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Do you ever wonder why some people are achievers, and others just sort of get by? Or why some leap forward, while others remain stuck? Let me let let you in on their little secret.
They have a plan.
The same holds true when it comes to wealth creation, too. Building your net worth doesn’t happen by accident. Instead, it takes having a specific plan for creating and growing your riches!
One of my great loves is adventure travel. It offers breathtaking views, tasting exotic foods, and interacting with foreign cultures. But, before I can have any of these experiences, I need to have a plan. One that includes where I want to go and what I want to do.
So, let’s ‘hit the road’ and journey through the process of building wealth!
Before you go on an expedition, you first need to know the starting point. In travel, this would be your physical location and the items you can take with you.
On your wealth-building journey, start by taking inventory of your finances. Compile a list of your assets and liabilities. Assets are things of value (ie. checking account, 401k, etc). And liabilities are obligations you have to make payments on (ie. car loan, mortgage, credit cards, etc).
Also, identify the sources and amounts of your monthly income and expenses. Using this information, you can determine your monthly cash flow. Which is the measure of your monthly inflows and outflows of money.
To build wealth, your cash flow must be positive. Your monthly income must be greater than your expenses.
My favorite app for keeping all this information in one place is Personal Capital. The FREE software is super easy to use and allows you tall all your accounts together. It gives a clear snapshot of where you currently stand financially. And did I mention it’s FREE!
Continuing down the wealth creation road, it’s time to decide on the destination you want to reach. Sit back, close your eyes, and dream a little. Where do you want to go financially?
Think back to the story of Alice in Wonderland. As Alice comes to a fork in the road, she asks the Cheshire Cat which road she should take. The cat responds, “Where would you like to go?” To which Alice replies, “I don’t know.” “Well then, it doesn’t matter which road you take,” says the cat.
Knowing the destination is key to any trip. But, the ‘why’ is vital to it. Many people start working towards something, but their efforts wither away over time. Goals fade because people forget why they wanted to achieve them in the first place.
Some questions you should consider:
Every journey has its challenges. And you will be able to push through them when your ‘why’ is stronger than the reasons to quit!
You have determined the reasons you want to build wealth, now start focusing on the details. The SMART Goal Method (Specific, Measurable, Attainable, Relevant, Timely) allows you to dial in on the specifics. All these characteristics help build the roadmap to your destination.
Some questions to reflect on are:
Answering these questions will provide a clear picture of where you are heading. And how to know when you arrive. I recommend reviewing your goals at least weekly. (I am a little goal crazy and look at mine multiple times per day!) The more you look at them, the more they will be top of mind. And the more you think about them, the more likely you will be working towards them too.
The biggest roadblock people face on their wealth creation journey is debt. The monthly payments on credit cards, mortgages, and vehicles take up the majority of people’s income. Not leaving much leftover for anything else. This leads to an endless cycle of working today for purchases that were made months or even years ago!
Debt is like walking around in financial handcuffs. It constrains your money and limits your possibilities. Reducing and eliminating debt will increase your cash flow. And allow you to pursue the next step.
This account is there for you when you need it most. Having untouchable money stashed away will give you confidence and peace of mind.
I recommend saving at least 4 months worth of your expenses (from Step 1) in cash. Don’t put it under your mattress either, that is a very well known hiding place!
Instead, deposit it into a savings account that you don’t touch.
Some friends of mine call it ‘Sleep Easy Money.’ These funds are there for you when life happens (and it will happen!). It will help reduce your stress and allow you to focus on the situation at hand.
Unexpected expenses can be anything from car repairs, medical procedures, or even a job loss.
I was laid off from my first real job during the Great Recession. It was a stressful time, with plenty of uncertainty. However, my emergency fund gave me time and allowed me to stay calm. I was able to decide on the direction I wanted to move in next. I wasn’t forced to jump at the first job offer I received just to make ends meet.
When you are on a trip you don’t take the exact dollar amount it will cost. You always take extra. An emergency fund is the extra you need in case you get lost, run out of gas, or need to bribe a Thai police officer!
Do NOT skip this step. Establish an emergency fund for your trips and your financial life.
The first five steps are required to prevent any derailments on your path to building wealth. Step 6 is where the real fun begins! Saving is the true starting point of wealth creation.
Back in Step 3, you decided on an amount to save, and when it needed to be complete. Using simple math you can compute your monthly savings amount to achieve the goal.
For example, let’s say you wanted to save $3,000 in 6 months. You simply divide 6 into $3,000 and have your monthly savings goal of $500.
Every month, deposit your monthly savings goal into an interest-bearing account. This is an additional account, separate from your emergency fund. Do this for the determined time (6 months in the above example) and you will undoubtedly achieve your goal!
In wealth creation, It is not enough to simply save money. You must invest it. Investing makes it easier to achieve your financial dreams by getting your money to work for you.
The sooner you start investing, the quicker you can take advantage of the 8th Wonder of the World, compound interest. Your money will grow faster and bigger than it would have by simply saving it.
For example, let’s assume you have a savings goal of $120,000 in 10 years. If you only saved, it would take $1,000 per month over the next 120 months to achieve it.
Or, if you saved and invested just $773 per month at a 5% rate, you would also have $120,000 in 10 years. But, you would have only physically saved $92,760 of your money and compounding interest would take care of the rest!
However, if you invested the $1,000 per month at a 5% interest, you would end up with $155,282. That’s a difference of $35,282 for taking just one extra step and investing!
The wealth creation process is more than setting goals and putting money aside for a rainy day. It’s also about self-exploration, achievement, and the best part, a little bit of dreaming!
Controlling your money and having a plan are essential to achieving your financial dreams. Create yours, stick to the ‘roadmap’ and you will hit your goals!
What’s your financial dream? Comment below.
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