Building wealth is a goal most people have, regardless of age. But what it means to live a wealthy life is different for everyone. From a purely financial perspective, there are some general guidelines for building wealth over time.
Here are some ways to build wealth and plan for your future: Find active and passive sources of income, stick to a budget, and invest consistently for the long term.
Step 1: Making money
Earned vs. passive income
While it may seem obvious — especially if you haven’t inherited a large sum of money or if your start-up hasn’t gone public — you’ll need to find a way to make money in one form or another. This can happen in one of two ways.
First, there’s the concept of earned income, sometimes called active income. This is the money you earn from working a job, freelancing, side-hustling, or any other activity that requires your active participation.
Second, you can work toward making passive income. Passively earned income is money that derives from some other investment and requires little to no maintenance to generate indefinitely.
Examples of passive income include rent from investment real estate, book royalties, or passively held stock investments. In most, if not all cases, there is usually some sizable up-front investment in the form of either time or money to generate a reliable stream of passive income.
Income and expense management
A popular phrase within the financial planning community is, “Mind the gap.” Here, the “gap” refers to the difference between your income (the sum of both your earned and passive income) and your expenses (how much you spend over a given period). The greater the gap between your income and expenses, the more you’ll have left over to save and invest.
Consider your expenses and how much leftover money you have today. You have a few different levers to pull if you’d like to increase the amount you have after accounting for expenses.
First, you can find ways to increase your earned income. For example, you could add a freelance job. Second, you can reduce your expenses by being especially mindful about every dollar that goes out and ensuring you’re receiving some benefit from it. Third, you can invest some of your leftover money in assets that generate passive income.
Any combination of these will lead to a greater surplus for your discretionary use every month.
Earning money for the long term
It’s a good idea to pursue an earned income — that is, something you get up and do every day — that’s sustainable in the long term. Ideally you focus …….