We all have probably had dreams or even current aspirations to accumulate wealth and live a more luxurious lifestyle.
Although you may think wealth accumulation only happens with those who are rich or born into generational wealth, everyone has a chance to dramatically boost their net worth.
Now before you roll your eyes at that, it will not be easy and others may have different advantages than you’ll have. It’s a part of life!
But when you consider yourself wealthy will also depend on your cost of living, how you spend money, and if you have a plan.
Your path to a higher net worth and financial freedom is more obtainable than you think, but it’s why you need to understand wealth accumulation if you want to succeed.
What is Wealth Accumulation?
Wealth accumulation means you are increasing your net worth and wealth over time. You are acquiring more money and investing in assets that compound, which help you live a more comfortable lifestyle and achieve financial independence.
Individual people may have a certain number in mind for what they consider to be wealthy. However, in a Modern Wealth Survey from Charles Schwab, it was found that respondents felt once you have a $2.3 million net worth, you can call yourself wealthy.
But then another survey from a market research website YouGov found if you earn $100,000+ per year, you can be considered wealthy and rich as well.
Those two numbers are quite different and it seems the average American has various ideas about when someone is wealthy. There are many factors that can attribute to these different viewpoints like current location, age, family, friends, etc.
Why is wealth accumulation important?
Wealth accumulation is important because it helps you build up your retirement, creates money while you sleep, and keeps assets in your family that can be passed down to future generations. It also can allow you to retire earlier than expected, remove financial stress, and creates multiple streams of income for you so you are not reliant on any single stream.
You might also notice, I’m not mentioning the word “rich” in these sections much. While you might have a goal to become rich, remember that accumulating wealth is much better and is more strategic.
So keep in mind, rich and wealthy are actually two different things.
What is a Wealth Accumulation Plan?
If you want to become wealthy, you need to learn what this entails and put a wealth accumulation plan together.
A wealth accumulation plan is a dedicated investment strategy that can help you increase the value of your investments and net worth over time. The goal of your accumulation plan is to invest in funds and various assets for the long-term and take advantage of compounding.
You can consult a wealth advisor, financial planner, or you could create your own DIY wealth accumulation plan. This depends on your level of comfortability and the number of assets you may have to manage currently.
Personally, I chose my own DIY plan, since I started accumulating wealth from nothing, and that saves me money in fees too. Plus, I love learning on my own and enjoy teaching myself about personal finances.
Just a few years ago I had a negative net worth but worked my way out of that. I’m not “wealthy” quite yet in my own eyes, but I have reached a comfortable level with my finances.
Steps to Start Accumulating Wealth
So what does it take to accumulate wealth and how can you put an action plan together? It’s not as hard as you may think, but it’s important to remember that wealth accumulation is typically a long-term play.
Getting rich quick is not real and if anyone tells you otherwise or offers you supposed ways to get fast wealth, ignore it! People always want shortcuts, but unless you win the lottery or inherit millions of dollars overnight, wealth accumulation takes time and discipline.
Here are the essential steps to help you build wealth (there are no secrets or groundbreaking ideas):
1. Create and update your budget
Before you can truly start accumulating wealth, you have to understand how your spending money and your overall budget. This forces you to look at the income that is coming in, and what money is going out.
You’ll want to find your fixed costs (like rent or mortgage payments, utility bills, insurance, etc.) and also things you are spending on that might not be as necessary or known as variable costs.
A common strategy to start with is the 50/30/20 rule. This the idea that you budget 50% of your money to go towards things like rent and utilities, 30% for things you want, and 20% goes towards your savings your debt.
I personally flipped the 30/20 aspect, with 30% towards savings and paying debt when I first started on my financial journey.
Budgeting can be a pain, but there are lots of ways to ensure you are successful. Here are some budgeting resources to help you:
- Budgeting 101: The Basic Tips to Improve Your Finances
- The Budget Calendar: What Is It And Do You Need One?
- What is the 30-Day Rule? Manage Your Impulse Spending
- Cash Envelope System: How Does This Budgeting Method Work?
2. Monitor your net worth
Most likely once you start budgeting, you are going to potentially see your general net worth. However, you should make it a priority to understand this number and why it matters, especially for wealth accumulation.
Calculating your net worth is pretty easy, it is just the sum of your total assets minus your current liabilities. And maybe you cringe at the thought of calculating it because of any high-interest debt you might have or that you don’t have many assets currently.
That’s okay and don’t be afraid!
Another variation you should also calculate and keep tabs on is your liquid net worth. It’s similar to your overall net worth, but with a slight tweak:
Liquid net worth is the number of assets you have that currently which ould be quickly sold quickly for cash. Basically, if you had to sell immediately for any reason, you’d have no problem acquiring the cash value.
But understanding both areas of your finances helps you get the overall financial picture, you can monitor your progress, but also understand how much you have to liquidate in case of an emergency.
3. Build up your emergency fund
One of the most important steps you can take first is to build up your emergency fund. Every personal finance article has talked about the value and need for it, but for good reasons!
Life happens, unexpected expenses come up, you could lose your job, etc.
