Last Updated October 26, 2020
Did you know according to a recent study 10.23 million households in the United States have a net worth of more than a million dollars? And that’s NOT counting the value of their primary residence. Want to achieve the same thing? Find out the secret to wealth creation that you didn’t know.
What Is Wealth Creation?
Wealth creation is when you accumulate money or assets (things of value) over a period of time. To sustain and create wealth, those assets need to generate income.
How Is Wealth Created?
Understanding how wealth is created is important to understanding how to become wealthy. There are many ingredients to create wealth. But here are a few fundamental ones:
Increase Your Income
It’s not surprising that the first step to creating wealth is to maximize your income. The more you earn, the more money you have not only to live on but to save and invest. This allows you to build wealth and become rich.
If you want some ideas on how you can increase your income, read my detailed article “5 Easy Ways To Increase Your Income Streams.”
Cut Your Spending
The next logical step to creating wealth is to spend less than you make. This may seem like a very simple concept, but 76% of Americans live paycheck to paycheck. That means they spend every dollar they earn.
If you cut your spending and spend less than you earn, you will have money left over to build wealth. The lower your spending is compared to your income, the faster you can create wealth.
Eliminate High-Interest Debt
It’s hard to create wealth if you have a lot of high-interest debt. Debt is a drain on your finances and slows down wealth creation.
I consider any debt with an interest rate above 8% to be “high interest.” The reason why I would pay off any debt with an interest rate above 8% is because the stock market has returned about 8% over the long haul.
Paying off a debt with an interest rate greater than 8% is equivalent to getting a guaranteed return of more than 8% on an investment. Therefore, paying off your high-interest debt above 8% will most likely give you a better return on your money than investing in the stock market.
I recommend you start with paying off your highest interest debt first and then work your way down. You can use the FREE Debt Worksheet to get organized and prioritize which bills you will pay first.
Sometimes having too many different bills coming in can certainly be overwhelming and hard to keep track of. Therefore, use the FREE Debt Worksheet to help you keep track of this.
Speed Up Paying Off Your Debt
You can also use an app like Tally. Tally is the world’s first automated debt manager that makes it easy to save money, manage your cards, and pay down balances faster.
The way it works is Tally analyzes your credit cards and finds ways to help you eliminate debt and save money. If you qualify, Tally gives you a line of credit with a low APR, then uses the new credit line to pay your credit cards every month. The low APR helps save you money on interest.
Tally manages all your credit cards in one simple app. They keep track of the balances, interest rates, and due dates for each card. That’s how Tally makes the right payment to the right card at the right time. All you have to do is make one monthly payment to Tally.
Tally is free to download, and they don’t charge any fees to use the app. The way they make money by charging interest on the amount borrowed (which is a lower interest rate than what your credit cards are currently charging you).
I highly recommend Tally because they only make money if they can save you money.
Control Lifestyle Inflation
Allowing your spending to rise with your income is called lifestyle inflation. A lot of us are guilty of this (myself included). When we increase our income, we tend to increase our spending. We buy nicer homes, cars, clothes, and take more expensive vacations.
It’s a subtle thing that we often do without even really noticing or thinking about it. Maybe we feel like we deserve it because we work so hard, or we’re just trying to “keep up with the Joneses,” but this is killing your ability to build wealth.
If you get a raise at work, try to keep your existing spending level. By doing that, you suddenly have that extra money to pay off debts and invest in the future to create more wealth.
- Related Article: Don’t Let “Keeping Up With The Joneses” Make You Broke
Invest In Yourself
My favorite quote from the most successful investor of all time, Warren Buffett, is “the most important investment you can make is in yourself.” The best way for you to create wealth and secure your financial future is to get the best use out of your talents first.
How much you earn in the future isn’t going to be based on how much talent you have, but how you use the talent you have. You can only create wealth if you take your own ability and use those abilities to its full potential.
So how do you invest in yourself?
