How to Build Wealth in 5 Easy Steps

The internet is full of articles on how to get rich quickly (spoiler: you won’t) or courses on financial freedom (spoiler again: the only people getting financially free off these are the authors).

In an attempt to shout through the noise, I want to set out what I believe are the only key steps that really matter in making a difference to your financial future.

Spend Less Than You Earn

This is without a doubt the hardest step, and can feel outside of your own control, but I would advise starting with the following:

• Detailed expenditure analysis. Read through your bank statements and figure out where your money goes.
• Check your direct debits and standing orders. Are they relevant, do you still use them, are they good value for money? Put the work in to check your bills once a year and switch them up, or cancel them altogether, to make savings where you can.
• Think before you buy. Is the purchase a need or a want? If it’s a want, wait 24 hours before making the purchase and see if you still want it.
• Make a plan for what the savings will be for. An underrated step but one that will give you motivation when you need it most.
• Increase your income (the hardest of an already hard category). Ask your boss what you can do to increase the opportunities for a pay rise or, if you have the time, pick up extra work or start working on a project of your own.

Build a Rainy-Day Fund

The boring one. General guidance is to hold between 3 and 6 months of expenditure (note: not income) as cash in an easy access account.

A Rainy-Day Fund is to provide you with piece of mind that you can cover your expenses should something happen meaning your income reduces but why is it so important when investing?

The main purpose from an investment stand point is to ensure you do not need to access your investments during the short term. The market is volatile so investments are best left to compound over the long term, where markets tend to rise. Short term markets are unpredictable and go down as well as up.

If you are forced to withdraw investments while the market is down, not only will you make a loss, but you will also miss out on the days of positive market returns that normally follow down days.

Invest the Surplus

If you’ve made it this far, you really have done the hard bits!

This can seem like a scary prospect or even a daunting one, given the number of options out there currently. So don’t over-complicate it, the key here is to go with the option that makes you most comfortable but if you have done the other two steps you should be in position to put this money away for a period of time and not worry about potential short-term ups and downs of your investment.

Think about the time horizon for your investment and invest accordingly. Short term (3 years or less) keep it as cash and then slowly increase risk from there.

Look at value for money in what you’re paying for and ease of use. Will it keep you accountable, can you set it up to debit your account each month?

Don’t worry about performance at this stage, this biggest impact you can have is the amount you save. A 10% return on £10,000 is £1,000, but if you are putting in £300 pm then the contributions will grow the pot far faster than the return achieved, at least to begin with.

Automate your Monthly Savings

There are two key reasons to automate your investments, one emotional and one technical:

• Decision paralysis — by automating the investment you rid yourself of the worry about whether now is a good time to invest. Investing regularly avoids building up cash and then having to work out whether now is a good time to invest a lump sum or not. You are instead getting a regular average, as below.
• Pound cost averaging — by investing monthly, you will naturally invest into the market at points that are higher and points that are lower, due to short term volatility. This should lead to a nice smooth, blended average cost and avoid investing it all during market highs.

A little trick to make sure you really get the most out of your savings: set the monthly direct debit to be paid on the next working day after you get paid. Known as “paying yourself first” this ensures the money is out of your account shortly after it arrives, minimising the time you have to spend it.

Patience

“People often overestimate what they can accomplish in one year. But they greatly underestimate what they could accomplish in five years.” — Peter Drucker

It’s time to sit back, make yourself a coffee and get on with your life. Provided you have set up the previous 4 steps you are now in a position to walk away and focus on the things that are truly important to you. The “magic” of compounding returns is about to do the rest of the hard work for you.

Summary

Obviously, there are many more things that can be done to optimise your finances but as with everything in life, Pareto’s law applies. Do the 20% of things I have listed so far and you will benefit from 80% of the results.

1. Spend less than you earn.

2. Build a rainy day fund.

3. Invest the surplus.

4. Automate monthly savings.

5. Patience.

Now go away and think about implementing these and begin making a meaningful difference to your personal finances.

If you have found any part of this article helpful please do pass it on to others who you think may benefit. Alternatively, if there is something else in the world of personal finance you would like me to write about please leave any suggestions as feedback.