It’s easy to lose sight of the simple things when it comes to finances. More often than not, we start to focus on complex strategies for growing wealth or try to get involved in the latest fad. The reality, though, is that the foundation for long-term wealth is built from the basics. That’s why it makes sense to remind ourselves what we usually believe to be obvious sometimes.
Before you get too advanced, have a quick read through these five basic rules for growing your wealth over time and make sure you are following all of them.
1. Earn More Than You Spend
This is the foundation of all financial advice. Let’s be honest: if more people were following this piece of advice, we wouldn’t have nearly as much debt. Everyone “knows” that you should earn more money than you spend each month. Duh! It’s one of those things that seems to be easier said than done though.
If you expect to grow wealth long-term, you need to earn more money than you spend. It’s that simple. This is a basic, but powerful concept. If you spend more than your income each month, you either need to make more money, or you need to reduce your spending. Fix the issue quickly. There are no exceptions. It’s so easy to put charges on credit these days, but keep doing it and you won’t be able to climb out of that hole.
2. Be Prepared for Emergencies
As the pandemic reminded all of us very clearly, you never know what will happen next. You need to be ready for an emergency no matter how it presents itself. Whether you have an emergency fund with liquid assets, food storage with other supplies, or both — you need to be ready for an unexpected event. When you take the time to prepare yourself for emergencies, you’ll spend less money and reduce the chances you’ll need debt to get out of your jam.
What’s worst is if going into debt isn’t even available to you when you need it most. Banks have shown time and time again that they are willing to reduce credit limits when economic times get tough because they want to limit their exposure to risks. As Bob Hope famously said: “A bank is a place that will lend you money if you can prove that you don’t need it.”
3. Protect Your Assets
Don’t forget to protect what you already have. Getting the right insurance coverage can help you avoid financial ruin in the face of the unexpected. Your home and your car should be insured, and you should have health insurance coverage. When appropriate, disability insurance can be helpful.
It’s true that in aggregate, you lose money by insuring because otherwise, all insurance companies will go out of business. That’s why the general rule of thumb is to buy insurance for anything that will ruin you financially if the unfortunate event were to occur and skip every other insurance you could afford to self insure.
For example, health insurance is a good bet even if there are no tax penalties for not having it because a major accident could completely devastate your finances, but paying for insurance on a new computer is likely a money-losing proposition.
All of these policies are designed to help protect your assets from financial catastrophe. And if you want to make sure your family’s financial future is protected if you die unexpectedly while you are still working, then you need life insurance.
4. Invest for the Future
Sometimes, you need to take a chance. You’re not going to build long-term wealth when all you do is keep your money in a high-yield savings account. Instead, you need to invest in your future. It’s not very hard to get started with investing. You can begin with practically nothing at an online discount broker. You will be off to a great starting just by using dollar-cost averaging to keep investing in index mutual funds or index ETFs. Yes, there are no guarantees that investments will gain in value. But if you invest in index funds that track the overall economy of developed counties, then this is as solid of a bet to make as anything in life. This has been one of the most effective ways to build wealth over time. Don’t pass up this chance.
5. Develop Yourself
Don’t forget to invest in yourself. Some of the wealthiest people in the world have taken the time to inform themselves, develop new skills, and keep learning new things. That seems to be what’s separating those who are uber-successful and those of us who are just average. We often hear about successful people talking about the books they read to enrich themselves, but how many of us truly do the same? We don’t even read that much, let alone books on self-improvement! If you want to boost your earning power, learn to manage your money more effectively, or develop the knowledge needed to start your own business, then you need to make a conscious effort to invest in yourself. Take the time to develop as a person, and you’ll have a greater chance of growing your wealth.
Finances are basic and simple, but following through is never easy. That’s probably why so many of us brush off these concepts as not useful, yet they still struggle with money matters. Gather the will to implement the basics, and you’ll be well on your way to the riches.
What are your best tips for growing wealth?