Disclosure: This post contains affiliate links and we may receive a referral fee (at no extra cost to you) if you sign up or purchase products or services mentioned.
I just finished reading The Richest Man in Babylon. I had a lot of recommendations to read this and I’ll tell you that, for as old as this book is (originally published in 1926!!), the content still holds strong. Great book if you’re trying to find your way to wealth. There is some very sound advice that stands the test of time, such as saving at least 10% of what you make and that you can live off your income, but you can’t get wealthy off of it.
Oversimplified? Maybe. But it’s a very good read and that simple advice might just be what people need.
But it got me thinking, and based off of what I go out of that book as well as what I’ve learned thus far throughout my journey, I thought I would put together what I would consider to be the steps to wealth. Drumroll, please…
Get a high-paying job
… at least as high as you can. Yes, you can work your way to financial freedom and wealth with a lower-income job, but obviously it will be much quicker if you’re bringing in more money. The challenge is to find a high-income job doing something you like. I was very lucky… I was actually a studio art major in college because I have a little bit of talent in that area. One day while taking my semester final for an art class, I decided I couldn’t do this for a living. I didn’t want anyone telling me what I had to draw and how I had to do it. I realized art was a hobby and not something I wanted to do as a job. I walked out in the middle of the final.
And that turned out to be an excellent decision. It was still the early days of the computers and the Internet and I took an interest. Eventually I graduated with a major in Computer Information Systems. I ended up moving into the same job that I’m in today as the manager of the Systems Engineers at my company. Although there are plenty of higher paying jobs out there, the salary is still pretty good. And it’s in a field that I enjoy.
That has enabled me to accumulate wealth faster and accelerate my timeline to financial independence.
Ok, this isn’t an absolute necessary step, but it can definitely help you get ahead quicker as long as you don’t spend what you make. If you can find something you enjoy that pays pretty good, go after it. Anything can be learned, but you need to be the one to pursue it and make it happen.
Get out of debt
You’re never going to find your way to wealth if you’re soaked in debt. You can use every excuse in the book when you’re sitting in debt, but the only solution is that you need to dig yourself out of it.
But I took action. I buckled down and worked my %^& off until I got it paid off. Am I bragging? No. I just want to tell you, if you’re in debt and paying the minimum on your credit card balances, you’re getting sucked into a black hole. The system is designed to ensure that you’ll be paying forever. You need to accept this and stop buying crap. Figure out how to stop spending money frivolously and get your debt paid off. Stop justifying and just make it happen. Debt can eat you alive.
Live below your means
What does it mean to live below your means? It means that you don’t try to live the champagne lifestyle on a beer budget. Do you really need that ritzy house in the best neighborhood? Is that expensive sports car really that important? Do you absolutely need to always have the biggest TV or the latest cell phone? These are the things that hold a lot of people back. They want. They want and want and buy a lot of doodads that do nothing for their future. Impressing people is not what it’s all about when playing the wealth game.
I’m currently reading the The Millionaire Next Door (another excellent book) and the author recommends a quick rule of thumb. Multiply your age by your current pretax income and then divide by 10. The answer is a gauge on what you should have put away. So if you’re 50 years old, making $75,000, your calculation would look like this:
50 x 75,ooo = 3,750,000
3,750,000 / 10 = $375,000
So this 50 year should have a net worth of $375,000. If he doesn’t, he’s an income earner and not a wealth builder – not good. This isn’t the end-all be-all and I honestly think this isn’t a strong enough formula, but at least it’s something to start with if you’re a beginner on this path and can be a wake-up call if you come up short here.
The more you can live below your means, the more wealth you can accumulate. There are always ways to cut costs – your job is to figure out where. Start with the bills that will save you the most or that are the easiest to fix and work your way down. Cable bills, insurance, utility bills, car payments, etc.
Save… a lot
In The Richest Man in Babylon, the recommendation is to save at least 10% of what you make. I agree wholeheartedly with this. Not just the 10% minimum, but also using a percentage over a specific number. I like that because if you have a percentage taken out of your paycheck for your 401(k), for example, when you get a raise, that amount you contribute goes up automatically with no intervention from you.
The minimum of 10% is also a good start – maybe I should say that again – it’s a good start. 10% will help you build up a nice savings. However, you’ll find that most of us in the financial independence community are contributing a lot more than that to be able to quit the 9-5 earlier in life. Mrs. R2R and I are currently putting aside around 35% of our income. I push at that number as much as I can and it really irks me that it’s not higher, but it’s still not too shabby.
Make your savings work for you
So saving is great, but if you just stick the money under your mattress, it makes it all the more difficult to accumulate enough wealth. That money just sitting becomes less and less valuable because inflation keeps chipping away at what you have.
So how do you get keep from losing money that sits there? You need to put your money to work. That can be a hard thing for savers. We want to keep our money safe, but we also want it to grow. The problem is that the two usually contradict each other. It’s hard to have growth without risk.
There are a couple of ways of making your savings work for you. You can look for appreciation or cash flow. Investing in mutual funds in the stock market is one way to do it… the old “hold and pray” method. Hey, I’m not judging – most of my 401(k) is stuck in that lousy setup, too, but the idea is that it’s better than nothing. Unfortunately, that’s a time-will-only-tell scenario.
The other side of the coin is cash flow. Buying dividend stocks or real estate rentals or other assets that regularly pay money back to you can be a solid option and one in which I’m starting to put more of my money to work.
The saying “knowledge is power” is right on target. I’m very surprised by the smart people I know that understand so little about money and investing. This is one area where you can never stop learning. The more you know about the nuances of how to make money work for you, the more opportunities will seem to jump out in front of you.
Books, websites and blogs, podcasts, seminars, etc. There’s a ton of great options out there – find them. And, of course, there’s real world experience. Find a financial mentor who wants to share what they know and latch on.
I try not to make everything I do revolve around money and wealth, but I do think it’s extremely important. I’m always reading and try to rotate between money/business books, other non-fiction books, and fiction books.
On a side note, I want to stay informed as much as I can, but a good fiction book can help relax you a little bit every now and then as well. If you’re looking for a good next book to read, I can’t speak highly enough of Wool by Hugh Howey – everyone I have recommended this to, male or female, loved it.
So there you have it – my steps to wealth. Hopefully, you’ve already looked at this list and had a lot of “yup, already doing that one and that one and that one…” If so, you’re well on your way to financial independence and great wealth. If not, it’s time to reflect and get yourself on track.
What about you? Do you agree with these or have any other steps you might add?
Thanks for reading!!