Know the secrets of building wealth to attain financial abundance through this first of two-part of the Wealth series
People are flocking to the Internet to find “How to be rich,” “ Five ways to become super-rich,” or “How to be Financially Independent.” Being financially free is bliss as it relieves you of job insecurity and money-related anxiety. Imagine never having to work again just because you have to.
But I believe a better way to find an answer is to find out “How to Build Wealth to gain financial freedom.” Because it involves learning about the process rather than gimmicks. The reason is that getting rich is a varied-perspective inherent in people. Some may be fine with saving one year of their salary and call themselves “Financially free,” while others aspire to stash ten years’ salary to become financially independent.
There is no limit to people’s aspiration to save money or build Wealth to be called Financially Independent.
So, how do we define Financial Independence or abundance?
It does not matter at which stage you are. You can start wherever you are. This article will explore the first two out of four essential questions about financial stability. You can treat this as a step-by-step guide from knowing to gaining financial freedom.
- What is Financial Freedom/Independence/Abundance?
- How to identify your financial stage?
- What are the five ways to build Wealth?
- Lessons from my mistakes
Although these words are used interchangeably, their meanings have got some differences. I believe in the following relationship. I will also use here these words interchangeably.
“Financial independence< Financial freedom< Financial abundance”
It means that the highest form of wealth generation is Financial abundance.
So, my version of Financial freedom may be different from others’ one. It is the stage in which passive income from your wealth adds to wealth even after managing all the expenses.
If S is the monthly Surplus, P is monthly Passive income, E is monthly Expenses, and W is your Wealth, then it can be stated as follows:
S= P — E
W” = W + S, where W” is the incremented Wealth.
The source of passive income can come from any investment instrument such as Mutual Funds, high-dividend stocks, ETF(Index funds), other rental revenues, etc.
How to Identify your financial stage:
Stage 1: Liability free
This stage is where your income is just enough to sustain life. Here, your income consistently exceeds your expenses. Your expenses may be in the form of living costs and low-interest debt such as Education loans. You might have small credit card debt in the form of EMIs.
Your bank account does not have any significant savings stashed. You do not have any giant loan or outstanding financial liability.
However, this stage is not self-sustaining. Any unanticipated costs or emergencies may disturb your financial balance due to a lack of savings. Your financial situation may fail to compensate for the costs associated with emergencies.
Your job is your primary source of income. So a job loss may bring disaster to your financial stability.
Stage 2: Contingent Free
This stage is relatively safer than Stage 1. You have some savings stashed in your bank account. The savings are generally a corpus of 6 months to 12 months of your living expenses. At this stage, you do not have any big high-interest loans. Your financial balance is not shaken even if some unanticipated expenses strike.
A job loss may not have an immediate economic effect on your lifestyle. However, until you find your next job, your stashed savings will draw down gradually.
Stage 3: Job free
This stage is just closer to financial freedom. You have enough savings in your bank account and have a retirement corpus. A job loss will not be anything you would worry about for at least ten years.
Your savings and retirement corpus earn you passive income and thus compensate for your monthly needs. This stage is where you are almost risk-free. However, any significant investment may shake some ground when things don’t go as planned.
Stage 4: Financially free
I consider this stage to be the safest one from an individual point of view. This is where you are financially abundant. A life without a job for even 30+ years would not be an issue. So even if you periodically withdraw from your investment, your portfolio is healthy and gains annually at the rate of inflation rate(around 5–6%)
Moreover, the portfolio could manage your annual withdrawal expenses even at the bank savings’ current interest rate(4%).
You will find innumerable free articles and paid newsletters that will guide you to build Wealth and manage a portfolio. But I am not going to repeat the same.
I believe education is the foundation of Wealth, and one should be aware of that. We will cover the “how aspect” of Wealth building in the following article of this two-part series.
I will touch on a few important points before we embark on the how part in our next article.
The first obstacle to building Wealth is the starting part. Once you start the process, it gets easier. And I am not saying this to motivate you. Warren Buffet made 90% of his Wealth when he turned 65. Such is the beauty of compounding. There are many examples like those.
Building Wealth is a process that takes time, commitment, periodic investment, and knowledge of the financial industry. Time and dedication can be attributed to a person’s quality. But investment and knowledge are external factors that you have to take control of.
While periodic investment will depend on your overall income level, knowledge will depend on your desire to gain Wealth.
Let us deal with these two.
Knowledge part: Making income from Real estate, rental properties, or side hustles may not require deep knowledge. However, earning from Traditional financial instruments such as Stocks, Bonds, Derivatives, Index funds, or Crypto markets requires a good understanding of such products.
The best way to understand such products is to study different investment instruments. Any course on the financial market will provide you with enough content to start with. You can find these courses for free on open source websites or Youtube. Paid courses are also available.
Here is a list of a few free courses:
Influencers create their Youtube channels, however, most of the content are not very structured. Still, I love to watch some deep-dive channels into finance and economics.
Here is a list of my two favorite channels:
Remember, these links mentioned above are just a few resources to start your journey towards financial literacy.
Investment part: You might want to note this down. You can invest in something only when you can control your expenses well. Even if your income level is not so good or below average, you can manage to invest, provided you cut down your costs.
When you take charge of your expenses, your savings have the potential to increase. This fact seems so obvious, but this is the core of investment. Let me illustrate this to you with an example.
Suppose your monthly income is $2000 and your monthly expenditures are $1500. Thus your saving per month is $500. Imagine you cut down the expenses by $250.
This $250 is just 12.5% of your income; however, it is 50% of your saving. Now that you have saved $750, you have increased your savings by 50% per month by just cutting down your expenses by $250.
Did the above illustration suprised you? Let me know!
Here is a spoiler of the content for part II of this series, “How to Build Wealth.”
We will first cover the general aspect of saving more from a primary source of income. We will then explore the ways and strategies to grow our monthly savings exponentially over time.
I am not saying this out of any irrelevant experience. My investment journey started in 2013. Though I am yet to reach the final stage of Financial abundance, I believe sharing my experiences would help you gain perspective. I know the journey can be intimidating but we all have our ups and downs.
Be fearless and open-minded for this attitude leads to success in our endeavors.