When wondering how to grow rich it can be frustrating to hear the same rhetoric: “Just spend less and save more”. But sometimes it’s worth going back to the basics to understand what exactly is happening to make this strategy work and what habits you can put into place to ensure that it becomes easy.
Why do the rich get richer?
Why does it seem that some people are able to build wealth where others struggle? At times it is easy to assume that those who grow their wealth are blessed with a well paying job. Other times we assume individuals were provided with large amounts of family support, be it via the Bank of Mum and Dad or via an inheritance windfall. The truth is that over 70% of the world’s richest people are entirely self made. This means that they built the wealth without any help from anyone else and all in their own lifetime – going against the common belief that the rich simply get richer. Almost anyone can grow their wealth. All that’s needed is a little time, discipline, effort and a plan.
“Just spend less and save more”
When growing wealth you need to think less about income and expenditure and start to think about cash flow. What cash is coming in and what cash is going out? Wealth is a simple science, as easy as A – B = C. You are growing wealth the minute you solve that simple equation. A is all the cash that you receive throughout the month. B is the cash outgoings throughout the month. If A is greater than B then wealth is being created (C). Simple right?
These basic foundations should start to permeate through all of your actions. Ask yourself whether the next action you take is going to help ensure that at the end of the month A is greater than B (A > B). If so then you’re guaranteed to grow wealth. If not, then your wealth is shrinking.
Guarantee wealth creation
There are two key steps that you can take in order to ensure that you start to build wealth rather than to destroy it.
Forget budgeting and start tracking
My number one action that you can start today is to start to track your cash coming in and your cash coming out. This simple action will automatically force you to think about each spending/ earning decision in the context of the A > B context.
I’ve never liked the old advice that you should start budgeting. If you’ve never looked at what you’re spending and earning before then having a guess as to what you’re going to spend over the next month is as good as guessing how many start there are in the sky. It’s a futile task unless you fully understand what your spending requirements are.
Instead of budgeting I suggest tracking. Start a spreadsheet and then on a weekly basis go through and categorise (e.g. food, travel, car, shopping etc) each spending item from your credit card, debit card and bank statements. Then add on what your cash inflows were. It’s irrelevant that you will pay off your credit card in a months time. You should start to get into the habit that money spent on a credit card today is effectively cash out the door today. This is called cash accounting.
One tip that helps me to track my spending is to start a ‘note’ on your phone and regularly update this each and every time you make a transaction. Transfer the balances on your ‘note’ to your spreadsheet once a week.
Over time you’ll start to notice two things. One, the act of having to note down your spending item before you’ve handed over the cash will cause you to check yourself when you’re making a purchase. You’ll find that you ask yourself whether you really need to make the purchase. Sometimes, you’ll realise that you don’t. The B part of the equation will fall, and the C part i.e. the wealth part will start to rise.
Secondly, tracking your cash in and out flows over time will lead you to start to notice patterns in your spending. You’ll be quite shocked as to how much you’re spending on unnecessary shopping over the month or going out to restaurants. With this knowledge you can start to modify your behaviour and ensure that you’re set up for wealth creation.
Cheat the wealth creation formula
The second major tip for solving the wealth creation equation is to cheat. Instead of focusing on the A and B part of the equation, skip instead to C. You can guarantee that you’re building wealth each month by allocating a portion of your cash inflow each month directly into savings. You are shortcutting the equation and ensuring that a portion of A goes directly into C and it’s really simple to do.
The simple wealth building step: automate your savings. Go to your bank (or log in online) and set up a standing order to transfer a set amount at the beginning of each month from your current account into your savings account. This will do two things. The first is that will ensure that at the start of each month, even before you’ve started spending, you’ve already prioritised saving. In addition to this, you’ve artificially, reduced A, your available cash inflow available for spending. Combined with the tip to track your cash inflow and outflow, you will now have to consciously ensure that part B of the equation, the cash outflow needs to be equal to or less than an already reduced part A.
What would be your top tips for wealth creation? Feel free to add these in the comments section below.