Many of us are doing that, but have hardly any wealth to show for our effort.
Why? We’re not only good at making money, we’re also very good at spending money.
In order to build wealth, you need to have a foundation to start with. We’ll start with some fundamental wealth building strategies from many, many years ago – advice from the “Richest Man in Babylon,” “The Millionaire Next Door” and “Rich Dad Poor Dad.”
You’d be surprised. Many people who dress and spend like a millionaire are not anywhere close to being one. Millionaires are often such plain, down-to-earth people.
Wealth is not defined by how much money a person makes, but how much money a person accumulates. You can have people making over half a million dollars a year, but have nothing accumulated. On the other hand, you can have someone making $80,000 a year, and have a million dollar asset and still be able to pay for their children’s college education.
Let’s explore some tried and true wealth building strategies or behaviors that have helped many become the richest men and women throughout history. I hope we’re smart enough to adapt these changes in our lives and our families’ lives.
Wealth Building Strategies:
1. Pay Yourself First. This is simple. No matter what, you need to pay yourself first, at least 10-15 percent of your pretax earnings.
I automatically put aside 15 percent of my pay to my TSP. My employer matches 5 percent of my contribution, which is free money for me tax-free, not to mention the appreciation over time is tax-free.
I also set up automatic transfer of savings from my checking account to my investment account that I have no debit card access to. The only way to access money from my investment account is through bank transfer to my checking, which takes at least 2-3 business days.
In order to build up cash, you have to make the process automatic and easy.
2. Live Within Your Means. Keep a budget and plan for your financial futures. Be frugal. Buy only what you can afford. Don’t dress to impress your enemies. Buy used cars and shop for clothing on sale.
You don’t need to wear expensive clothes or drive a Mercedes Benz to impress. You should impress others with who you are and your personality.
Remember, wealth is how much you accumulate in asset, not the doodads you accumulate.
3. Invest in profitable business and real estate opportunities. Pay attention to financial details and look for profitable financial investment opportunities.
4. Own Your Residence. Everyone has to have a place to live in. Instead of paying rent to someone else to pay their mortgage, why not pay your own mortgage.
If you don’t have the money yet to put down for down payment, start studying the strategies on this page and practice them every day.
While you’re building your down payment, learn about the process of home buying and home loans basics to become a savvy homebuyer.
5. Own a business. Many self-made millionaires are business owners or self-employed professionals.
Most people think owning a business is risky. But most wealthy business owners would tell you that “having only one income is risky.”
Business owners are in control of their earnings, they have multiple sources of income from many clients.
Think of what you enjoy doing the most, and make that your business. I love real estate and renovating, so I made real estate investing my business.
The other big perk of having a business is tax benefit. The U.S. tax laws are written to protect business owners and married couples. The biggest tax beneficiaries are married business owners.
6. Be goal-oriented. You need to have clear goals to direct your action and search for wealth building opportunities. Once I set my mind to become a real estate investor, all the resources and people just started coming into my life to help me toward my goal of becoming a real estate investor. Set daily, weekly, monthly, yearly and lifetime goals to help you stay on track.
7. Increase your ability to make more money. Try to be better each day and look for opportunities to make more money.
Again, set goals to keep you on track and know what you’re looking for.
8. Life insurance. Buy life insurance to protect your family. As Ben Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.”
Everyone dies eventually, leave a legacy for your family.
Today, life insurance not only benefits the family when you die, many offer “living benefits” that you can use when you’re alive, such as terminal illness provisions, loan borrowing, and long term care benefits built into the life insurance policy.
9. Minimize income tax. Income tax is the single largest expense for most U.S. households. It is taxed on income, not wealth and not on unrealized appreciation of wealth, such as home value appreciation.
Most U.S. household pays more than 10 percent of their wealth in income tax each year, while wealthy household pays just about 2 percent of their wealth in income tax.
Anna Tai is the CEO and Founder of Perfect Homes Honolulu.
Photo Courtesy of Flick in Picks [FLICKR]