Building wealth is a learned skill set just like any other in this world. It takes discipline, dedication, "know how" and for most of us who decided not to major in the field of finance, we must have the interest to take on learning about this subject in our spare time. Like everything else in life, you won't get good at something unless you practice, which explains why we find people with large earnings fail to build wealth over their lifetime. They just don't know how to do it. It makes sense though, doctors spend a good portion of their life learning how to prolong people's lives and mechanics dedicate themselves to learning how to fix equipment. Why would you spend your limited free time outside of your work learning about something you don't enjoy?
The good thing though is that you can improve your wealth generation significantly with very little time and effort by focusing on the following 5 terms:
1. Income - Invest in your earning power and grow your income above the rate of inflation through things such as formal education & accreditations, apprenticeships, relocating for promising career opportunities.
2. Expenses -Control your expenses as much as possible. Don't buy the most expensive home that your bank has approved you for. Avoid buying new cars as much as possible!
3. Net Worth - Read and understand the definition of net worth and learn how to calculate it. This will be the primary metric that will determine your financial progress over your lifetime.
4. Compounding - Read and understand the definition of compounding. Master the art of compounding by reinvesting earnings from your job, stocks and any other source of income you might have.
5. Patience - Most people do not get rich overnight. Have the patience to see your money grow overtime and enjoy the journey!
It is that simple. Most people would be in a significantly better financial position if they just focused on the 5 principles outlined above. Unfortunately though in a world where banks are for a large part, people's most trusted source of financial consultation, there is a tendency to make bad decisions. Should I be taking a mortgage out to the full amount that I can afford? Is real estate a good investment for me? Should I really be investing in a banks mutual fund that charges a 3% management fee? Banks would likely say "yes" to all these questions but we as SA readers know better than that….because we practice.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.