How to create wealth

 
Building  wealth is  everybody's dream. After years of hard work and toil, you want something to show for it. But how do you set aside the needs of the present and invest in your future? Here's a quick but comprehensive guide on how
to do just that.
 

1. Sit down and make a budget. First things first. You can't build wealth if you don't save money, and you can't save money if you don't know what you have and how you spend it. You probably already know the basics of how to do a budget — and if you don't, click on the link above — so we won't bore you with the nitty gritty. The big picture to remember is that setting a reasonable budget that you can stick to and learn from is a huge (!) step towards the ultimate financial independence. 

 

2.Set aside part of every paycheck you earn. How much you set aside is up to you. Some swear by 10% to 15%, others by figures a little higher. But the younger you start saving, the more time you spend saving, and the less you probably need to put away. So start saving early, even if you're only setting aside 10%.

• Another rule of thumb that people use is the rule of 8x. This rule of thumb recommends that you save 8 times the salary you have by the time you retire. By this yardstick, you'd do well to have 1x your salary saved by age 35, 3x your salary saved by 3X by 45, and 5X by 55. 

 3. Take advantage of "free" money. Few things in life are free, and money is not often one of them. In fact, money is so rarely free that you really have to grab the bull by the horns when it comes along. Here's one situation in which people earn "free" money:

• Employers sometimes match 401(k) plans. This means that for every dollar of your salary that you put into your 401(k) plan, your employer will put in another dollar from their pocket. Hypothetically, if you contribute $2,500 to your 401(k) and your employer matches, they'll also pay out $2,500 for a total of $5,000. That's the closest thing to "free" money you'll probably ever get. Take advantage of it.
•  A 401(k) plan is retirement account where the money you put into it is tax deferred, meaning it's not taxed until a later date or possibly not at all.

 

4.Put money into a Roth IRA — early! Like a 401(k), a Roth IRA is a retirement account that gets invested and potentially isn't taxed. There's an individual limit to how much you can contribute to your IRA annually ($5,000), but a goal you might have — especially in your 20s and 30s — is to hit this max contribution every year.

• Here's how effectively a Roth IRA can help you build wealth. If a 20-year-old person contributes the maximum $5,000 to their IRA every year for 45 years at 8% annual growth, magic things happen. By the time they retire, they'll have a portfolio of over $1.93 million. That's $1.7 million more than if you'd just stuck that money into a regular savings account.
• How do Roth IRAs produce such wonderful wealth? Through compound interest. This is how compound interest works. A bank or other institution gives you interest on your IRA, but instead of pocketing that interest, you put it back into your pool. Then, the next time you get interest, you're not only gaining interest, but interest from your interest as well.
• As with all savings vehicles, the earlier you start, the better. If you make a one-time contribution of $5,000 at age 20 and then let it sit for 45 years at 8% growth, you'd have a whopping $160,000. If, on the other hand, you make a one-time contribution of $5,000 at age 39, by retirement age that $5,000 would only be about $40,000. So start early!

 

5.   Wean yourself off of credit and debit cards. While credit cards can be incredibly useful in some situations, they can promote really bad financial behavior in others. That's because credit cards can encourage people to spend money they don't have, to push very real worries farther out into the future until they finally become unavoidable.

• Not only this, scientists have discovered that the human brain thinks about credit and real money very differently. One study found that credit card users outspent cash users by an average of 12% to 18%, while McDonald's found that people who pay with plastic spend an average of $2.50 more in their stores than their cash counterparts. Why is this?
• We don't know for sure, but we think that cold, hard cash feels a lot more like "money" than credit cards do, perhaps because the money isn't physically present when you swipe the card. In short, credit can feel like Monopoly money — fake — in the primitive part of our brains.

 

6.  Change your perspective about saving. We know saving is hard. Incredibly hard. By its very nature, saving is deferring present pleasure for future gain, and that's a courageous act. By tilting your head and looking at the process from a different angle, you can motivate yourself to be a much better saver. Here are a couple pointers:

• Whenever you make a bigger purchase, divide the cost of the item into your hourly wage. So if you're eyeing those $300 pair of shoes, but you only make $12/hour, that's 25 hours of work, or more than half a work week. Are the shoes worth that much to you? Sometimes, they will be.
• Cut your savings goals into smaller chunks. Instead of setting a goal of saving $5,500 per year, think in terms of months, weeks, or even days. Think, "Today I'm going to try to save $15 and put it away." If you do that for every day of the year, that will turn into $5,500.

7. Save your tax refund, or at least spend it wisely. When the government issues a tax refund at the beginning of the year, many people go on a spending spree. They think, "Hey, here's this windfall. Why don't I spend it and have some fun with it?" While this is a perfectly acceptable thing to do on occasion (and given good circumstances), it doesn't exactly help you build wealth. Instead of spending the tax refund, try to save it, invest it, or use it to pay off significant debts that you have. It may not feel as good as spending it on a new set of deck chairs or a rebuilt kitchen, but it will help you achieve your goal of preparing for the future.