Wealth accumulation is one of the topics that require many years to kick in
That’s why I convince people who are debating that those wealthy ones around us inherited their money
I reply with if you invest 15% of your income into mutual funds with 8%-12% dividends and reinvest your dividends within the next 15 years you will be wealthy
Of course, I prove my theory with calculator
Usually it ends up with a conclusion it is to late to start especially if they are not investing any money yet and I accidently depress them
Also one more thing you can do right now, if you as individual or a couple invest your money into a rental properly
You can join with another person or couple, just pay the down payment and mortgage the remaining amount – do it in a way that your rental amount pays your mortgage
You are accumulating a wealth as the value of the property is saved for you at the same time the properly itself is increasing in price year after the other
That’s why in this post, I will discuss wealth accumulation in details
What is wealth accumulation?
Wealth accumulation is simply a process of building up your net assets and wealth over time
A recent survey shows that there are 11.8 million households with $1 million net worth and that’s equivalent to 3% of U.S.
Again, it doesn’t happen overnight as this survey above does not reflect how long it took them to accumulate their wealth to the one million
Is wealth accumulation important?
Imagine you and your wife spend all of your income
What would happen when you retire?
Either you end up selling your home and move to a cheap city and rent a humble property with barely minimum to survive
According to Yahoo Finance 64% of Americans are not ready for retirement
You are not only building wealth for your retirement but also to pass it to your next generation
Any accumulated invested money in mutual funds that yield decent dividends will always stay intact as you are spending the profit and not the principal
You can pass it to your children and believe it or not, they will appreciate the fact that you did not live for yourself but you thought about them
Is it possible to accumulate wealth quickly?
This topic is controversial especially for those who postpone saving money and investing it
But to accumulate and build wealth fast like really fast, you have to consider investing in mutual funds and ETFs (Exchange Traded Fund) under one of the following accounts
Either under Roth IRA as called in the U.S. or TFSA (Tax Free Saving Account) in Canada, both Roth IRA or TFSA will let you invest money where your earnings are tax free, hence you can reinvest your profit
Other option is to invest your money into retirement saving account for long term investment
Keep in mind that both Roth IRA or TFSA is limited to a certain amount annually
I believe it is a fixed amount and not a percentage to your income
That’s why to boost your wealth building process, I suggest to invest while your cut your spending and build a budget for your household income
Does investing in real estate build wealth?
People ask me if they are building wealth within their living home
I always tell them, as long as you live in a home you cannot consider it an investment
You have to have a shelter and even if you sell it, you will buy another one
The only exception to this rule when you sell you home when you retire and downsize or rent an apartment
Back again to the question if investing in real estate build wealth, short answer is yes
But there are few types of real estate investment, I only like one type which I consider the best wealth accumulation option
Purchase property for rental
This is my favorite type because when you buy a rental property your tenant is paying your mortgage through your rent
If the house market crash, whatever your rental property is worth, its value was paid for you
Flipping houses
Flipping houses is simply buying low and selling high
It is risky but in some states like New York, New Jersey in U.S. and in Great Toronto Area in Canada, houses are always on the rise
House hacking
Similar to flipping house but you buy a duplex where you live in one and rent the other
REIT
REIT stands for Real Estate Investment Trust where you invest your money in real estate stocks similar to mutual funds
How do you build wealth from nothing?
I heard this percentage but not sure about its source, around 67.7% of millionaires are self made
To effectively build your wealth, here are the steps to follow
- Educate yourself about money and acquire financial knowledge
- Get a regular income as you don’t want to waste your hard earned money to cover your unemployed periods
- Stick to a budget
- Insure yourself against the unexpected like dental and life insurance
- Cut your spending and practice saving money
- Build an emergency fund
- Work on your skills to seek higher income
- Explore passive income ideas that can make you money while you sleep, like renting part of your house
What is the best way to accumulate wealth?
Although what I list below is similar to the above
I will use this opportunity to elaborate more on the best way on building your wealth
1- Start with the concept of creating a budget
I give credit to my first budget which I made with with wife
The end result, I found 2 bills I completely not using
I discovered many ways to cut my expenses like I started using VOIP phone which costs me $2.5 a month
I also replaced my cable which used to cost me $25 a month to $30 a year
Start now by building your budget
2- Pay off your debt fast
I believe what is the point of paying interest and leaving the principal
You will end up paying interest for infinite time
Take an action now and start with paying high interest debt first and use the same energy to keep the debt ball rolling
3- Build an emergency fund
After paying off your debt, it is time to think about build your emergency fund
You don’t want to fall in debt again and the best way is to have a reserve to pay any unexpected sitiuation
4- Seek high income jobs
I always recommend job seekers to stretch their income opportunities and look for the highest income for your skills
I know it is hard for many to ask for raise at their work
But if you find a competitive opportunity you can take it to your employer either to match it or you leave
5- Invest your saved money
Investing part of your income into mutual funds and ETFs under your retirement saving account
You not only build wealth but you also get a good tax deduction when doing your taxes
Actually in U.S. and Canada you get a tax deduction for the amount invested from your taxable income up to 18% in Canada of your total income
For example, if you annual income is $60,000
You can invest $10,800 in mutual funds and ETFs under your retirement saving plan
When you do your taxes, your taxable income drops down to $49,200
You get back a refund of your taxes paid on $10,800 (something around $4,000)
6- Choose the right insurance
Choosing the right insurance whether a medical, dental or life will protect you against inevitable life emergencies
I was hospitalized in 2017 for what is called one day operation
I know in Canada medical is covered by the Government but at least all the miscellaneous expenses like drugs were covered by my insurance
Bottom line, you don’t want to spend the rest of your life paying a medical bill
7- Have a will for your next generation
Imagine you have done all the above but with no will
GOD forbids you don’t want your hard earned wealth to go to the Government
In fact, without a will, part of your wealth will go to the Government
But why you that if you are a good citizen paying taxes
How do you calculate accumulated wealth?
The formula is very simple
Your wealth = your net wealth which is equivalent to Assets – Liabilities
What is Asset
Asset is anything that puts money in your pocket
Your income for example is an asset
What is Liabilities
Liabilities on the other side is anything that takes money out of your pocket
That’s why car loan is a liability that can stay with you even after selling your car
Do you know your car loses its value day after day?
If you sell your car earlier before you pay all your monthly loans, your selling value will not be enough to pay the remaining monthly loans
Final thoughts on wealth accumulation
Buildiing wealth is an ongoing process, you cannot start investing and stop
As long as you work and save money, you have to invest your money
Also it is not a quick process, it takes long time to reap your rewards
This is the power of compound interest