Today’s article is all about starting the process of building wealth using those things that are already available to you. I guess I’m somewhat of a pragmatist in that I don’t vest my interests in abstract ideas and theories. I would much rather spend my time learning and teaching about tangible ideas, and the practical application of those ideas. Which is why today, I’m going to share with you 7 steps to building wealth that you can implement in your life right now. Kiss procrastination goodbye and lose all of those excuses. Today marks the date where you stop thinking about reasons why you can’t, and start thinking about reasons why you can. We’ll call it your financial paradigm shift.
Now I don’t want to disillusion anybody, just like in the credit score article last week, building wealth will take time. I know because I’m still in the midst of working my plan. But don’t be distracted or discouraged by that. It’s actually a good thing. The Word says that wealth that’s unearned or comes from get-rich-schemes quickly disappears; but wealth gathered little by little grows over time. Why? Because true wealth comes gradually, as it is a seed born of knowledge and persistent purpose. Almost anything that comes quickly, goes the same way. So though we live in a society where everything seems to be instantaneous, always remember that anything worth having is worth waiting and working for.
1. Always Pay Yourself First
A part of every dollar you earn is yours to keep. What do I mean by that? I mean that of every dollar you make, you should save at least 10% of it. Most of us complain that when we get paid, we feel like nothing but middle men between our employer and those we owe. We get paid, we pay bills, then we’re broke again until the next check. But I’m here to tell you that though we are accustomed to this style of living, it is not the proper way of living.
The goal here is to learn to live off of less than what you earn, so you can start building your fortune by utilizing the stream of income you already have access to. It’s a discipline thing. And it starts when you change your way of thinking. If you start today with putting 10% of your earnings into savings, over time you will develop the habit of living off of the other 90%, and before you know it you won’t even miss the money.
In his book, Richest Man in Babylon, George Clason states, “Wealth, like a tree, grows from a tiny seed. The first (money) you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed, the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.” But don’t take my word for it. And don’t take George Clason’s. Try it for yourself and see.
As a side note, I do want to express that as a believing woman my true belief system is to pay God first, and yourself second. And I have very substantiated reasons for believing as I do. But since the principle of giving is an article unto itself, I’ll save my reasoning on that subject for another time.
2. Control Your Expenditures
At no point should your “necessary” expenses be equivalent to your net pay. I think where the trouble comes in is people often blur the line between desires/wants and necessities. I know this is the case because more often than not, if you make more, you spend more. But what people fail to realize is it’s not about how much you earn. It’s about how much you keep.
If you study carefully the habits of living you’ve grown accustomed to, you’ll find that in between all the minutia are hidden expenses you’ve come to accept that you can actually reduce or altogether eliminate. Do you really need that gym membership if you only go once a year? Do you really need that 200+ channel cable package when you only watch 20 channels? We all waste money on conveniences that we really don’t need. You just have to take the time to examine your financial bushes and trim the excess.
The best way to trim the excess is to place all of your expenses into one of three categories. The first category you label as necessity (i.e., food, utilities, rent/mortgage). The second category you label as wants but fits within the budget (i.e., cable, high speed internet, hulu subscription). The third category you label as wants but doesn’t fit within the budget (only you know what that is). Anything that falls within this third category should be eliminated from your monthly expenditures.
Now don’t get me wrong, I’m not saying that you shouldn’t enjoy your life. In fact I caution against overstraining yourself by divesting your life of any and every want. What I am saying is that anything taken to extremes becomes dangerous. You should enjoy your life, especially when you work so hard for it. But all things in moderation, including wants. If it disturbs your ability to save 10%, then it needs to take a long walk off a short pier.
3. Create 3 Piggybanks
Robert Kiyosaki says the basis for financial security is saving, investing, and tithing/giving. And since financial security is what we’re striving for, these are the names for your three piggybanks. According to his roadmap, you should put 10% of your income in savings, tuck another 10% away for investing, and the last 10% for tithing or giving to charity. Doing the math, that means you’re now living off of 70% of your income instead of 90.
I know, I know, what happened to 90 right? Nothing happened to it. The 70% is just a goal to strive for. And no worries, we’re going to baby step it. I heard a story once of this guy who was smoking a pack of cigarettes a day. Due to health concerns, he had to quit smoking sooner rather than later. And instead of going cold turkey, each week he reduced the amount of cigarettes he smoked. When he started, every time he bought a pack of cigarettes, he immediately took one out and threw it away. The next week he took two out. The week after that he took 4. He repeated this until eventually he wasn’t smoking any cigarettes at all. It took time, but he weaned himself off of his addiction little by little. And that’s what we’re going to do with these piggybanks. Wean you off the addiction a little bit at a time.
To start, live off of 90% and save 10%. And once you’ve developed a rhythm, live off of 80%, save 10%, and put 10% on debt. Where did debt come from? Well debt is going to take the place of your investing piggybank until all your bad debt is paid off. By bad debt I mean any credit card or debt outside of home, auto, or student loans (makes no sense to invest if you’re living a borrowed life). Once you’ve developed a habitual rhythm with the 80/20 lifestyle, you can then create your third piggybank and contribute the last 10% to tithing or gifts to charity, and live off of 70% of your earnings.
