Just because something is simple doesn’t mean it’s easy. Building wealth IS simple – just three small steps – but it isn’t always easy. Thankfully, for those who learn to spend less then they earn, it becomes easier! It’s just three simple, positive, action steps:
- Earn your money
- Save your money
- Invest your money
The wealth building process
The amount of money you eventually save and invest DOES NOT depend on how much you earn. It depends on how much you keep. Stories abound of people who earned paltry sums of money at their job yet still ended up with multi-million dollar investment portfolios. Our goal should be to earn enough money (or make some extra money) to pay our monthly expenses and still provide a surplus of at least a few hundred dollars per month. Then we move to the second step.
Set up a savings account and make regular contributions to it from your monthly surplus. The account you set up should have no setup or monthly fees and should pay the going rate or interest (my preference is Ally Bank’s online savings account). You should then deposit whatever amount of money you have left over each month into your savings account.
And with Ally, you don’t even have to change banks! Their savings account can be linked to your existing checking account. It really makes things easier. Withdraw funds from this account only for the most dire emergencies or to move it to the third step.
As your savings grow, you’ll be able to buy investment products such as index funds and exchange traded funds (ETFs), which can grow your money at rates much higher than savings accounts. In the beginning, stay away from stocks until you learn how to properly evaluate a company and its financial records.
Also avoid leveraged ETFs, which may follow well-known indexes like a traditional ETF, but use borrowed money to purchase option contracts, financial derivatives, and futures. Typically a leveraged ETF provides $1 of debt for every $1 of investor equity, and are marketed as 2X funds. These are too risky for all but the most savvy investors.
How to get started investing
To begin investing, you’ll first need to set up an investment account, also known as a brokerage account. Once you’ve saved $500–1,000 or so (generally the minimum required to set up an account), contact a major financial services firm such as Scottrade, Etrade, TradeKing, tradeMonster, or Zecco. I personally use Scottrade and love how easy it is to use their site.
Which investments should you buy?
In general, beginner investors should not buy individual stocks, bonds, commodities, options, futures, or other financial derivatives that are typically not well understood. Instead, focus on Exchange-traded funds (ETFs) and index funds. These types of investments allow you to buy a large assortment of other individual investments in groupings, such as stocks or bonds, through one low- cost fund or ETF.
One final note:
There is a fourth requirement to building wealth albeit a negative one: Don’t waste your money!