The simple way of building wealth

Do you ever wonder how some people somehow seem to building wealth without putting any effort into it?

They have the means to carry out all sorts of things without being stretched financially.

What is it that set them apart?

It turns out that you don’t have to be a genius to figure this out. Anyone with a basic understanding of simple math can do it.

It comes down to two very simple formulas:

• They make more than they spend and
• They invest the surplus wisely

So what does it mean to make more than you spend?

It basically means that you should save a certain amount of your earnings each month.

Of course not so much that it infringes on your basic necessities, but still a significant part of what you earn should be put aside. Each month. All the time.

This means that you need to look into each part of your economy and identify unnecessary spending to try to cut down on it.

Of course there are things that you need, but then I’m sure there are other expenses that can be labeled as “discretionary” and sometimes downright “silly”. Try to cut down on those.

Each dollar saved is a dollar earned.

Where can I find tips on how to save money?

There are some very good websites out there that can help you, but here are three of my own favorite money saving tips:

1./ Keep a deep cupboard.

When buying groceries try to buy several months’ supply so that there is always an extra pack of sugar or flour in the cupboard no matter what.

This tip is obviously limited to products with a long shelf life, but it is amazing how much money you can save by just sticking to this.

2./ Always have a budget and make sure to stick to it.

An essential part of having your finances under control is to have a budget.

This ideally lists all your income and expenses as well as gives you space for an occasional treat.

Of course there are many ways to do this, but personally I prefer to use a spreadsheet where everything is labeled accordingly.

3./  Consider reducing the number of cars in the household.

A car is one of the biggest expenses in a household and having one is of course great.

However, many families also have a second car out of convenience. Try to skip this and get a bike instead.

A bike is an extraordinary way to get around in town where you quite frankly very seldom need a car.

In the rare cases where a second car is necessary there is always the possibility of taking a taxi. There is a lot of money to be saved.

That sounds all fine and dandy, but how do I get started?

There are many kinds investments that you can choose from. In this section I will briefly try to outline a few of those:

Index funds

For a beginner a good way is to invest in an index tracker.

An index fund is a fund that owns all the stocks in an index, all the time, without the pretense of being smarter than anyone.

An index fund is cheap – you only pay about 0.2 percent of your invested capital in annual fees.

Index funds only have one drawback – they are boring. They will perform as the overall market – no better, no worse.

This behavior is inherent in an index fund, but because index funds are so cheap their cost advantage will only accrue over time.

My suggestion would be to keep your index fund part of the equity proportion (discussed below) at least to 50 percent.

Equities

If you just leave your stock picking to chance, you will be out of luck quickly.

That said, if you would like to join the excitement of investing in stocks, you will need to do some research.

One important metric is price (i.e. how much do you pay for the stock) and another one is the return that you will get out of it.

The first one should be as low as possible in relation to the companies’ earnings and the second should obviously be as high as possible.

Another thing to watch is the companies’ financial situation where the company should have a sufficiently amount of assets in relation to liabilities.

Corporate and treasury bonds

To invest in debt is fundamentally different from investing in equity.

The company or the treasury borrows investors’ money in return of interest that they will pay back over a long time.

The most fundamental question an investor asks himself is the proportion of stocks and bonds in his or her portfolio.

My advice would be never to go below 20 percent of either.

That way you make sure that your at least some of your money will be protected against inflation.

What do I do if my investments don’t pan out the way that I planned?

Stocks fluctuate in value all the time and there is always the possibility that your investments will go down in value.

Therefore it is important that you know why you bought your securities in the first place.

In the words of famous value investor Benjamin Graham “you are never forced to sell or buy securities just because they have gone up or down in value”.

If you are inclined to sell in a bear market chances are that you would be better off not having your securities quoted in the first place.

This is important in all kinds of markets, but especially important in a bear market.

This all boils down to what I call “sanity checking your investments”.

If the fundamentals of the security change then there is reason for the decline, but often declines just come from unfounded rumors and hearsay.

Therefore never sell a security just because its value has fallen.

 

 

Conclusion:

This post tries to explain the simplicity of getting rich. In essence it boils down to two simple things: 1./ Make more money than you spend, and 2./ Invest the surplus wisely and see it grow. That’s all you need to think about.