As I said earlier, the principle of giving is so profound an entire article could be dedicated to the subject. For now, I encourage you to read the Law of Compensation essay by Ralph Waldo Emerson. It essentially says that the universe requires balance. And if you give, because the universe demands this balance, you will inevitably receive. I’m a very strong advocate of giving out of your abundance. I do understand that not everybody is at a stage financially where they can afford to give anything away. But I’ll tell you like I tell my friends, if you don’t have money to give, you can always give of your time. Never underestimate the value of what is already available to you.
Oh and one last thing before we move on to step 4. Never touch your piggybanks for any purpose outside of that for which it was created. When the temptation comes to dig into your piggybank for something menial, ask yourself, do you desire the temporary gratifications of today? Or the substantial belongings of tomorrow? It’s all about prioritizing. If you can help it, never spend tomorrow’s money, today. You don’t want your future self knocking you upside the head for some impulse buy you made on the whim of your emotions.
4. Increase Your Ability to Earn
I once read that “formal education will make you a living, but self-education will make you a fortune.” It’s a result of this statement that I am such an advocate of educating yourself. I truly believe that one of the best things you can do for yourself is define what goals you want to achieve (definiteness of purpose), then tailor your education to pursue exactly that.
If you want to attain wealth, first make yourself more valuable at your current place of employment. If you’re an engineer, become the best engineer. If you’re an attorney, become the best attorney. If you’re a burger flipper, become the best burger flipper. Always be improving upon and growing your skill set, so that you may better serve those you work for, as well as, your clients/customers. Also, take advantage of the relationships available to you. Consult with others in your some vocation that do what you do. If you’re looking to get promoted, consult with those who occupy the position you want. Never underestimate the value of a relationship. You never know where it may take you.
Second, learn financial literacy. You can start by reading my book, Hard Work Pays Off (shameless plug lol). It’s a very bare bones, simple, and practical strategy to help you get your finances in order. And there’s many other authors like Robert Kiyosaki, Dave Ramsey, or Suze Orman who can teach you about finances as well. No doubt reading this blog on a regular basis is a step in the right direction. But don’t stop there.
I encourage you to read as many books as you can get your hands on, attend seminars, listen to podcasts, find a mentor, volunteer with an organization that can add to your financial education while you’re helping others. An example of one such organization would be Operation Hope. One of the best ways to learn is to teach. And Operation Hope trains its volunteers on the subject of financial literacy, so that the volunteer can turn around and teach others. If you want to get some education for free and learn by doing, look up your local Operation Hope chapter.
And finally, learn by doing. They say experience is the best teacher. My advice, once you’ve cultivated the necessary skills, start putting what you’ve learned into practice. Start small at first, investing little sums of money. And as you become more comfortable and capable, move on to larger sums. The only limitations are the ones you place on yourself.
5. Turn Your Home Into a “True” Asset
Notice I put “true” in quotes. I did that because, by definition, a home is not truly an asset unless it’s making you money or you own it. The accounting definition for asset is something you own. The accounting definition for liability is something you owe. So technically, until you’ve paid your mortgage in full, you don’t “own” it. Instead you “owe” the bank a mortgage payment, and have possessory rights over your home in the meantime. We could go into title theory and lien theory states. But I think that would be getting too far off topic. For now let’s suffice it to say that as long as your home is costing you money instead of making it, it’s a liability.
But all is not lost. You can turn your home into an asset, even though you have a mortgage, by house hacking. What the heck is that right? All house hacking means is you’re renting out rooms in your home to help cover your mortgage. That way you can live in your house rent free, while other people are paying down your mortgage. Of course this is more conducive to somebody who is single and has the bedrooms to spare. But if you’re married, and you have a basement, you can still do this. You would just convert your basement into a one or two-bedroom apartment with a separate, outside entrance. You also have the option of buying a small multi-family (duplex, triplex, or quad), living in one unit, and renting out the others. Either way you’re turning your home into a source of income for you. And because it is now making you money instead of costing you it, it is truly an asset.
If the options I listed above are still a no-go for you, I recommend endeavoring to pay off your mortgage as quickly as you can. Again, don’t strain yourself. Just moderate at a pace that your budget will allow. If you pay your mortgage payment plus the next month’s principal, every month for the life of your loan, you will cut your mortgage in half. Instead of taking 30 years to pay it off, it’ll take 15. If you make a payment every two weeks, instead of once a month (essentially making 13 payments a year instead of 12), it will knock about 4 years off of your mortgage. There’s a lot of little tricks that you can do to pay down your mortgage more quickly. Ask your lender for an amortization chart so you can start making a plan and then working that plan. You’d be surprised what a little creative financing can do. Besides nothing decreases your cost of living like owning the roof over your head.