These unexpected life events are never fun and not being prepared can throw more financial stress at you. But by building your emergency fund, you help ensure you are protected in case some event happens.
The common recommendation is to have 3-6 months of expenses saved in your emergency fund. However, having more can never hurt! But conservatively aim to have a few months ready to go.
You should keep this in your bank’s savings account or you can go to an online-only bank that may offer higher interest on your money.
4. Get rid of high-interest debt ASAP
There is no doubt that if you want to become wealthy, you’ll need to eliminate any debt as soon as possible. And you especially want to get rid of high-interest debt, which can drag on payments for a long time and waste quite a bit of money just on interest.
Debt from credit cards, student loans, and payday loans can all have relatively high-interest, so knock those out! Figuring out your budget from earlier will help you see how much debt you have and currently are paying.
Plus, once you free up more income, you can start making more aggressive payments to be done with debt much sooner than with minimum monthly payments.
Pending your debt amount, this may require you to be more frugal and not invest as much until you can pay everything off. There are various debt strategies out there, but choose the one that best supports your personal goals and needs.
5. Start saving more money
So you have an emergency fund of 3-6 months (or more) and you’ve paid off your high-interest debt, now what?
Well in wealth accumulation, it starts coming down to increase the amount of money you are saving and investing. But let’s start with your ability to save more money.
You already have your budget, so you know what income is coming in and going out. You also have knocked out all or most of your debt. So the first thing you can start doing is banking that money you used to pay on any loans you had. Immediately, you are increasing your savings rate.
This is exactly what I did, I pretended I still did not have access to that money but now I could pay myself first instead of towards debt. Pending how much debt you had, that could be an extra few hundred bucks or more a month being saved!
Additionally, look at your overall spending. Are you going out to eat too much? Does your spending on entertainment look too high? Where can you cut back drastically on things you won’t miss, but still not live extremely frugal?
Finding ways to save more money will allow you to invest more and acquire appreciating assets to build your wealth further.
6. Find ways to earn more money
Budgeting and cutting expenses only get you so far in your financial journey. If you want to earn wealth, you’re going to need to make more money. Fortunately, in today’s world, there are lots of ways to earn extra money or maximize your current income.
- Ask for a raise: you might be overdue for a raise or truly deserve one based on your work performance. Too often companies will over minimal raises where you barely see a difference and others won’t give you one until you ask. While it might be intimidating, create a plan, and keep track of your great work. You might be surprised how receptive managers will be.
- Negotiate salary: if you move on to a new company or look for a new job, don’t be afraid to negotiate your salary for more. While you want to be realistic in your ask, you can push back on any offer to maximize results. Many people increase their income by changing jobs or moving on to different companies. Don’t be afraid of job-hopping to maximize your income.
- Side hustle: you can do quite a bit by side hustling outside of your normal work. You can freelance, take on a part-time job, look into the gig economy, start an online business, etc. There are lots of different ways to make some extra money, which you can use to save or invest.
7. Start investing wisely
The best way to become wealthy is to start investing your money and putting it to work!
Keeping money in cash for emergencies is great, but if you really want to compound your wealth you need to invest in assets. This can be a whole mix of things and what assets are right for you, depends on your risk tolerance and financial goals.
- Stock market: the most common place to build long-term wealth and for retirement is investing in stocks and bonds. Set up your 401k, IRAs, or any other investment account as needed. Keep it simple with index funds and max out your accounts (if you can). You can invest even if you don’t have a lot to start with, micro-investing apps like Stash and Acorns let you get started with a few bucks!
- Real Estate: many people build wealth by acquiring real estate where they rent to people or rehab and flip for a profit. This may require more upfront money and knowledge, but real estate can be huge to skyrocketing your overall net worth. You can also start with real estate crowdfunding for less, like Fundrise, Groundfloor, or DiversyFund.
- Alternative investments: you can also accumulate wealth through alternative investments too. Technically real estate can fall into this category but think of things like commodities, gold and silver, cryptocurrencies, collectibles, and fine art.
8. Have a will and estate plan
As your wealth grows, you want to ensure you are protecting it and also where you want it distributed once you pass.
Talking about creating a will or estate planning is not something fun to talk about for most people.
But without thinking about these things, it can be a messy situation for family members when you are gone. And it can cause more issues when money or assets are involved, which can create more family tensions.
With a will, you can organize who will get your assets and what things will go where. And with an estate plan, this goes into more detail about paying estate taxes, setting up any trusts or charities, naming an executor, and more.
9. Keep investing in yourself
The last step I wanted to include on wealth accumulation is to keep investing in yourself. Building wealth takes actionable planning, work, and a bit of luck — but you can manifest money by believing in yourself and boosting your knowledge.
This means spending time reviewing your finances on some recurring cadence. But also keep learning, regardless if you think you know quite a bit. Read books about money, tax strategies, and business (if you want to start your own one day).
Also, work on your relationship with money and view it as a tool. Understand your needs vs. wants and how this impacts you becoming wealthy.
Essentially, spend the time on improving your knowledge and you’ll be rewarded in years of dividends from your efforts.