The question in this article’s headline is a no-brainer. Of course you want to be wealthy. Everyone wants to be wealthy. Even if your happiness in life is more contingent upon emotional experiences than material goods, more money can help you do more things; whether that’s traveling more frequently or donating to help more people in need.
Unfortunately, only a fraction of the people who aspire to be wealthy will actually be successful. There are many paths to building wealth, from starting your own business to investing in the stock market, but no matter which path you choose, there are some specific financial fundamentals you’ll need to master before you can take the next step.
The Most Important Fundamentals
No matter how you choose to build wealth, these fundamentals are an absolute necessity for your success:
1. Avoiding debt.
While not all debt is inherently bad, it’s a good general principle to avoid debt where you can, and pay off the debts you do have as quickly as possible. Why? The big problem here isn’t debt so much as it is interest; the longer it takes you to pay off your debt, the more you’ll pay in interest–as well as the interest on the interest you’ve already earned, resulting in a compounding effect. If not handled swiftly, or kept to a manageable level (in terms of both principal and interest), your debts can end up costing you many times more than the items or services you originally purchased.
2. Budgeting properly.
You also need to understand the fundamentals of budgeting. At its simplest, budgeting is a simple matter of noting how much money you make, and allocating that money efficiently and responsibly. Your main goal here should be living below your means; ensuring that you have more than enough money for all your needs (including unexpected emergencies), with some left over for savings and investments. Cutting unnecessary expenses and reducing your costs (such as housing) are vital.
3. Setting short-term and long-term goals.
If you want to build wealth, you should also understand how to set and achieve both short-term and long-term goals. Your long-term goals should drive and dictate your short term goals; think of them as stepping stones, getting you to your ultimate destination. Regardless of what specific goals you set, the power of setting goals will help motivate you, and keep you on a solid path toward success.
4. Investing in yourself.
You also need to understand the power of investing in yourself, rather than only investing in external assets and enterprises. If you spend time and money furthering your own education, for example, you’ll be able to earn a much higher salary in the years to come. If you focus on personal development and networking for a few years, you’ll have a much bigger foundation on which to build your business than if you started from scratch. Obviously, there’s a balance to strike here, but you are your own greatest asset.
5. Diversifying your assets.
Ideally, while building wealth, you’ll have multiple streams of income fueling your upward momentum. That could mean a full-time job and a side gig, a portfolio of different stocks and bonds, or collecting rental income in addition to your main source of revenue. Diversification is important because every type of investment, job, or gig will be prone to unexpected fluctuations; you might lose your job, you might see a market crash, or the anticipated value growth of your asset might be disrupted. Being able to fall back on other assets allows you to bounce back swiftly, and helps you ensure a steadier and more reliable trajectory of personal wealth development.
6. An understanding of risk and reward.
Finally, you should be aware of the balance that exists between risk and reward. Generally, the riskier a venture is, the more potentially valuable (and/or potentially devastating) it could be. Different circumstances will dictate where you fall on the spectrum; for example, younger people need to take more risks, while older people need to be more conservative. What’s important isn’t a specific spot on the spectrum, but knowing which point on the spectrum is most appropriate for you at this time and place. Along similar lines, you’ll need to know how to take calculated risks–thoroughly understanding the risks and rewards before making any final decisions.
Are the Fundamentals Enough?
If you’re able to follow all six of these fundamentals, perfectly, would that be enough to build wealth? The short answer is yes, but that involves lots of assumptions; it assumes that you’re successful in reaching your goals, and you keep setting them higher and higher. It assumes that you’ll see reasonable luck in all your risk-taking efforts. It assumes that your investments in yourself are ones with the potential to truly pay off.
You might not become a billionaire by following these rules alone, but you’ll certainly have mastery over your own financial standing, and you’ll benefit from a much more stable and comfortable life as a result.
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