There are an infinite number of guides out there on how to get rich. It is easy to get overwhelmed by all of the options, data, and advice. This phenomenon is called “analysis paralysis”, where the individual becomes so overwhelmed by the decisions they see in front of them, that they make no decision at all. This affects everyone at some point in their life and can have dire consequences for peoples’ financial situations.
One of the best ways to solve analysis paralysis is to simplify the situation in front of you. By simplifying it, you can better see the best option in front of you and move forward. When speaking about building wealth, this means presenting the desire “I want to build my wealth” and searching for solutions. This guide presents 3 steps to building wealth that are guaranteed to help you. Remember, escaping analysis paralysis isn’t about making the perfect decision, it is about making a good decision.
Step 1: Save, but Not How You Think
We’ve all heard it: “If you just quit those lattes”, “If you stopped eating out”, “If you would stop buying porcelain penguins”. Alright, maybe that last one needs to go. Regardless, these are the messages that many financial gurus preach. They blame your lack of financial success on small purchases that help to keep you sane and motivated. This is not an idea that I subscribe to.
Of course, don’t spend $500/month on coffee, but also don’t burn yourself out. If that periodic coffee or small Amazon purchase is what gets you excited and keeps you motivated then go for it. These small purchases are not what’s hampering your wealth. Let’s shift our focus to more influential decisions.
With the end goal of financial independence, as this blog focuses on, let’s aim for at least 25-30% of our income saved monthly. As of now, think of saving as equivalent to not spending, not necessarily sitting in a bank account (more on this later).
Think about the home you live in right now. You more than likely pay for the housing in one way or another, whether through rent, mortgage, or some other compensation. We want to aim for this expense to take up no more than 30% of your monthly after-tax income. Of course, lower is always better. If this number is above 30% for you, consider other nearby options. It is easy to choose a nicer place to live once you get some money, but keep in mind that the money saved now will be exponentially more in the future.
I am in no way saying to live in an unsafe neighborhood just to save more money, but this is not the situation most people face. Check Zillow for lower rents nearby, refinance your mortgage, or negotiate your rent the next time the renewal period begins.
The next focus would be that box of steel on 4 rubber donuts you use to drive everywhere. Here we have a goal of no more than 10-15% of our monthly expenses for all transportation costs. This includes everything related to transportation including gas, insurance, and maintenance. You may feel that this number is low, but these costs are being put into a harshly depreciating asset. We want to focus our spending on absolute necessities and assets that can produce returns.
Step 2: How to Use Those Savings
It’s important not to stop at this first step. Many people rely on savings to get them to financial independence or retirement. However, unless you’ve managed to save several million, this won’t cut it. The only reliable way to reach your financial goals is to have those savings work for you.
See most people get stuck working for money. But as eloquently stated as rule #1 in Rich Dad Poor Dad, the rich don’t work for money. So for our 3-step process, this means using our savings to work ‘round the clock, even when we sleep. Let’s go over a few ways to achieve this.
Rainy Day Savings
Just to briefly touch on the one caveat to having savings work for you rule is having a rainy day savings account. This account must be very liquid, accessible, and hold at least 3 months of living expenses. Preferably even up to 12 months. This will be your backup plan in case things go south, surprise medical bills or you need to cover bills while you pursue a dream outside of a 9-5 job.
A good number to aim for if you’re unsure how much to save is an even $10,000. I recommend using either a bank savings account or a liquid high-yield savings account as both of these are decently liquid accounts.
I know I harp a lot on the stock market on this blog. I feel this way because it can be such an incredibly passive way of generating wealth. Most people imagine generating wealth to involve very active energy to trade their time for money. An important goal to achieve financial independence is to get your money to work for you. For example, in the stock market, money that is used to purchase shares is always working to grow, even when you aren’t putting active time into it.
These kinds of uses for money are ideal for generating wealth rather passively. Of course, there is no actual way to generate entirely passive income, but the stock market it damn close. Check out my Beginner’s Guide to the Stock Market to get up and running. The barrier to entry is so low that it is a fantastic way to escape analysis paralysis. If you find a better investment prospect in the future, that is fantastic. Shares can be easily bought and sold with no fees, so let your money grow independently in the meantime.
