01 April 2011

Eight things to know if you want to be wealthy

The tips in this entry come from an article written on financial-advice-for-beginners.com. Although it is contrary to many statistical facts, it is nonetheless interesting. Unfortunately, as Robert Frank answers when asked whether everyday investors can make more money by copying the behaviors of the wealthy, "The answer is: not really." The rich can afford to invest differently than the other 90% because they can afford to lose more. Naturally they also can gain more.


1. How to Get Wealthy Step 1 - Pay Yourself First
Wealthy people always pay themselves first. When that cheque shows up in your mailbox or drops into your bank account, what should you do first? Most people go out and buy some new stuff, then pay some bills, buy some groceries, then see what's left over. If there is anything left (usually there isn't), they might consider putting some of that money aside in investments.

Wealthy people do not follow this approach. Wealthy people always put money aside for investments right off the top of any money they receive. They know that their investments are more important than any creditor, or any new stuff that they might want. By putting money aside for their investments first, wealthy people are ensuring that their wealth will continue to grow.

Studies have shown that the wealthiest people usually put 20% of their income aside for investments and use the remaining 80% for living expenses.

2. How to Get Wealthy Step 2 - Live Below Your Means

Wealthy people always live below their means. Most of them do not drive expensive luxury cars or wear top of the line clothing. They spend their money frugally and use the money they save to continue growing their wealth.

People with a poor spending habits often go out and buy cars with payments that stretch their monthly income. They also tend to go out and use their credit cards to buy new electronics, clothing and toys that they don't really need.

Let go of the desire to have the latest and best stuff. Make building your wealth a higher priority than status symbols and owning stuff that loses value anyways.

3. How to Get Wealthy Step 3 - Create and Follow a Budget

The best way to make sure that you live below your means is to create and follow a budget. After you have taken out the percentage of money you are allocating for invesments. Allocate the rest of your money using a budget, and make sure you follow it. This will ensure that you don't overspend and end up racking up debt.

4. How To Get Wealthy Step 4 - Learn How To Invest

If you want to become wealthy, you need to learn how to invest your own money. The vast majority of wealthy people handle their own investments. They don't hand their money over to a financial advisor who is really best served by investing their money in whatever earns them the most commissions.

Wealthy people understand that their money is best handled by the people it matters most to - themselves.
It isn't that hard to educate yourself on how to invest. Your local library is sure to have several books available. There is also a lot of information available online. And most bookstores also have a section on investing. Read information from lots of sources and you are sure to find something that will fit well with your goals, resources, and risk tolerance.

5. How to Get Wealthy Step 5 - Learn The Difference Between Active and Passive Income

Wealthy people know the difference between active and passive income. And they also understand that it is of the utmost importance that they build up as much passive income as they can.

Active income is income that comes from exchanging your time for money. For most people this is in the form of a job that you go to that pays you money for each hour that you are there. With this form of income, you can only make as much money as the hours you are able to work. This income can also be cut off very easily if you are fired, get laid off, or become to ill to work. If you can't work, you don't earn any more money.

Passive income is income that is generated no matter what you are doing. This type of income comes from various sources including: real esate investments, business income, online incomes, or investment income. These income sources will continue to earn money for you whether you are able to work or not. They continue to earn money even while you sleep. Passive income is critical to building wealth and making sure you always have income coming in no matter what else is going on in your life.

To learn more about passive income, please read "What Everybody Ought To Know About How To Get Rich"

6. How to Get Wealthy Step 6 - Start Young If Possible

The more time you have on your side, the better your chances of becoming wealthy.  With more time, you have more opportunity to take advantage of compounding interest. Compound interest is when the interest you've earned from an investment gets added the principal amount you invested, and that interest earned also begins to earn interest on intself. As this process repeats year after year, the process is called compounding.

An extra ten years of this compounding process can add hundreds of thousands of dollars to your investments depending on how much you've invested and for how long.

7. How to Get Wealthy Step 7 - Set Goals

You need to have a clear idea of where you want to go before you can figure out the route you need to take to get there.  Wealthy people always have goals. They know how much they want to have, and by when. And they have a game plan on how to reach that goal.  You should do the same. If you plan on reaching this goal by investing. Use an investing calculator to figure out how much you need to be putting away and what returns you need to be getting to reach that goal.  Once you have your plan in place. Follow it. Then check and adjust as needed as time goes by.

8. How To Get Wealthy Step 8 - Get a Mentor

The best thing you can do for yourself if you would like to become wealthy is to get a mentor. Try to meet people that are already wealthy and build relationships with them.  Contrary to how the media tends to portray wealthy people, most of them are very giving, extremely nice, and would be more than willing to help you out if you only ask.  Look for local places where you can meet wealthy folks. Country clubs, golf courses, yacht clubs, etc, are all great places to start looking. You could even hang out in the business section of your local bookstore and chat with some people that come through.

If you are really averse to meeting new people, don't lose heart. You can still find mentors through other means. Mainly reading. Books written by wealthy people can offer a treasure trove of advice.

Over and out.

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