Building Wealth- What Does Than Mean?
Updated: Sep 21, 2021
What does it mean to build wealth in this day and age? This is a question that many Americans struggle to understand. Growing your wealth is a difficult task, as the cost of living continues to rise. However, it is attainable if you develop a feasible plan of saving, budgeting and investing.
There are many strategies and layers to building wealth. However, you won’t know where to start without building your knowledge base on the idea first.
What Does It Mean to Build Wealth, Exactly?
If you asked 100 people what building wealth is, you would probably hear 100 different answers. There isn’t a standard definition.
So what does it mean to build wealth? It’s the process of generating and maintaining long-term income through multiple sources. This includes your savings and any assets that generate income, such as your investments.
Let’s start with the foundation of this process: your income streams. Generally, there are three types of income. There is your earned income, your passive income, and your portfolio income.
Earned income is your livelihood and main source of money. You put in the time and effort with a company and you are compensated for it. You can’t begin to build wealth without it.
Passive income is your earnings from any property, partnership or enterprise in which you are not actively involved. The most common form of passive income is rental properties. In addition, passive activity includes interest income through peer-to-peer lending or partnerships.
Portfolio income is often considered another form of passive income. It’s a subset of passive income that covers all your income from investments. Dividends, royalties and capital gains fit it into this group .
How to Attain Wealth
You now know the various ways you can generate income, but how do you save and maintain it?
This is the tricky part that can confound anyone. This step doesn’t discriminate, no matter if you bring in more than six figures each year or not.
The foundation to wealth is your income, but the key to building wealth is your ability to save and budget effectively. It is important to develop a plan that not only saves your money, but also eliminates your debt.
The 50-20-30 rule is a great place to begin. It’s a rule that has jump-started many individuals’ ability to build wealth.
This guiding principle suggests that you place 50% of your income into your fixed expenses first (Needs). That takes care of your monthly bills.
Take the next 20% and place it directly into your savings and investments. It’s best to open accounts that give you the highest yields available and lowest costs for investment.
The final 30% of your income covers your variable living expenses (Wants). Here’s where you can completely miss the mark if you aren’t careful. It’s vital that you live within your means and steer clear of taking on debt.
If you already have debt, such as credit cards or other loans, pay them off in a timely manner. Make your payments each month and use bonuses, or extra money, to pay them off even more quickly. If you don't know where to start, then I suggest using snowball method to pay off debt.
Build Wealth Through Smart Investing
There’s a secret you should know: If you want to build wealth, boosting your income helps, and paying off your debt is necessary. However, do you want to know the real key to building wealth?
You can’t build real wealth without investing. Investing your money is the only component of this equation that results in significant compound returns.
When you make an investment, you earn a certain return on your money. It could be 3%, it could be 13%, or it could be even more.
Let’s say you earned 10% per year on $1,000 you invested and your interest was compounded annually. You’d have a return on your investment of $100 that year. That would put your new total at $1,100.
Now, the fact that your investment is compounding means you earn a return not just on the principle you originally invested, but on the return you earned, as well.
Due to this compounding effect, after 10 years, you’d have $2,593. After 30 years, you’d have $17,449.
Now, if you invested $100,000 instead of just $1,000, the difference would be even more significant. After 10 years at 10%, you’d have $259,374. After 30 years, $1,744,940.
In other words, you’d be a millionaire without having added a dime of income to the pot aside from the actual returns on your investment. See the power of compounding?
That’s why investing becomes such a key to building wealth throughout your life.
So, What Does It Mean To Build Wealth?
It means you are doing a great job of making money, saving that money and investing it properly. Building wealth is a lifelong process, and it is not easy, but everyone can do it.
If you’re looking for more information, check out these additional articles on the best ways to build wealth by each decade of your life:
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