Even though it can be done before you receive your paycheck, investing in retirement accounts is absolutely worth it. This can be either your 401K (pre-tax) or Roth IRA (post-tax). Make certain that if your employer offers a 401K match, you contribute enough to get that max (eg you must contribute 6% of your paycheck to receive a 6% match). A 401K match is not only free money but an immediate 100% return. A far better return than you will get from any other investment.
Also, if you decide to start investing and use Robinhood as your after-tax brokerage, signup using my link and we both get 5$ in free shares.
Real Estate Crowdfunding
I won’t type too long on this as the upsides to real estate crowdfunding are very similar to those of the stock market. It is an incredibly passive investment while allowing for fantastic growth. In addition, it gives you a hedge against inflation. When inflation forces people to spend less money on consumer products, companies in the stock market can suffer. To be fair, this can allow you to get fantastic deals on companies, but your portfolio will certainly suffer.
In contrast, when significant inflation occurs, rent increases, and people still need somewhere to live. This can mean that landlords can make significant gains while others are losing money. Having some money invested in both allows you to hedge and get the best of both worlds. Another benefit is that it too has an incredibly low barrier to entry, making it easy to get started and beat analysis paralysis.
Similar to Robinhood, I personally use Fundrise. It is an easy-to-use platform that allows you to get started investing in real estate with a very small amount of money. They too have a signup offer where if you use my link, we both get $50 in funds.
Read this post to learn more about Fundrise and real estate crowdfunding in general.
Invest in Yourself
You are your greatest asset. Without growing yourself, all of the above investments are essentially useless. Make sure to invest money in your own knowledge and skills. This is the most wide-open of the steps, as this could look different for anyone. The most common forms of self-investment are reading and courses. Reading allows you to absorb knowledge from an expert that may have taken decades to learn. Similarly, courses give access to similar information in a more easily-absorbed format, and likely more actionable goals.
Don’t be afraid to shell out some money for self-investment. If a $30 book can help you earn $10,000 through learning how to invest in real estate, that is a no-brainer return. Believe in yourself and amazing things can happen.
Step 3: Automate Everything
As with most challenges in life, the most difficult part of building wealth is getting started. To achieve financial independence, let’s think smarter not harder, and eliminate the need for constant willpower. We can do this by automating our savings and investments. Examples of this include:
- Set up 401K and/or Roth IRA contributions to be taken out of your paycheck
- Direct deposit a portion of your paycheck to a savings account
- Set up automatic deposits and investments in a brokerage
- Separate bank account for daily spending where you “pay yourself” with each paycheck
- Use automated spreadsheets to make analysis easier
I personally have 7% of each paycheck to a 401K including a 6% employer match, 2% to a Roth 401K, ~8% to my Roth IRA until I hit the $6000/year cap, and 5% to my rainy day savings. The rest of my savings go directly to a taxable brokerage account. I have found that this amount of automation, ~22% of my paycheck, never makes me uncomfortable financially. However, it does ensure that even without ANY action on my part, that 22% will be saved each month. After all is said and done, I have been saving around 40-50% of my paychecks, which I am very happy about.
I would argue that even though this step is the simplest, it has the most long-term effects on your wealth. The person who has the best ideas in the world will be beaten out in the long run by the person who consistently acts on their solid ideas. Use automation to be more consistent than anyone else.
Automating the process of building wealth is one of those magical steps that can have a massive impact with little upfront effort. It’s easier to convince yourself not to buy that porcelain penguin if that takes up the rest of your food money for the week.
The thing to be careful about with automatic savings and deposits is to not spread yourself too thin. Save as much as you can, but don’t automate all of your savings so you estimate you will have $10 left over each month. This can easily get you in trouble by having a popup expense and already having the money committed to an investment. Automate savings until you are comfortable, then manually save until you are uncomfortable.
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