Did you know that according to a recent study, nearly 80% of millionaires in the US are self-made? That’s right – they weren’t born into wealth or handed their success on a silver platter. Instead, they followed a proven process for building wealth and achieving financial freedom. If you’re ready to join their ranks and learn how to become rich on your own terms, then read on. This is an ultimate guide, that will show the exact steps one must take to become wealthy.
Are you tired of living paycheck to paycheck? Do you constantly worry about money and struggle to make ends meet? Do you dream of building wealth and achieving financial freedom, but don’t know where to start? If so, you’re not alone. Many people aspire to become rich, not just for the money, but for the freedom and opportunities it can provide.
In this ultimate guide to building wealth and achieving financial freedom. we’ll see the exact steps needed to take to make these dreams a reality. We’ll cover key principles and strategies for building wealth, such as saving, investing, and minimizing debt. We’ll also provide guidance on setting financial goals, creating a budget, investing for the long term, building passive income streams, managing debt, and staying motivated.
But becoming rich isn’t just about money – it’s about creating a life of choice and abundance. In this article, we’ll explore what it truly means to be rich and how you can prioritize your financial goals alongside other priorities in life. Whether you’re just starting out on your wealth-building journey or looking to take your finances to the next level, this guide has everything you need to succeed.
According to a report by Credit Suisse, the number of millionaires in the world increased by 5.2 million in 2020, despite the pandemic. This suggests that it is possible to build wealth even in challenging times.
On the concept level, we can say that to become rich one must generate passive income in excess of the needs. Passive income is income that is earned without our active involvement in the process of making money. For example, doing a job is a form of generating active income. On the other hand, dividend earned from stocks is a form of passive income. To earn dividend income, the investors need to do nothing post the stock purchase.
A common man’s way of building passive income is through investments. Hence, one’s focus should be on building an investment portfolio with assets that can yield passive income.
A study by the National Bureau of Economic Research found that individuals who pursue entrepreneurship have a higher chance of becoming millionaires compared to those who work as employees.
However, it is important to note that the yield of investment options that generate passive income is often low. It is especially true in the starting years of investment. But for good investments, the yield improves with time.
This is what makes the process of becoming rich difficult to execute and maintain. It can take multiple repeated investments and decades to build a sizable investment portfolio.
For example, suppose your requirement is to generate Rs. 100,000 per month in passive income. Assuming a yield of 6% per annum, an investment portfolio of Rs.2.0 crore size will yield an income equivalent to Rs.1.0 lakhs per month.
Try to do your math, how many years it will take you to build a Rs.2 crore portfolio?
The Process to Become Rich
Elaborating more on the concept of how to become rich, we’ve seen that two components are essential to reach the goal. The first is an investment portfolio, and the second is passive income. How to implement this concept? Implementing this idea in two stages will make it more effective.
The first stage is about building a growth-focused portfolio and the second is about building an income-focused portfolio.
- Stage#1: Here, the investor should focus on the continual accumulation of growth assets like stocks, equity funds, etc. To reduce the risk of loss and take advantage of the power of compounding, these purchased assets shall be held for a long term (like 10-15 years). The idea is to use growth to increase one’s purchasing power. The enhanced purchasing power is used to fund purchases in stage two. In this stage, one must also be on the lookout for undervalued income assets.
- Stage#2: As the yield of income assets is low, hence large financing is essential from stage one. In this stage, the focus is on the accumulation of income assets like dividend stocks, funds, rental properties, etc. These assets generate passive income. When the quantum of passive income is just sufficient to take care of one’s standard of living, it is a stage of financial independence. If excess passive income is yielding in excess, it is a state where one starts to become rich. The bigger the quantum of the “excess”, the richer the person.
The key here is the continual purchase of growth assets and the gradual accumulation of income assets. It is also essential to check that both asset types are NOT being purchased at expensive price levels. For a time horizon of 10-15 years, growth assets must yield a minimum return of 15% per annum. The income assets must be bought when it is yielding a return of at least 4% per annum.
A study by Vanguard found that consistently saving and investing over time is the key to building wealth. The study found that individuals who invested regularly in a diversified portfolio over a 30-year period had a much higher chance of accumulating wealth than those who did not.
Side Hustles Necessary To Become Rich
The concept of investment portfolio building as explained earlier has its focus deeply rooted in our idea of how to become rich. It sees nothing else. But it is also necessary to plan for possible future diversions that can derail our plan of becoming rich. In order to plan and take care of these diversions, one must also execute other tasks. I’m calling these “other tasks”, side hustles. There are following five side hustles that are absolutely necessary to manage:
Five Side Hustles
- #1. Emergency Fund: Before one even starts to invest, building a cash emergency fund is necessary. The minimum size of this fund must be at least six months’ worth of total expenses. An emergency fund can be built in cash or bank deposit. Read a detailed post on the emergency fund.
- #2. Tax Planning: It is an unavoidable task and has dual benefits. It prevents unnecessary tax-related outgo. Moreover, it pushes people to save more. A smaller tax deduction means more spare money for the investment portfolio. Read more about how equity investing (ELSS) can save tax.
- #3. Insurance Cover: Insurance may look like a cost initially, but it saves much more in the long run. Start with a term plan for life cover and medical insurance for health coverage. Another insurance providing a cover for vehicles is also necessary. Read more about insurance planning.
- #4. Home Purchase: People often start by living in rented apartments. But having one’s own home is necessary for financial independence. But there is one control point, always buy an affordable home.
- #5. Becoming Debt Free: In one’s endeavor to become financially independent and eventually rich, debt is a major obstacle. For the majority, carrying this liability and seeking financial independence is almost impossible. Availing of loans at times can be unavoidable, but important is to prepay the loan to become debt free. Read more about how to become debt free.
The article talks about building wealth and achieving financial freedom. It explains that the key to becoming rich is to generate a passive income that exceeds one’s needs.
It also discusses the importance of building a growth-focused portfolio and an income-focused portfolio. It’s essential to continually purchase growth assets and gradually accumulate income assets. The funding for “income assets” purchase is sourced by selling assets in the “growth portfolio”. But it also indicates that the minimum holding time for assets in the growth portfolio is between 10-15 years.
It also mentions the importance of side hustles in the process of becoming rich. Five essential side hustles are building an emergency fund, tax planning, having insurance, buying home, and staying debt free.
Overall, this article is a quick guide to help people first achieve financial freedom and then eventually become richer over time.
Building wealth and achieving financial freedom is a long-term process that requires commitment, discipline, and strategic planning. To become rich, you need to adopt a growth mindset, focus on increasing your income, and invest wisely.
Following the steps outlined in this guide gives one the ability to take control of the financial future. It can also create a life of abundance and prosperity. One must also remember to prioritize goals, be patient, and be disciplined in the approach.
Building wealth is not a quick fix, but rather a journey that requires consistent effort and dedication. As the saying goes, “Rome wasn’t built in a day.” Similarly, becoming rich is a gradual process that requires patience and persistence.
So, start taking small steps today to build your wealth and create financial freedom. Whether it’s increasing income, reducing expenses, or investing, they are all steps toward the financial goal.
Ultimately, becoming rich is about more than just accumulating money. It’s about creating a life of abundance, freedom, and fulfillment. So, set your sights high, stay focused, and never give up on your dreams of financial success. With the right mindset and the right strategies, you can achieve anything you set your mind to.
In case you have some feedback/queries on the topic, please post them in the comment section below. It will be my pleasure to read and reply to your thoughts.
Have a happy investing.
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