All of us have dreams and aspirations about accumulating wealth and living a luxurious life.
You may believe that wealth accumulation is only possible for those born rich or into a generation of wealth. However, anyone can dramatically increase their net worth.
Before you scoff, remember that it won’t be easy. Others may have more advantages than you. Life is full of challenges.
It will also depend if you are wealthy on how much you spend, what you do with your money and whether you have a budget.
You can achieve financial freedom and a higher networth than you might think. But you must first understand how to accumulate wealth.
Table of Contents
What is Wealth accumulation?
What is a wealth accumulation plan?
How to start accumulating wealth
What is Wealth accumulation?
You can accumulate wealth by increasing your net worth over time. You accumulate more money by investing in assets which compound. This allows you to live a comfortable lifestyle and reach financial independence.
Some people have a number that they think defines wealth. In a Modern Wealth Survey by Charles Schwab, respondents believed that once you reach a net worth of $2.3 million, you are wealthy.
Another survey by market research website YouGov revealed that if you earn more than $100,000 per year you are also wealthy.
These two numbers are very different, and it appears that the average American has different ideas of what constitutes wealth. These different views can be attributed to many factors, such as current location, age and family.
Why is it important to accumulate wealth?
It is important to accumulate wealth because it will help you save for retirement, generate money even while you are sleeping, and keep assets in the family so they can be passed on to future generations. You can retire earlier, reduce financial stress and have multiple income streams.
In these sections, you may also have noticed that I don’t use the word “rich” very often. You may want to be rich but accumulating wealth will make you more wealthy.
Remember that rich and wealthy are two distinct things.
What is a wealth accumulation plan?
You need to know what it takes to be wealthy and create a plan to accumulate wealth.
A wealth accumulation strategy is an investment plan that helps you to increase your net worth and investments over time. Your accumulation plan should aim to invest for the long term in various assets and funds.
Consult a financial planner or wealth advisor. You could also create your own DIY plan for wealth accumulation. It depends on how comfortable you are and the assets that you have to manage.
Personal, I have chosen my own DIY plan since I began to accumulate wealth from scratch, saving me money on fees. Plus, I enjoy learning by myself and teaching myself personal finance.
A few years back, I had a net worth that was negative. But over time, I managed to improve it. Although I don’t consider myself “wealthy”, I am comfortable with my finances.
Personal Capital is a great tool to track your investments and net worth. You can use the platform and app for free and visualize all of your assets. Sign up for Personal Capital to learn more.
How to start accumulating wealth
What does it take for you to build wealth? How can you create a plan of action? You may not think it is as difficult as you might think. However, wealth accumulation takes time.
If anyone tells or suggests that you can get rich quickly, you should ignore them. Wealth accumulation is not a quick fix. Unless you are a lottery winner or inherit millions overnight, it takes time and discipline.
There are no new ideas or secrets to building wealth.
- Budget: Create and update it
You must first understand your budget and how you spend your money. You will have to examine your income and expenditures.
Find your fixed costs, such as rent, mortgage, utility bills, and insurance. You should also look at the variable costs, which are things that you spend money on but may not be necessary.
The 50/30/20 rule is a good place to start. The 50/30/20 rule states that 50% of your budget should be allocated to rent and utilities and 30% for your wants, while the remaining 20% is set aside for savings and debt.
When I started my financial journey, I flipped the 30/20 rule. I put 30% of my income towards saving and 20% toward paying off debt.
Budgeting is a challenge, but you can do it in a number of ways. Here are some resources that can help you with budgeting:
Budgeting 101: Basic tips to improve your finances
What is a Budget Calendar and do you need one?
What is the 30-Day rule? Manage your impulse spending
How does the Cash Envelope system work?
- Monitor your net worth
You will most likely see your net worth once you begin budgeting. You should understand the importance of this number, particularly for wealth accumulation.
It is easy to calculate your net worth. You simply subtract your current liabilities from your total assets. You may be apprehensive about calculating your net worth because you have high-interest debt or don’t currently have much in the way of assets.
You’re okay, don’t worry!
You should also keep track of your liquid networth. This is similar to your total net worth but with one small change:
The liquid net worth of your assets is the total value that you could sell quickly to get cash. If you were to sell your assets immediately, for whatever reason, it would be easy to get the cash value.
Understanding both aspects of your finances will help you to get a better overall picture of your finances. You can track your progress and also know how much money you need in an emergency.
- Create an emergency fund
Building up an emergency fund is the first thing you should do. It is important to have an emergency fund.