You can use the money you have to pay for coaching or lessons to help you master a new skill or learn more about an area in your life in which you’re weak.
My Own Experience With Investing In Myself
There are two major ways I invested in myself:
- Going to law school.
- Learning more about money management and investing.
I went to law school because I saw it as an opportunity to learn a skill that could turn out to be lucrative. I use my newfound skills to increase my professional income, which helped me with wealth creation.
Although I was earning more money, I struggled at first with keeping that money. As I stated before, I was a victim to lifestyle inflation. So, I decided to focus on learning how to manage my money better and investing my money to grow wealth.
When I started my financial journey, I understood that if I had the proper budgeting tools managing money would be a lot easier. I later took it a step further to learn more about investing my money.
I knew if I found someone to guide me, I’ll be a lot better off than trying to figure it out on my own. I also knew that by spending money and investing in myself I would have skin in the game and will be serious about it.
So I want you to think about all the ways you can start investing in yourself this year.
If you need one-on-one help with your money, you can hire me as your financial wellness coach in a private setting. For questions about how I work with my clients, you can sign up for a free 15-minute consultation with me.
- Related Article: Why You Need A Financial Wellness Coach
Invest Your Money
It is so important to invest your money. Saving money alone is counterproductive to wealth creation because of inflation.
Inflation is the rate at which the general prices of goods and services rise; and as a result, the purchasing power of money falls. In the United States, the historical average rate of inflation is approximately 3%.
If you are only saving your money, and not investing it, your money is actually eroding every year. This is because the cost of living is increasing faster than any rate of return offered to you by a bank.
As stated earlier, the stock market has had a historic return of about 8%. So that shows you how much more powerful investing is over saving to create wealth.
There are so many ways you can invest your money; such as stocks, bonds, mutual funds, exchange-traded funds, and real estate just to name a few. If you want to learn more about how you can get started with investing, read my detailed article “Best Ways To Start Investing For Beginners: Investing 101.”
Reinvest Your Income
As you know, there are many ways to invest your money and different ideas are going to appeal to different people in different situations. But, no matter what you choose to do, eventually, that investment is going to return some money to you.
Maybe your rental property will start producing income from rent; your stock investments pay you dividends; or your better education will start paying out in the form of a higher salary.
To create even more wealth, you should take that income that you’re earning from your investments and reinvest it.
Rather than pocketing that rent check or those dividends, roll that money right back into stocks or into buying your next rental property. Don’t spend it. Just reinvest it.
By putting more money into your investments out of your investment income, you’re allowing your income to grow more and wealth creation will accelerate.
5 Stages Of Wealth Creation
Did you know there are many different levels of wealth?
I talk about achieving financial freedom all the time on my blog. But there are a few other levels of wealth you need to achieve before you can become financially free. So let’s go over the 5 stages of wealth creation and the order in which you should build wealth.
1. Financial Stability
The first and most basic level of wealth that anyone should attain is Financial Stability.
Financial Stability is when you have enough savings to cover 3-6 months of minimum mandatory expenses. This is also sometimes called an emergency fund.
When you achieve this fist level of wealth, you will have the peace of mind that if something unexpected should happen, you will have enough time to recover financially.
- Related Article: How To Build An Emergency Fund
2. Financial Security
The next level of wealth is Financial Security. Financial Security is when you have enough passive income from your investments to cover your minimum expenses and most basic lifestyle. What I mean by “basic lifestyle” is living with only the necessities such as food and shelter.
3. Financial Independence
The next level of wealth is Financial Independence. This is when you have enough passive income from your investments to cover your minimum expenses and some of your discretionary expenses.
4. Financial Freedom
Financial Freedom is when your investment income can cover all your current monthly expenses. Reaching this level of wealth means that you have the option to never work again and still maintain your current lifestyle.
