Accumulating wealth, building from the ground up
The key to accumulating wealth is to minimise your expenses and maximise your excess income. This is done by budgeting, maintaining an excellent rate of return and seeking additional sources of income.
Why is budgeting important?
The first step to accumulating wealth is to create a budget. This is important because it is quite easy to spend money rather than to save it, and saving is the foundation of wealth accumulation. In fact, it is impossible to accumulate wealth if you are spending more than you earn. Another thing that budgeting helps with is planning. Large expenses like buying your first car, first house, going back to school and even having your first child can be quite expensive and you can easily spend more if a plan is not in place. The reason for this is that there are a lot of ‘hidden’ costs associated with most major expenses.
How do I budget?
Creating a budget
This can be done in many ways, one of the most common ways is to group expenses into various categories and set a limit/target to meet each period. For a yearly budget we would create a table and put the columns as the months and the expenses as the rows. Each month the budgeted amounts are compared with the actual amounts to determine if we went “over budget” or “under budget” for that period. In cases where the budget would have been exceeded you would need to look back and adjust the upcoming periods. Sometimes gradual changes are easier to handle then radical changes; also, some categories are easier to change in the short term. That is, a 5% to 10% reduction in your entertainment or food categories may be easier to change than a 30% reduction in your housing costs.
Getting the best value
Another crucial factor in accumulating wealth and saving money in general is getting the best value of items purchased. Shopping around, buying used when possible are things that significantly reduce your spending.
Investing – One of the keys to accumulating wealth
After you’ve budgeted and accumulated some excess cash it is time to invest and reap the returns. Click here to see my next article in this series!