How to become Rich: The Basics

Much of the following article has been explained previously in articles such as The Get Rich Plan and The Science of Wealth. However, I'm going to lay down the basic foundations to building wealth as clearly as I can explain them in a series of rules.

Rule Number 1: Balance the Wealth Equation

As explained in The Science of Wealth you must make sure that you are spending less than you are earning. Simple! you may say, and yet many people wonder why the don't build wealth. Obviously this is a case of "easier said than done".

The key is to track current spending to see where reductions and cutbacks can be made and where excess spending can be eliminated.

Rule Number 2: Automate your Savings

Make savings a priority by setting up a standing order from your current account to a savings account. The standing order should be on the first day of every month so that you can see what you have left to spend for the rest of the month. Try saving 10% of your net disposable income (your income after tax). You will be surprised at your ability to reduce and adjust your spending as a result. Try to increase this percentage each year or every time you receive a pay increase.

Rule Number 3: Make you money work for you

Don't just leave your savings in a current account. Once you have built up a safety net of emergency cash savings (advisers recommend between 3 to 6 months income), look to invest your money in a mix of shares, property and bonds.

Rule Number 4: Try to avoid debt

People get very confused about debt. I shall simplify it here (as I've said already - this is just an overview).

Avoid credit card debt. You can use credit cards but just make sure that you pay them off in full each month. There is no excuse for paying interest.

Try not to be too leveraged on your house. That is, try to have some equity in the house. It has been suggested that 40% is a decent amount that allows you to obtain cheaper mortgage rates.

Generally avoid other loans. I will write a piece in the future on more advanced uses for debt. But for now let's just try to minimise it and reduce any currently held debt.



For the next article in the series: How to become Rich: Student


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