Clearly, the more expenses you have and the more luxurious your lifestyle, the longer it will take for you to achieve Financial Freedom. If you want to have the freedom to choose whether or not to work sooner, you may want to reduce your monthly expenses.
5. Financial Abundance
The ultimate level of wealth is Financial Abundance. Financial Abundance is when you have enough passive income to afford anything you want, and can live your dream lifestyle.
Obviously this is completely subjective and depends on the lifestyle you desire. The more luxurious your dream lifestyle is, the longer it will take you to achieve Financial Abundance.
I am currently working towards trying to achieve Financial Abundance one day.
What Is The Secret To Wealth Creation?
The secret to wealth creation is to have a positive money mindset.
Having a positive money mindset allows you to look at money from a place of abundance. You don’t focus on how bad your financial situation is; instead, you look at what you can do to change your situation and focus on the path moving forward.
If you have a positive money mindset, you will be more likely to succeed in creating wealth because you feel like no financial problem is impossible to overcome.
Building massive wealth rarely happens unless you have a firm belief that you can do it.
- Related Article: How To Change Your Money Mindset So You Can Have More Money
Where To Start On Your Journey Of Wealth Creation
At this point, you’ve hopefully changed your money mindset and have a firm belief that you’re capable of creating wealth. So, where do you start?
Calculate Your Net Worth
I would start by calculating your net worth. This will allow you to see where your starting point is. Calculating your net worth is a simple formula. Subtract your liabilities from your assets (what you OWN – what you OWE).
Once you know where your starting point is on your wealth-building journey, I would move on to making a budget.
Make A Budget
When you are going through the stages of wealth creation, I recommend everyone start with making a budget.
Having a budget allows you to see how much your expenses are. You need to know how much your monthly expenses are in order for you to know how much money you need in your emergency fund.
If you’re just starting out, you can download this FREE Monthly Budget Worksheet.
However, if you want to get serious with your savings and need something a little more sophisticated, you can get my Budget Template.
My template makes it easy to see exactly what percent of your income you’re saving. It also shows you what percent of your money you are spending. This is the template I actually used to save over 50% of my income and it is the same template I use to this date.
Invest In Yourself
As I stated earlier, it is crucial for you to invest in yourself if you want to build wealth. We all know the value of a formal education, but it’s just as important to educate yourself about money.
Read every personal finance and investing books you can get your hands on. Also, don’t be afraid of spending money to get professional help. Why waste time and money trying to figure out your finances on your own?
When I started my financial journey, I bought tools to make a budget that FINALLY worked for me. That lead to me being able to pay off my debt and save more money. I also paid to learn from financial experts about making a financial plan, how to invest my money, and grow my wealth. This lead to me being financially free in 6 short years!
If you’ve been stuck in the same financial position (or have gotten worse) over the past few years, tried all the free resources and read the blogs/books, but you’re not seeing any results, then consider hiring a financial coach.
- Related Article: Why You Need A Financial Wellness Coach
To get to the next stages of wealth creation, it is vital that you invest your money. You cannot only save your money to create wealth, you HAVE to invest your money.
You want to invest in things that produce income and increase in value. I like to invest in real estate and the stock market for those reasons.
I personally use Robinhood.com to purchase individual stocks. I like this website and app because you can buy and sell stocks for free—there are no commissions or fees.
Most other brokerage firms charge at least a $4.95 fee per trade, and some have hidden fees.
Sign up today and you and I can get a free stock like Apple, Ford, or Sprint. With Robinhood you also don’t need a minimum account balance, so you can get started right away.
If you want to learn more about investing in real estate, read my detailed article “Real Estate Investing Guide: 3 Simple Steps To Be Successful.”
Now that you know the secret to wealth creation, take some time to determine which stage of wealth you would like to achieve. Make that one of your goals and work towards your objectives every day.
Whatever level of wealth you would like to achieve, you have to start with making a budget and building an emergency fund. If you need help setting up a budget fast try this FREE Budget Binder.
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