How To Become Wealthy - A Summary

First lets make sure we all understand what "wealthy" means, for the purposes of this discussion. The term is very subjective, and here are a few similiarly subjective synonyms: "flexibility," "security," "freedom" and "independence." It's possible to have those things with $10,000, and it's also possible NOT to have those things with $10,000,000. But let's be honest; we'd all rather fall closer to $10,000,000. Here's a slightly more concrete definition of wealth: the generation of enough income to comfortably exceed your expenses, while simultaneously providing you flexibility, security, indepenence, and freedom.

That probably sounds convoluded. Normally I'd simply say you need enough passive income to cover all your expenses. But that definition doesn't account for the fact some people really desire to continue actively earning income--whether it's by blogging, running a company, fixing cars, or investing in real estate. So you can still be wealthy without living 100% off passive income (obviously). But in order to qualify as wealthy, in my opinion, your total income needs to exceed your expenses AND you need to 1) have the flexibility to quit your job if you wanted to, 2) have the security measures in place to be "OK" if you lost your active income source, 3) have the freedom to do whatever you want on any given day, and 4) have the independence to make these decisions on your own accord.

So now we know what we want. How in the world do we get there??

By now everyone knows (or everyone who reads PF blogs knows) that it's easy to become wealthy over the long term. Of course the terms "easy" and "long term" are relative, but basically if you invest a decent percentage of your income regularly for long enough, then you should end up with enough to live off comfortably...eventually. So hop on that train and get started getting wealthy the easy way. But what else can we do in the meantime? Here's my summary of How to Become Wealthy:

1. Educate yourself. Continually.
There are many sophisticated wealth-building strategies. You'd probably do best to become an expert in one (maybe two) and focus on them. Even though you don't have the money to execute them now, start learning. Read books, find mentors, join associations. Figure out how YOU want to build wealth and start learning about it now. A few options: start a business, create a website, invest in real estate, trade stocks, invest in futures/options/foreign exchange, etc. (I'll write a future blog on the various wealth-builders).

2. Save regularly in retirement accounts.
Start NOW. Invest in a broad mix of index funds, put in at least 10% of your income, and NEVER touch that money. This way, even if all else fails, you should still end up with a comfortable retirement. Note: if you are older than 35 and have little in the way of retirement, you should put 15% or more in your accounts.

3. Build an emergency (cash) fund.
Put at least 1 month of expenses in it. Make it 3, 6, or even 12 months of expenses if your job would take awhile to replace or if you have dependents. Don't raid this fund except for real emergencies. Seriously. Make sure it always has at least 1 month's worth of living expenses in it.

4. Buy a home.
This isn't mandatory, especially if you live in a very expensive (and/or volatile) real estate market. But it's a great way to be passively increasing your net worth every month. And it's another great security measure, protecting you from rising rents. If you can do it--DO it. And get a fixed rate loan for heaven's sake; that's part of the security. This requires good credit and enough money to cover closing costs (1st timers can get great deals even with no downpayment). Note: your first home does not need to be your dream home.

Most people never get past step four. And honestly, that's fine. These four steps are the basis of your financial security net (see link to a whole post on that below), and getting there can sometimes take years, depending on your situation. Most people hang out somewhere in steps 1-4 indefintily, spending their excess income on bigger and better "stuff." And as long as you keep saving for retirement and living within your means, you'll be fine. But if you want to be wealthy (and sooner than age 65 or 70), join me in step 5!

5. Execute the wealth-building strategy you came up with in step one!
You should (could) have been learning and networking toward that end all through steps 1-4. If not, start now. Simultaneously, focus on saving and/or raising capital for your venture. You need a separate account for this. Don't raid your security funds (retirement/EF) to get started--you could lose everything! Rather, save separately for your goal and then move forward with the confidence that even if it goes all wrong, you'll have your EF and retirement accounts to fall back on.

I know my plan is conservative. Some people risk it all for some business and become instant millionaires--but many more end up in bankruptcy. Your security net (steps 1-4) will give you the ability to take any necessary investment risks and to calculate them appropriately--if you know you and your whole family will be broke if you fail, you aren't going to be a very effective investor. You have to have the freedom to fail. Then try again. And again. Start yet another business. Another blog. Buy another property. Another stock. Until you succeed and get really wealthy! Worst case--you still end up wealthier than most via your retirement accounts. It might just take a few decades.

Other posts of mine that give more detail on these issues:
What Is Wealth?
Your Financial Safety Net
Start Your Journey to Wealth
Next Steps on Your Journey to Wealth