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How do rich people grow their wealth? What role does mindset play in wealth building?
The route to wealth is to leverage your money through investments that create long-term growth. Building your net worth starts with adopting a future-oriented mindset about money: you need to think of the money you earn as seeds that you can plant in order to grow more money for your future wealth.
Here is how to build your net worth in five steps, according to financial educator T. Harv Eker.
Think Long-Term, Leverage Your Money, and Build Your Net Worth
Rich people plan for their long-term wealth by growing all of their financial assets (their net worth). The more money they grow, the less they have to work to pay for their lifestyle. Rich people work to receive an income but they also leverage their money in a way that makes it grow for them in the long term.
Eker gives the following five-step advice on how to build your net worth:
1) Learn about investments: Read financial books or journals and then begin investing your money. Consider hiring a financial planner to manage your investments for you.
(Shortform note: Eker doesn’t offer practical advice on how to choose and set up investments or create passive income. Many finance books, including I Will Teach You to Be Rich, The Automatic Millionaire, and The Millionaire Next Door, explain how investments work and discuss the benefits of leveraging your money in ways that make it grow. These books also offer detailed strategies to help you set up and manage your investments to create ongoing income in the form of compound interest. The authors of these books, in contrast to Eker, say that you shouldn’t need to hire a financial planner once you understand how to balance your investments.)
2) Switch your focus from earning money through hard work to earning money from passive income. Write down three ways you can create income without working. Research and then act on these strategies.
(Shortform note: While Eker doesn’t elaborate on how to create passive income, there are many ways you can create passive income streams such as selling digital products, renting out property, or investing your money in an account that applies compound interest.)
3) Write down your current net worth—add up the value of everything you own such as your cash, current business, investments, and real estate. Then subtract what you owe such as your mortgage payments or other debts. Next, write down your ideal net worth—the total value of all of your assets. What amount will allow you to achieve financial freedom (that is, you won’t need to work to live comfortably)? Track your net worth every 90 days—this will motivate you to keep moving toward your net worth goal.
(Shortform note: Eker doesn’t provide advice on how to determine your ideal net worth. According to The Millionaire Next Door (Thomas J. Stanley and William D. Danko), your ideal net worth should be based on your income and your age. Stanley and Danko present the following formula: Multiply your age by your taxable income, then divide this amount by 10, and subtract any inherited money. The result is what your net worth should be according to your income and age. If your actual net worth is significantly below this figure, you’re probably living a consumption-orientated lifestyle (spending more than you save). On the other hand, if your net worth is significantly above this figure, you’re already practicing wealthy habits.)
4) Develop the habit of directing your money towards different savings and investment accounts regardless of what you earn. This act will reprogram your money mindset into believing that you can effectively handle more money and will increase both your confidence and your financial setpoint. Divide your income and deposit into the following categories:
- 50% to cover your essential living expenses (rent, utilities, food)
- 10% into an investment account (stocks, passive income businesses, real estate)
- 10% into a savings account to cover large or emergency expenses (unexpected repairs or medical costs)
- 10% into a self-improvement account (mentoring, coaching, books, and seminars)
- 10% into a rewards account (use this guilt-free money to indulge yourself and feel rich)
- 10% into a charitable account (donations to causes you care about)
- Deposit your loose change into a jar every day
| Additional Advice About Dividing Your Income Like Eker, David Bach (The Automatic Millionaire) suggests that you should develop the skills to manage your money regardless of what you earn. This way, you’ll develop positive habits that will increase your current net worth and prepare you to effectively manage your future income. Eker’s suggestion to divide your income into separate accounts is standard practice—the majority of financial books suggest that you restrict your daily expenses and contribute towards your savings and investment accounts. A number of these books also suggest that you set up a separate account with money that you can spend on treating or educating yourself (I Will Teach You to Be Rich and The Barefoot Investor), and that you donate a portion of your money to causes that you care about. However, Eker doesn’t mention anything in his list of categories about planning for your retirement—this is something that the majority of financial books place a lot of emphasis on, as it’s accepted as the safest and most proactive way to ensure that you’re financially comfortable after you stop working. The Automatic Millionaire offers advice and presents specific steps to help you set up and automate your retirement account—Bach suggests that setting up a tax-deferred retirement account and maximizing your contributions is the easiest way to accumulate wealth for a comfortable retirement. |
5) To increase your net worth, focus on increasing your working income and your passive income. Next, decrease your current expenses so that you can contribute more money towards your savings and investment accounts.
(Shortform note: Eker doesn’t explain how to increase your working and passive income and decrease your current expenses. If you’re employed, I Will Teach You to Be Rich offers advice on methods for negotiating a higher salary, such as emphasizing the value and benefits you provide. If you’re self-employed, Business Model Generation offers strategies for you to maximize your profits, such as employing different pricing mechanisms for different customer groups. For advice on ways to decrease your expenses, The Automatic Millionaire suggests that you track your daily expenses to identify how much money you can redirect towards your savings and investment accounts.)
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- The difference between the way rich people and poor people think and feel about money
- How to improve your finances by taking conscious control of your thoughts
- Why you may be holding yourself back from becoming wealthy
