Everyone wants to build wealth but why do very few ever succeed in doing so? It’s because most people don’t take the time to establish a proper game plan on how to grow their money. Building wealth requires planning, budgeting and an awareness of how money can work for itself. The sooner you can amass even a small amount of money, the easier it is to accumulate wealth in the long run. It all starts with the proper frame of mind.
Most people try to take shortcuts and end up wasting their time or squandering what little wealth they have. Make no mistake, there are no real shortcuts unless you get lucky and win the lottery. The foundation of building wealth starts with establishing the right mindset and following through on a few basic principles.
One of basic keys to building wealth lies in how you view your money. Instead of looking at the present value of your bank account, you should view all of your dollars in terms of the future. What does that mean? It means calculating how much your money would be worth at some point in the future assuming a certain rate of interest. My personal goal is to retire in my mid 40′s so I always view my current stash at some point between 10-12 years down the line.
Let’s add some numbers into the mix to illustrate my point. If I have 100k in the bank, I usually assume a realistic rate of return and project this value into future. Assuming a 6% interest rate(easily doable with some safe investments), my 100k would be worth about 200k 12 years later. As a result of this calculation, I treat every dollar that I can save as 2 dollars towards my retirement. Taking on this mindset makes me think twice about making frivolous purchases.
Let’s say I decide to blow 30k on a car. My future wealth now declines to only 140K. The car effectively cost me 60k. Thinking this way forces me to prioritize my purchases and really scrutinize my expenses. The same calculations also work in the opposite direction. If I can just earn a few extra dollars, it’s equivalent to making double that in terms of future earnings.
Just as an exercise, let’s assume a longer time frame. If I retire like most people at age 65, that puts my time horizon at around 30 years. 100K for 30 years at 6% is 574,000 dollars. If I had purchased that car, my future stash would only be about 400k. That 30k car really cost me about 175 thousand dollars!
Save Your Money By Saving On Taxes
If you adopt this mindset, you’ll soon realize that it’s crucial to find ways to save your money or to find new ways of making more of it. Besides spending less, there are other key ways of saving your money. One way is to pay less on your taxes
If you have a regular day job, good ole Uncle Sam can take away more than a third of your income right off the bat. In fact, working for someone else is probably the worst thing you can be doing if you want to save your money. If you are even remotely interested in quitting, make sure you read my article on 5 reasons you should quit your day job. The fact is is that the biggest tax breaks are only available to those who start their own businesses. Your business doesn’t have to be anything grand, but if you don’t have a business, you are seriously getting gouged by the government.
Last year, our small business allowed us to expense over 12k in computer and other related equipment, a few thousand in entertainment expenses and over 6k in travel expenses. Assuming this money would’ve been taxed at 30%, we effectively saved 6k overall. Compounding this money for 12 years at 6% means we saved almost 12k! The above calculations don’t even take into account all of our deductions. If you’re interesting in learning how to save on your taxes, be sure to check out our articles on tax savings for small business.
Grow Your Topline
Starting your own business will also allow you to grow your top line. Given that you can only earn a fixed wage with a day job, there’s only so much that you can save in a given month. That is why it’s crucial to worry more about your top line than your bottom line. By investing your time into ideas that can earn you passive income, you can exponentially increase your wealth.
Let’s see what effect additional income streams have on our compound interest model. Using the same example as above, let’s assume you have 100K in the bank and your business nets you an additional 10k of profit a year. Assuming the same 6% interest rate over 12 years, you’ll have saved over 380K with the additional income. The additional 10K income stream effectively doubled your earning power. These examples illustrate why it’s so crucial to establish as many income streams as possible.
Put It All Together
Thanks to compounding interest, it doesn’t really take much to build your wealth over time. The key to amassing a fortune is by constantly contributing to the overall pot as often as possible and allowing the money to work for you and grow itself. You have to remember that it doesn’t take much additional money to have a profound effect on your wealth. In the example above, a 10% increase in income a year can almost double your future wealth. Covet your cash and don’t let go it too easily. Before you make a frivolous purchase, consider the ramifications on your overall future wealth. Look ahead and plan your retirement early instead of blowing your cash on short term thrills.
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