Building Wealth Is A Simple 4 Step Process
Here's your playbook for building passive wealth
Here’s a comforting truth…
Despite what some personal finance gurus might tell you, there is no “secret formula” to building wealth.
It’s actually a very simple three-step process.
Spend less than you earn.
Put “investible money” to work, building passive wealth.
Staying patient
Read through to the end of this post, where I’ll discuss a bonus fourth step that can help accelerate the process.
Step 1: Income > Expenses
The basic arithmetic of building wealth is very simple; your income must always be higher than your living expenses.
A big debate in personal finance is which is more important, lowering your expenses or increasing your income?
Again, the answer is pretty simple.
In the short term, lowering your expenses is more important.
In the long run, increasing your income is more important.
If you’re just getting started with prioritizing your finances, you must start with understanding where your money is going.
That means you have to do two things that frankly are boring, hard work.
Tracking your spending.
Budgeting.
In my personal finance crash course, I teach; I cover both of these topics.
First, track your spending. You need to understand where your money goes every month. That means reviewing:
Your credit card statements.
Your bank account statements.
Keeping track of what cash purchases you make.
If you’re not already using an expense tracking app, here’s a free spreadsheet I made to help you track, categorize and analyze your spending (turn macros on).
Next, you need a budget.
Sorry, budgeting is hard work and not very fun, but you have to do it—at least at the start.
There’s no shortage of techniques for budgeting, but I prefer to keep things as simple as possible and set up a system that does not rely on my making many decisions.
Here’s a quick explanation.
I define specific financial goals.
Figure out how much I need to save to hit those goals.
Automate the saving.
Spend what’s left.
I provide a detailed explanation of this process in my personal finance crash course here.
So to recap step 1.
Track your spending.
Cut out spending on purchases that provide no value to your life.
Define your financial goals.
Automate the savings for those financial goals.
Step 2: Put “investible money” to work building passive wealth
Investiable money = Income — expenses — money for short-term savings goals.
Having your income greater than your expenses might not be enough to have money you can invest.
Surplus money first needs to be allocated to short-term savings goals like building an emergency fund or paying off high-interest credit card debt.
But, if you can pay all your bills, fund your short-term goals, and still have a surplus each month; congrats you can start building wealth.
Another never-ending debate in personal finance is “how should you invest your long-term money?”
Again, the answer is very simple.
Invest in a handful of globally diversified index funds and be prepared to hold them for 20+ years.
If you don’t know what index funds are or are unsure about how they stack up to other investment options, I have dedicated an entire section of this publication to help you learn everything you need to know about investing in index funds here.
Have specific questions about index investing? Ask them in the comments.
Step 3: Patience
Building wealth is simple.
As we covered, anybody can do it by earning more than they spend and investing in index funds.
But, building wealth is hard.
The hard part is that it can be a slow, non-linear process. You need discipline and patience. To be honest, it will probably take decades—not years—to build enough wealth that you can fund your lifestyle from your investments.
Sorry, no “to the moon” get rich quick ideas here.
But the good news is that building wealth is not an all-or-nothing proposition. You don’t spend 20 years being poor and then suddenly wealthy.
If you stay consistent with steps 1 and 2, you begin building more wealth each year. The more wealth you build, the more flexibility you build into your life.
You can’t quit your job after 5-years of investing and saving, but maybe you could take more time off. As wealth compounds, so do the opportunities it builds into your life.
Once you start seeing tangible benefits of how building wealth improved your quality of life, it motivates you to keep going and makes it easier to remain patient.
Step 4 (bonus): Speeding up the process
If you want to speed the process up and build wealth more quickly, you need to increase the amount of investible money you have each month.
The only way to increase your investable money is to widen the gap between your income and expenses.
If you’ve been tracking your spending and budgeting, then there probably isn’t too much left you can do on the expense side of the equation.
By process of elimination, that leaves us with an obvious conclusion. The only way to speed up the wealth-building process is to make more money.
Now, there are many ways to increase your income. You might ask for a raise at work, switch companies for a better salary, or learn a new valuable skill.
I’ve spent the last 4 years increasing my income by starting a business (the publication you are currently reading) that I run in addition to my 9-5 job.
The 9-5 covers all my living expenses and allows me to save enough to retire in my 50s. That allows me to invest every penny the business earns, which is putting me on track for financial independence before 40.
The faster I grow my business, the more money I invest in index funds. As long as I don’t fall victim to lifestyle inflation, the faster me and my family will become financially independent.
It’s all very simple.
But don’t be fooled; it is very hard work, and even with the side-hustle “shortcut,” it still takes years of patience and consistency. That’s why the first chapter of my book the “Financial Freedom Equation,” asks the reader to identify their “Why”.
Why is it worth it to you to do the hard work to build wealth? How will it make your life and your family’s life better? I would love to hear your answer in the comments.
Stay tuned. Next week I will be publishing a follow-up to this piece where I go into detail about how I built a profitable side-business that runs seamlessly around my 9-5.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
The “Why?” How exactly will it make me and my family’s life better? Good question.
Again thanks for sharing. Oh! Also, You should take a bow being so dedicated to helping others live a better life!