5 Steps to Start Building Your Wealth in 2021
Personal finance is your own way of building your wealth. You may be asking yourself, “how come I am poor?” or “why am I always broke?
The answer to these questions is simple — it’s your decisions and choices that make you “poor” or “broke”.
The good news is that with some changes in your habits and choices, you will be able to organize your life financially.
That’s where the concept of personal finance comes in. In fact, personal finance plays a tremendous role in your life. You need to apply the most basic concepts of financial management in your daily life.
If you’re looking to build your wealth, I’d like to share with you some actionable personal finance tips that will help you manage your money effectively and grow your wealth.
1. Define your financial goals
It is hard to manage your money when you have no clear goals in mind.
It’s always good to have a clear idea of what you want to have. Think it through and list down several things that come to mind. Your goals can be long-term as well as short-term.
No matter your goals (short-term or long-term), having them will help you create a better financial plan.
To achieve these goals, you’d need to make some changes in your habits and lifestyle:
- Have a cup of coffee at home, instead of a coffee shop,
- Use public transport more often, instead of driving or using Uber,
- Do meal-prep for lunch, instead of going to the nearby restaurant,
- Look into long-term plans rather than plans for the weekend.
The small changes that you make will help you save on the costs that you’d usually incur. The savings made can be put into the bank to generate interest and grow your wealth.
2. Earn passive income
We live in a world where one source of income (e.g., your full-time job) is not sustainable. The costs of living rise faster than salaries do, plus the uncertainties (e.g., COVID-19 pandemic) can leave many without a source of income.
That’s why having an additional stream of income (ideally, more than one) is something you should endeavor.
Passive income has different types: fixed and varying.
Fixed passive income is something like rental properties, freelance retainers, etc. If you lease a property, you know how much you’ll be getting every month. The same goes for retainer fees — you know how much your clients will pay every month.
Varying passive income is quite the opposite. You don’t know how much income you’ll be getting each month. For example, you run a blog and generate income from advertising — you cannot know how much traffic you’ll be getting every month, thus cannot know the exact amount you’d be earning. Some months can be great, and you’d get $500; some can be worse, and you only make $50.
Which one is better? Both are great to have! Thus consider the following activities to diversify your income streams:
- Invest in dividend stocks
- Rent properties
- Earn money from your website or blog
- Sign up clients for your freelance business
- Keep money in bank accounts that pay interest
3. Learn about investing
Investing is one of the best ways to make your money work for you. Keeping your money in a fixed deposit account is excellent, but the returns can be relatively low.
Consider investing a percentage of your income so that these investments could generate passive income for you.
Start by opening an account where you can learn by using virtual money (not your actual money). It will help you accustom and better understand the movement of charts. Meanwhile, while you do this, check out books or YouTube videos helping new investors. Some basic information will come in really handy.
However, if you are scared or unwilling to invest yourself, you can try social trading. Etoro is a great social trading platform that helps you copy other successful investors. By copying them, you don’t need to do anything yourself. Just deposit some money, choose an investor who you wish to copy, and let them do the job. The best part — it doesn’t cost anything to copy someone!
Use the link I shared, and if you open an account with my referral code, you will get $50 upon completing your registration and depositing the first $100. You read it right — free money for you to start your investment journey.
4. Don’t spend more than you can afford
One of the biggest mistakes that prevent many people from generating wealth is living beyond their means. I’ll be blunt — stop spending more than you can afford!
If you have credit cards, you might be tempted to overspend because you know that the bank will willingly give you extra cash for your purchases. It leads to credit card debt.
Total U.S. credit card debt was $893 billion in the first quarter of 2020. That is equivalent to around $2,700 per American (U.S. population in 2020 was 331 million).
Overspending leads you to pay banks interest on the amount you cannot repay. It drains your bank account and makes it impossible to save.
My advice is — pay off all your credit card debt, disregard what your limit is, but instead look at how much you can spend. Base it on your income after all essential expenses.
If your salary is $2000, and your credit limit is $6000, it may be tempting to splurge, but remember that the additional $4000 you spend belongs to a bank, and the bank will charge you for using it.
On average, a bank charges 18% interest per year for any unpaid balance. Imagine you spend $4000 on your credit card every month but repay $2000 only. In a year, it will result in up to $4500 in bank interest charges.
Therefore, always spend within your income limit.
5. Get insurance
Get comprehensive insurance that has good coverage. Getting health, personal accident, and car insurance are very important. You want to prevent any unexpected costs that could be needed if you fall ill or have an accident.
Even though having insurance can be expensive, it is an investment into your peace of mind and protection of yourself or your family.
Imagine falling sick and needing to worry about huge hospital bills? Let your insurance cover that.
Here you have it. These are the five personal finance steps that I encourage you to make this year.