You've probably heard of the Millionaire Next Door, The Richest Man in Babylon, Dave Ramsey's Total Money Makeover, Rich Dad Poor Dad, Graham's The Intelligent Investor, Think and Grow Rich, The Simple Path to Wealth, and The Millionaire Mind.
I've read all of those books and many more just like them. These books and people all say about the same thing, and those suggestions do work IF you implement them. In this article, I've picked out the top 10 steps you can take to generate wealth for the long haul.
Following these steps, I've added six figures to my net worth in the last year while raising 5 kids, so I can personally attest to how well they work. As a former bank director who has visited with many multi-millionaires over the years, I can tell you that there is value to reading all of these books and I encourage you to read all of the ones I mentioned above, but these 10 steps will cover the high-level points of becoming financially independent.
P.S. There's more to generating wealth than just skipping the Starbucks latte every day. You'll be hard-pressed to buy a yacht if your plan is to scrimp and save your way there.
1. It Can be Done
The very first thing to do is get it in your head that YOU can do this. There are many, many wealthy people in the world. In fact, according to a study from Credit Suisse, there are an estimated 35 million people with a net worth of more than one million dollars in the world. Most of us won't figure out how to buy a private jet, but having a multi-million-dollar net worth is not uncommon.
The only difference between you and those who are financially independent is the habits that they have created. Many of these people started out with loads of debt, and a good number of them have gone bankrupt at some point in their life. Aside from a few random lucky lottery winners, these people are wealthy because they have figured out habits that generate wealth, and practice those habits every day.
Interestingly enough, a huge percentage of lottery winners and people who inherit wealth are broke again within 3-5 years because they do not have the right habits. Emulate the daily habits of the wealthy, and you can build wealth.
2. Pay Yourself First
Every paycheck, take at least 10% off the top and stick it in an investment account. This money does not exist as far as your bills go, you MUST pay yourself first to get wealthy. The saying that it takes money to make money is semi-true, the more you can invest in your earning ability the more you will make.
If this seems like too much at first, then take 1%, and increase it 1% each month until you are able to save at least 10%. After a while, you won't notice it, but if you skip this step you will NEVER be wealthy, that money will always find a way to get away from you. This single habit maintained over a working career can easily make you financially independent.
3. Give Some Away
Contrary to popular opinion most wealthy people I know are quite generous with their money, and they started doing that before they got wealthy. Usually, they don't give to individuals because they know that creates other issues, but their gifts are the backbone for most charitable organizations.
There are a lot of thoughts as to why this works since it is counter-intuitive to give money away when you're trying to save it. In my opinion, this works because of what we talked about in step #1 – believing you can do this.
Wealthy people don't ask can I do this, they figure out how they can do it, and then they do it. Giving to others creates a sense of plenty, and that mindset of having plenty eventually translates into actually having plenty.
Anyone can become a millionaire by pinching every penny and sticking it in the stock market for forty or fifty years. The wealthiest people I know aren't misers; they give generously to causes they deem worthwhile. If you have ever worked in any charitable organization, you know that the vast majority of the funds come from a handful of people, and those people are far from broke.
4. Create a Plan
Unless you've been living under a rock, you've heard of the dreaded “B” word. That word makes people shudder, and think about eating Ramen Noodles and Mac N Cheese for the rest of their lives. The word, of course, is “budget”. I prefer saying I'm creating a spending plan. I'm planning what I'm going to do with my money before I do it. I do this at the beginning of every month, there is no such thing as a fixed budget that works every single month of the year.
If you skip this step, you will always be asking where did my money go at the end of the month, rather than saying here is where I want my money to go at the beginning of the month. There are many resources out there for creating a budget like YNAB which I use so I won't get into that too much, but it's pretty simple to do. Write down what your income is (be very conservative here, don't spend money you aren't sure you are going to get), and all your expenses.
Do this a month at a time, don't try to look years ahead or you'll get yourself stuck in planning mode forever and will skip the next step, executing the plan. If your savings and expenses add up to more than your income, then you've got to decide what you are going to cut, or how you are going to get the additional income to offset the costs. The nice thing is you haven't spent anything yet, so you can make those hard decisions before you get to the end of the month and wonder why you dug yourself further into a hole.
Budgeting Tip: Increasing your income is often easier than cutting expenses!
If you need some help creating a plan, YNAB is an excellent tool.
5. Execute the Plan
This is where many people mess up. They wrote down a plan, then saved it on their computer. Now they come to the end of the month, and they're broke again! I created a plan, so why did my money disappear again?
You may have created a plan, but did you execute it? Execution means running it by anyone who will be spending your money, getting their buy-in or making adjustments and compromises, and then following the plan.
In the beginning, you may want to use cash for anything that is discretionary. I did that for a long time, and that way, I know exactly how much I have to spend, and when I look in my wallet I know exactly how much I have left. You can't do that very easily with debit or credit cards. Once you get your spending under control, you can use something like the Chase Sapphire card which is what I use to travel hack, but I wouldn't recommend it until you can get your budget under control.
If the plan is going to work you have to be able to visualize how much you have left in real-time or you will overspend every single time. Realize that no plan survives contact with the enemy, so go back to creating and adjusting the plan as soon as it starts to get off track! I also use YNAB to keep things in order for personal finances and QuickBooks to keep things in order on the business side.
6. Prepare for Emergencies
Preparing for emergencies means first creating an emergency fund, then looking at how you can protect yourself from major financial issues. Dave Ramsey says to put $1,000 away for a rainy day, pay off debt, then save up for enough to keep you going for 6 months if you were to lose your job. I think that is an excellent plan.