6. Multiply Your Savings
As I alluded to earlier, it’s not enough to save. You also need to invest. Why? Because money that just sits in savings is eaten up by inflation every year. The general consensus is that the inflation rate is about 4% per year right now. So to save and not invest is like placing all of your money in a safe, and at the end of every year opening that safe to light 4% of your hard-earned cash on fire. Saving without yielding at least 4% interest on that savings is quite literally wasting your money.
Your money, once earned, should always be working for you. Turn the tables on your finances. Start seeking advice from those who are skilled in investing and multiplying their earnings. Those who know how to acquire assets and start/run businesses. Those who have proven, through experience, that they are competent or qualified to advise you.
Note: When seeking a mentor, always bring something to the table. The relationship needs to be mutually beneficial for the both of you. If all you have to offer your mentor is sweat equity, give it. Never be afraid to work for free if the experience will develop you as a person. Most people love to give advice. And they love to give it even more if you can save them some “labor costs.”
A few words of caution, be careful who you take advice from. Everybody has an opinion, but not all of them have substance. In fact, very few do. You always seek advice from somebody who has what you want. You wouldn’t ask a nurse how to fix a car any more than you would ask a mechanic how to perform open-heart surgery. Choose your mentor/advisor wisely, or risk losing your savings to the falsity of their opinions.
And that goes for these so-called finance experts too. The ones at your bank or with brokerage firms. If somebody contacts you about investing with their firm or bank, agree to it a one-on-one counseling session. And when you get to that session make sure you ask how much they’ve invested in whatever stock, mutual fund, or bond they try to get you to invest in. Their answer will be the tell-tale sign of their personal experience with and faith in any offering they present to you.
Lastly, don’t be afraid to take risks, as long as it’s a calculated risk. You want to be a person of action, not just knowledge or theory. At some point you have to apply all of the knowledge you’ve been acquiring to real life. A lot of people say that luck is nothing more than when preparation meets opportunity. And this luck tends to favor people of action. So if an opportunity presents itself, and it proves through due diligence to be sound, trust yourself enough to take advantage of it.
7. Guard Your Piggybanks and Insure Your Future
To the best of your ability, be a wise steward over your finances. Diligently research any and all investment opportunities. Kiyosaki said he looks at 100 deals, puts in offers on 10, 3 of those offers get accepted, and he only chooses 1. If that isn’t diligence, I don’t know what is.
Don’t be overconfident in your own wisdom. I’ve heard many times, if you’re the smartest person in the room, then you need to change rooms. You should always be surrounded by people who are smarter than you. Napoleon Hill says that the “harmonious coordination of two or more minds working (toward) a definite end” is a sure fire formula for success. If an investment/opportunity comes your way and it stretches beyond the scope of your current knowledge-base, don’t be afraid to ask somebody smarter than you to help you analyze it.
On another note, be smart about who you loan your money to. I have a rule. I never loan money that I can’t afford to do without. Nothing destroys more relationships than friendly loans gone bad. And if you value that relationship, don’t put undue financial strain on it. You know which of your family members or friends are creditworthy. You know those who never pay you back. So lend wisely. If your friend has a job and is honest, lend to your heart’s content. If your friend isn’t accountable but wants to give up some collateral (expensive jewelry, gaming system, electronics, etc…) until he can repay the loan, lend to your heart’s content. But if your friend is unreliable, asking for money because of another money issue, or in the throes of great emotion (nobody thinks logically when emotional), have the courage to say no. It may not seem like it at the time, but by refusing to enable them you are actually helping in the long run. If you truly wish to help a friend, do so in a way that won’t visit your friend’s burden upon yourself. It’s the best way to maintain an amicable relationship.
And lastly, prepare for suitable income for the days to come. As I’m sure you’ve heard time and time again, there will come a day when your physical ability to work is far behind you. So it behooves you to plan for that day. The true definition of wealth is how long can you survive without working? Right now, it may not be very long. But if you follow these steps, you’ll learn to develop streams of passive income that will sustain you for the rest of your life.
In the meantime, I encourage you to invest in your employer’s 401k. Especially if they’re matching your contribution. You can also invest in IRAs or Roth IRAs. If you have a family that depends on your income, you should look into life insurance. Because everybody’s situation is different, it’s hard for me to speak generally about planning for your elder years or whether or not you should have life insurance. My advice, do some research on retirement accounts and life insurance, then do what works for you.
Me, personally, I invest in my company’s 401k (they match) and my employer offers a pension plan. I do not, however, have life insurance outside of the basic insurance my employer gives me. Why? Because I don’t have kids or a husband that depend on my income. The basic life insurance paid for by my employer is enough for my family to bury me should something happen to me (God forbid), and have a little something-something left over. And right now that’s all I need. So again, do what works for you.
My hope is that the 7 steps laid out above will instigate a financial paradigm shift in your life. It won’t be easy, and it won’t happen overnight. But with time, patience, and a consistent and persistent effort, you will see the tide begin to change. I plan on living out every last one of these steps. And I pray that you will join me. As I progress, I’ll be posting about it and sharing the knowledge I’ve gained along the way. I hope you would do the same.
Until next week…