Wealth building is a skill that can lead to financial freedom for you, your family, and generations to come. To become wealthy, there are 3 stages that can get you there. Earning, saving, and investing are 3 tried and true methods of amassing wealth.
There are two different perspectives on earning more. The first is to cut your expenses and the second is to make more money. You should actually do both if you want to become wealthy.
Find ways to cut down on expenses that you don’t need and find ways to generate an extra income. Optimally, earning money as a business owner can lower your taxes while adding other benefits as well. The key to earning more is creating more value and capturing the value created through ownership.
Let’s say that you are earning $250,000 per year. From the outside it looks like you are doing very well for yourself and your family. However, you are spending all of your take home pay and are living paycheck to paycheck. If you do not save any of your money, you can never become wealthy.
On the other side, if you can have a saving percentage north of 30% you can become wealthier in a shorter time frame. For example, if you are earning $25,000 per month net and saving 50% of your take home pay, you can can retire in around 17 years or less if you are also increasing your income. Saving the $12,500 per month and living on the remaining $12,500 can still get you a life people dream of.
The money that you are saving should be placed in a position of working for you. Keeping your money in CDs earning 0.8% will keep you working until your 65. The three ways that will grow your money are: stocks, real estate, and businesses.
Each method has risk associated with it, but like the old saying goes “No risk, No reward.” If you haven’t learned how to invest, start now. The earlier you learn, the more knowledge you can apply in wealth building. Once you have an income rolling in, low expenses, and saving a high percentage; use the knowledge you have gained from books and videos to build up your nest egg.
Wealth Case Study
Michael has just graduated college and decided that instead of working for “The Man,” he wants to start his own company instead. Wanting to retire early Michael makes a decision that he will keep his expenses low so he can have a higher savings rate while also increasing his income. After 6 months, his business ( Single-member LLC) is earning $10,000 gross per month.
6 months ago his parents agreed to let him stay in one of their rental houses for cheap. His expenses are $400 for rent, $50 for internet, $66 for his cell phone, $30 for water, $50 for electricity, $200 for food, $125 for gas, $300 for car insurance, and $625 car note. His expenses total: $1800 + an extra $500 for traveling = $2,300.
After taxes (15.3%) you are left with a monthly income of $7,800. Michael is essentially saving 70% of his income ($5,500 per month) while also living a pretty comfortable life.
Now, I know that as a single person Michael can save at a high rate but what if Michael decides to have kids, get married, etc. Well, the key is to increase your income when increasing your expenses to keep your savings rate high. Let’s say that Michael’s business is booming and now pays Michael an income of $40,000 per month after taxes. Michael can spend up to $12,000 per month and still retire in 8.8 years.
As long as you can earn on average 5% investment returns per year and have a 4% safe withdrawal rate, your money can last you “forever.”