Insurance is the other thing you need to get in order. First off, medical insurance is required. Medical issues are one reason why many people end up homeless (what, you thought they were all just bums?).
I've experienced major medical issues in my family, many years averaging more than $1,000 a month in medical expenses even with insurance. I started with over $30,000 in medical debt by age 19 because we didn't have insurance, which felt like an impossible amount to repay at the time. Medical expenses can be humbling, and you should insure against them.
Look at anything that would destroy your finances if things went wrong, and purchase insurance for it – house, vehicle, health, life. If you don't have insurance, these things will destroy any wealth you might have created. Don't purchase too much insurance though, you probably don't need ten million dollars to rebuild your house.
7. Work Hard
I'm sure you've heard the mantra about working smart, not hard, or do something you love and you'll never have to work a day in your life. I'm going to call bullshit on this one
People like Jeff Bezos, the founder of Amazon, worked hard. But he probably didn't work 183 Billion times as hard as you do…
The key is to identify the things you need to do, do those, and stop doing the things that are not productive. The key is NOT to stop working and hope the money will somehow end up in your account.
Most small business owners have worked 70-90 hours a week when they were first building their business, they knew the value of working hard! What we tend to see is the result. Eventually, they find enough good people and automate enough processes that they can afford to relax a little.
That's what people miss, every self-made wealthy person I've ever talked to can tell you stories about how hard they worked, in the beginning, to get where they are now. As Dave Ramsey would say, be willing to live right now like no one else, and later you'll be able to LIVE like no one else.
I recommend reading The Speed of Trust for a deep dive into how to build up your reputation. A high degree
8. Find Mentors
You are going to have a lot of difficulty in becoming wealthy on your own. Find mentors in your life, those people you respect, who are experts in their field. Take classes from our partner Udemy or your local college to build your marketable skills, find someone doing what you want to do and help them, or find a coach or teacher you trust.
Steer clear of asking people who haven't achieved what you want to accomplish for advice, though. At best, if you do, you may get some advice they were given but didn't follow. At worst, you'll waste a lot of time heading down the wrong road.
If you can't find direct connections at first, find them in books. Later when you're on the right track, mentors will find you, or you'll be able to invest in hiring professionals to help you in various areas of your life. I believe that more than anything else, my reading habit and relationship with my mentors have been instrumental in my success. Click here for some books I recommend to get you started.
Speaking of finding mentors, don't forget to sign up for our newsletter if you haven't already! That's what this website and community are all about, helping each other grow in our personal and professional lives.
9. Buy Things That Make You More Money
Rich people buy appreciating assets that make them richer.
Poor people buy depreciating assets that make them poorer.
That means investing in things like rental property, businesses, products you can sell, high-quality stocks and bonds, index, and mutual funds in your 401k, Roth IRA, or other investment accounts. A great passive option is a target-date fund from a reputable company like Vanguard or a simple index fund like VTSAX which was mentioned in the book The Simple Path to Wealth by JL Collins.
Most of my increase in net worth this year didn't come from anything crazy, just some mutual funds I purchased over the years that are now compounding rapidly. You can set up a Roth IRA or other investment account through E*Trade, which I use, or use a similar company to start investing. Just start buying stuff that makes you money rather than spending all your hard-earned cash on things that cost you money.
Invest in Increasing Your Income Potential
You will never save up enough to buy a 20 million dollar private jet or a 65 million dollar yacht by pinching pennies. The only way to do that is to increase your income dramatically.
I've met many multi-millionaires over the years as a former bank director, and those who make $500,000 a year live much differently than those who make $60,000 a year and save up for their entire lifetime to get to that level.
It's easy to believe that you can't improve your situation, but you can significantly increase your income by investing in yourself. Buy some personal development books and start reading. Take some courses, and hire people to help you who are strong where you are weak. Go to college if the numbers make sense for your career path.
Warren Buffett, one of the greatest investors who ever lived in my opinion, put it this way.
Generally speaking, investing in yourself is the best thing you can do. Anything that improves your own talents; nobody can tax it or take it away from you. They can run up huge deficits and the dollar can become worth far less. You can have all kinds of things happen. But if you’ve got talent yourself, and you’ve maximized your talent, you’ve got a tremendous asset that can return ten-fold.
-Warren Buffett, multi-billionaire investor
Invest in yourself! Did you know that $1 invested in yourself today can return $1,000 back each and every year? Read “The Insane Math Behind Investing in Yourself” for more details. How about taking a salary negotiation course?
Education or coaching is one of the few things that you can invest in that can potentially add tens of thousands of dollars to your annual income.
Look for ways to boost your income, not just ways to cut your expenses.
Buying that new car may be the worst investment you can make, as it loses a ton of value as you drive it off the lot, and then continues to go down in value. Don't make that mistake unless you can afford to just throw that money away! If you can, in fact, afford to just throw it away then enjoy your new car! But don't kid yourself that you're making an investment!
Anything that costs you more money in the long term than you get out of it is not an investment, that's an expense. An investment makes you more money than you spent to buy it.
10. Enjoy Life
All the money in the world will bring you no pleasure if you don't take the time to enjoy life. Certainly, money can help buy things like experiences, but if all you are doing is buying possessions, you are not likely to be happy with those for long.
A hospice nurse found 5 common things that people regret at the end of your life (When death draws near, what will I regret?)
Don't make the same mistakes!
Take time to develop and maintain deep relationships with others, go after your dreams, have the courage to express your feelings, let yourself be happy, do the things on this list, and true wealth will find you!
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