Wealth is not acquired through addition. It is acquired through multiplication.
Very few fortunes have been made by adding up paychecks and overtime. Nor are they made through a huge one-time killing in the markets. Unfortunately, this is the path that many investors try to follow in achieving financial security. While a high annual income is certainly helpful in achieving great wealth, it is not the primary determinant.
According to statistical studies, two factors are most important in achieving wealth. Firstly, the number of years that an individual has been consistently saving and investing. Secondly, the proportion of funds, on average, allocated to higher return investments such as stocks.
Know the tricks of investments
Wealthy people know the tricks of investments. They know not to let savings adjust to your spending needs. Instead their spending adjusts to the savings needs. It will help tremendously if you budget a certain amount of saving monthly, and make your investments first, as if you were paying a telephone bill.
Make, save, invest
Basically, building wealth boils down to this: to accumulate wealth over time, you need to do three things:
- You need to make it. This means that before you can begin to save or invest, you need to have a long-term source of income that’s sufficient to have some left over after you’ve covered your necessities. And not least, are you good enough at what you do and do you enjoy it enough that you can do it for 40 or 50 years in order to save that money? To begin, there are two types of income – earned and passive. Earned income comes from what you “do for a living,” while passive income is derived from investments. This section deals with earned income.
- You need to save it. Once you have an income that’s enough to cover your basics, you need to develop a proactive savings plan. Track your spending for at least a month. Ensure that you categorize your expenditures. Sometimes just being aware of how much you are spending will help you control your spending habits.
- You need to invest it. Once you’ve set aside a monthly savings goal, you need to invest it prudently. To begin, determine your return and risk objectives and quantify all of the elements affecting your financial life. Then you may take assistance of a financial advisor to invest in the right sector at the right time.
Add to your investments consistently
All the millionaire and billionaires around the world follow the above principles. It’s definitely not a rocket science. Wealth accumulation does not require extraordinary income or investment “home runs.” It requires, first and foremost, that you start saving and investing early, and add to your investments consistently. As for investment strategy, wealth accumulation requires avoiding large losses, particularly in environments that have been historically hostile to stocks. And it requires the willingness to take larger amounts of market risk in environments that have been historically friendly to stocks.