6 Simple Steps to Wealth

By Aktive Learning | MoneyMatters.sg – Wed, Feb 6, 2013 2:47 PM SGT

By Brian Halim (guest contributor)

Many believe there is a great secret to becoming wealthy. Few realize that the simple basics are all you need to build wealth. The “secret” to wealth is not much of a secret. A variety of simple concepts and actions can be applied to achieve prosperity. Follow the following six steps and you will be on your way to building your wealth.

1. Spend less than you earn
The number one rule of personal finance is this: You cannot spend more than what you earn. You must live within your means, and take care that you never outspend your income.

2. Reduce Debt
Pay down your debt, and you free up resources that can be used to improve your net worth. If you are leveraging on your loan, repay your loans diligently. Reduce the amount of interest you pay, and instead use that money to your advantage.

(my comments: pay off the debts with the highest interest rates first. For example, credit card interest in Singapore is 24%, overdraft interest ranges from 0% to 15%. I would keep my home mortgage because interest is around 1% to 1.5% and if you rent out your property, you can get between 3 to 4%. Hence there's a positive carry. Secured overdraft against your investment is also very cheap, around 1% - 2%. This is a useful form of cash too and allows you to invest without locking up your capital fully).

3. Grow Income
If you want more, you need to earn more. Look for ways to grow your income. Maximize the lifetime earnings of your career as well as seek non-career options to profit like part-time jobs. Staying overtime in an office that does not pay you extra will not help you, unless it will lead to a promotion.

(many Singaporeans think that studying hard, getting good results and getting a good job is the best way to achieve financial freedom. But that's only half the story. What you need is to take courses in investing, take a Chartered Financial Analyst program, pay thousands to learn from the best investment coaches. Next, you need to invest in real estate as well as stocks, bonds, i.e. a diversified portfolio. Your stable job is a means to get mortgages to invest. My internal rate of return from investing in properties is around 20 to 50% per annum. For financial assets, due to the lack of leverage, I achieve between 10 - 20% per annum. That speeds up my process towards financial freedom).

4. Save for the Future
Your emergency fund can protect you against financial setbacks or unforeseen emergencies. Be prepared and stay calm.

(My take is that you need to keep an amount of cash equal to no more than 6 months of your average expenditure. Anything more will drag on your returns and be unnecessarily cautious.)

5. Invest in Yourself
Wealth also depends on your human capital. Invest in yourself by getting an education, and/or developing a skill. It does not necessarily need to be a degree. All you need is a marketable skill, or a knowledge base that can help you improve your finances.

(Refer to my recommendations in point 3)

6. Play Good Defense
Be sure to avoid the worst finance mistakes that people make. They can derail your gains and even ruin all of the hard work you put in to grow your net worth.
When reading the above actions, it is easy to dismiss them. If it were so easy, everyone would be wealthy. The steps that lead to wealth are simple concepts. Applying these concepts is much harder.

(You cannot throw caution to the wind and invest in only stocks. You need some short dated bonds, good bond funds, and dividend stocks as a defence against things going wrong.)

3 Building Blocks of Wealth: Discipline, Patience, and Persistence
In addition to the steps above, you also need to develop three qualities to ensure maximize the chances that you will achieve wealth.

1. Discipline
Discipline requires a measure of self-control in expenditure. Rather than buying everything you want, prioritize and purchase only what is important to you. This will help get rid of debt and build your savings.

Earning money requires discipline. Growing your income means that you have to get up early and do extra work. Occasionally, you might have to complete tasks you find unpleasant. Knowledge and skills too are acquired only after you exercise the discipline to study and to practice them.

(I still drive a 8 year old beaten up Honda Accord. My favourite car is of cause a Ferarri but hey, I'm married and there's no need to impress anyone :-) I still love to travel, but now I combine my travels with my searches for overseas investments. I get to make more friends like that, learn more about the city and spend less money shopping and eating).

2. Patience
In today’s world, we are bombarded with promises of instant gratification. We want that expensive car now. You can have your vacation with a credit card. A 60-inch television can be yours if you qualify for in-store financing. The inability to wait and save up the money for what we want leads to debt and financial insecurity.

Results require time. A good emergency fund takes months, or even years, to build. Dollar-cost averaging in your investment portfolio requires decades of patience.

(My advice: buy one property a year. If prices of real estate collapse, buy double, or even triple the amount. If prices go up too much, buy smaller units, or buy off plan properties that allow you to own assets with little down payment. The time it takes to complete will allow you to hopefully allow you to skip the downturn and make a small profit when it TOP.

Do not trade shares too much. Look at fundamentals, and technicals. Do dollar cost averaging if you have no knack for financial investments).

3. Persistence
Persistence is the ability to keep with your wealth-building efforts. It is easy to give up when you do not see quick results, or when you see your neighbors enjoying their over-leveraged lifestyles.
However, in the long run, those neighbors are likely to have very little wealth, since most of the goods they enjoy have been bought with debt. It is hard to see that when everyone around you is having fun while you follow a more practical course. But stay the course.

Take action now. There will be many temptations along the way. It is up to you to decide which path to take. Follow the simple concepts of building wealth with discipline, patience, persistence, and you will achieve financial freedom.

(The time to act is NOW. There's no short cut to building your wealth. You need to do a lot of research, talk to a lot of people, read a lot of books and attend many courses).

The concepts behind wealth are that simple, but it takes hard work to put them into practice.

By guest contributor Brian Halim, a professional accountant who blogs at A Path to Forever Financial Freedom. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.