Unexpected expenses can arise, or you may lose your job.
Unexpected life events can be stressful and if you are not prepared, they will cause even more stress. By building an emergency fund, however, you can ensure that you’re protected if something happens.
Most people recommend having 3-6 months’ worth of expenses in an emergency fund. Having more money is always a good idea! Aim to be ready for a few months.
If you want to earn more interest, consider transferring your money to an online bank.
- Get rid of debts with high interest rates ASAP
It is a fact that you will need to pay off any debts as quickly as possible if you wish to be wealthy. You should also get rid of debts with high interest rates, as they can cause payments to be delayed for years and cost you a lot of money in interest.
Get rid of your debt from student loans, payday loans, and credit cards. They all carry high interest rates. Calculating your budget will allow you to see the amount of debt you owe and how much you are currently paying.
You can also start paying more aggressively to pay off debt sooner, rather than just making minimum payments.
Depending on your debt, you may need to be more frugal or invest less until you pay off all of it. Choose the debt strategy that suits your needs and goals.
- Save more money
What do you do now that you have an emergency reserve of at least 3-6 months and you have paid off all your high-interest loans?
In order to accumulate wealth, you need to save and invest more money. Let’s begin with your ability and willingness to save more.
You know exactly what your income and expenses are. Also, you have paid off all or most your debt. You can now start saving the money that you were paying on your loans. You will immediately increase your savings rate.
It’s exactly what I did. I pretended that I didn’t have the money, but I was able to pay myself before paying off debt. This could save you a few hundred dollars or more per month depending on how much debt is owed.
Also, consider your total spending. Do you eat out too often? Does your spending on entertainment look too high? How can you save money on items you don’t need but still enjoy yourself?
Saving more money allows you to invest and buy assets that appreciate, which will help you build wealth.
- Earn more money
Budgeting and cutting costs will only take you so far on your financial journey. You’ll need to earn more money if you want to be wealthy. In today’s modern world, you can earn more money or increase your income.
You may be due for a pay raise, or you may deserve it based on the quality of your work. Many companies give out minimal raises that you can barely notice, while others will not give you a raise until you ask. It may be daunting, but make a plan and track your achievements. You may be surprised at how open managers are.
Negotiate your salary. If you are moving to a different company or looking for a job, do not be afraid to ask for more. You should be realistic when you ask for a salary increase, but you can also push back against any offer. Many people have increased their incomes by switching jobs or companies. Job-hopping is a great way to increase your income.
You can accomplish a lot by working side hustles outside your regular job. You can start an online business or a gig economy, freelance, get a part-time position, do e-commerce, etc. You can earn extra money in many ways. This money can be used to invest or save.
- Invest wisely
Start investing and put your money to work.
It’s great to have cash on hand for emergencies, but to really compound your wealth, you should invest in assets. It can be anything, and the assets that are best for you will depend on your financial goals and risk tolerance.
Stock market: investing in stocks and bonds is the best way to build wealth for retirement and long-term. Create your 401ks, IRAs or other investment accounts as required. Index funds are the best way to keep it simple. If you can, max out your account. Micro-investing apps such as Stash and Acorns allow you to get started even with just a few dollars!
Real estate: Many people create wealth by purchasing real estate to rent out or renovate and sell for a profit. Real estate may require more money up front and knowledge but it can skyrocket your net worth. Fundrise, Groundfloor or DiversyFund are all good options for real estate crowdfunding.
Alternative investments are another way to accumulate wealth. Real estate technically falls into this category, but also consider commodities, gold, silver, cryptocurrencies and collectibles.
- You should have a will or estate plan
You want to protect your wealth and decide how you would like it distributed after you die.
Most people don’t enjoy talking about estate planning or creating a will.
It can be difficult for your family to cope if you don’t think about these issues. It can also cause problems when assets or money are involved. This can lead to more tensions in the family.
You can decide who gets your assets and where they go with a will. With an estate plan, you can go into greater detail on paying estate taxes, naming executors, establishing any charities or trusts, etc.
- Invest in yourself
Last but not least, I want to emphasize that you should continue to invest in yourself. It takes a lot of work and planning to build wealth, but you can also manifest money if you believe in yourself and boost your knowledge.
It is important to review your finances at regular intervals. Continue to learn, even if you feel you already know a lot. You can read books on money, tax strategies and business (if one day you plan to open your own).
Work on your relationship to money, and see it as an instrument. Understanding your wants vs. needs and how it impacts you becoming rich is important.
Spend time improving your knowledge, and you will reap the rewards for years to come.
