On the internet today, you’ll find no shortage of information on how to get rich. Type ‘how to get rich’ into Google, and you’ll be hit with over 2bn (yes billion) results! There’s an awful lot to take in.
Personally, I think you can simplify the process of getting rich into three very basic steps. Ultimately, owning a fortune is far simpler than most people make it out to be.
Without a doubt, the first step if you want to be wealthy is to spend less than you earn.
It’s not rocket science to realise that if you spend more than you earn, as many people do, you’re going to go backwards financially. If you want to increase your wealth, you need to start by saving money.
Now I realise that life’s expensive. Often, large expenses get in the way of saving. There are plenty of ways to make saving easier though.
For example, paying yourself first (where you save a proportion of your salary before taking care of your other bills) is a very effective saving strategy as it forces you to prioritise saving over spending. Round-up savings apps (which most banks now offer) can also be effective.
The key is to find a savings technique that works for you and stick at it. Even if you only save a little bit every month, you’ll be heading in the right direction.
The next step is to grow that money by investing it. If you leave your savings sitting in a ‘high interest’ savings account, or a Cash ISA, earning 1% or so, it’s not going to grow much at all. In fact, once you factor in inflation, you’ll actually be getting poorer in real-life spending terms over time.
The key, if you want to get rich, is to invest your money in assets that produce high returns over time, such as stocks and funds. By investing in these kinds of growth assets, you can take advantage of one of the most powerful forces in the universe – compounding.
Over the long run, the stock market tends to generate investment returns of around 7-10% per year. What this means is, over time, stocks can transform even just a little bit of money into a huge sum, due to the amazing power of compounding.
For example, if you were to invest £500 per month into stocks and earn a 9% return on your money over the long run, you’re looking at wealth of around £1m in around 33 years. Invest £10k a year and earn 9% on your money, you’ll hit £1m after just 27 years.
Finally, if getting rich is your goal, it’s crucial to act sooner rather than later. By this, I mean you need to act immediately.
As my calculations above show, getting rich takes time. It’s not going to happen overnight. The sooner you get started, the more chance you have of achieving your financial goals.
Edward Sheldon owns shares in Alphabet (Google). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.