," in this case we're talking about monetary wealth.) Then check out this little gem of an investment opportunity.
It's a simple investment. You only have to invest almost all of your money. On the upside, after a year you might earn 3 percent more. The downside? Any day you could lose it all, for reasons usually outside your control and that you will almost never see coming.
Would you make that investment? Of course not.
Yet millions of people do--every day they go to work for someone else.
Of course the analogy isn't perfect. Until you're laid off or fired you do earn a salary. But when you work for someone else, your upside is always capped--sure, you might occasionally get a raise, but in most cases 3 to 4 percent is the best you can expect.
Yet your downside is always unlimited because getting fired or laid off can make your income disappear overnight--and with it the considerable investments you've made in time, effort, dedication, and sacrifice.
Extremely limited upside. Unlimited downside.
That's a terrible investment.
Rich in Wealth
So if you hope to get really rich, working for someone else will never get you there. But don't just take my word for it, the government agrees.
The IRS Statistics of Income Division, a place where fun surely goes to die, has published "400 Individual Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009," or in non government-speak, "400 People Who Earned a Freaking Boatload of Money."
In 2009, it took $77.4 million in adjusted gross income to crack the top 400. (That just barely got you in; the average income of everyone on the list was $202.4 million.)
Where it gets interesting is how the top 400 made their money:
- Wages and salaries: 8.6 percent
- Interest: 6.6 percent
- Dividends: 13 percent
- Partnerships and corporations: 19.9 percent
- Capital gains: 45.8 percent
A few conclusions are obvious:
- Working for a salary won't make you really rich.
- Making only safe "income" investments won't make you really rich.
- Investing only in stock of large companies won't make you really rich.
- Owning a business or businesses could not only build a solid foundation of wealth but could someday...
- Generate a huge financial windfall--and make you really rich.
Don't trust the IRS? Fine. Check out the top 10 on the Forbes billionaires list. Gates. Buffett. Ellison. Koch. Walton. Adelson. All entrepreneurs. (I worked my way down into the 200s and still couldn't find an employee, so I got bored and stopped looking.)
Clearly getting really rich in financial terms is the result of investing in yourself and others, of taking risks, of doing hundreds of small things right...and then doing one or two big things really right.
But what if you don't get one or two big things really right? There's another way to get really rich.
Rich in Life
I've spoken to hundreds of entrepreneurs, and each and every one does the same thing. When we talk about the financial side of being an entrepreneur--exit strategies, revenues, IPOs, cashing out--they're interested but far from animated.
But when we talk about the life of an entrepreneur, about how it feels to be an entrepreneur, they all light up. They start to gush about the challenges, the responsibility, the sense of mission, the sense of purpose, the sense of fulfillment and excitement of working with and for a real team, the amazing feelings of empowerment and the control over their own destinies....
It happens every time.
The bootstrappers with infinite dreams and negligible revenues light up.
The successful entrepreneurs such as Joel Gascoigne, who helped expand Buffer from a personal project into a business with a talented team with real revenues, light up.
The hugely successful entrepreneurs such as Scott Dorsey, who helped steer ExactTarget out of a garage, into an IPO, and then into an acquisition by SalesForce.com, light up.
Every entrepreneur lights up when we talk about being an entrepreneur because they feel alive: free to chart their own courses, to make their own decisions, to make their own mistakes--to let the sky be the limit not just financially but also (and almost always more importantly) personally, too.
And in that way, regardless of financial return, they feel really rich. And they are really rich -- regardless of income or wealth.
Really, Really Rich
That's why the only way to become really rich financially and really rich personally--in other words really, really rich--is to start your own business. Even if it's just on the side. Even if it's just a slightly stepped-up hobby.
There's no reason not to. You don't have to quit your job right away; in fact, you probably shouldn't. (One of the best ways to minimize your risk is to keep your full-time job while you build your foundation for success.) Plus the basics of starting a business are easy; you can do it in one day.
Here's the deal. In return for less freedom, less control, and less fulfillment, every day you go to work for someone else your upside is always capped and your downside is always unlimited.
The downside for entrepreneurs is also unlimited--but in return, they enjoy the possibility of an unlimited financial upside and an unlimited personal upside.
Take a chance on yourself. Try to get really, really rich.
Maybe you'll only become really rich.
Maybe you'll only become really rich.
One out of two is still awesome--and you will have achieved it on your terms.
If your friends and family think you were crazy for starting a business, show them this article. If you've been thinking about starting a business and people say you're being foolish, show them this article.
If the people around you don't understand how personally fulfilling taking a chance on yourself can be, have them check this out.
And then get started on your entrepreneurial journey, even in the smallest and safest way. Every step you take will bring you closer to becoming at the very least really rich--and maybe, just maybe, really, really rich--and will let you join a group of people who live their lives their way, on their own terms.
Who are those people?
Entrepreneurs. Be one.
It's the best investment you can make--because it means you're investing in yourself.
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