Wealth is a very personal concept. For some, it means being a millionaire. For others, it is about not living paycheck to paycheck or having enough money into an emergency fund. And according to Hollywood, being wealthy is about having so much money that you don’t need to work at all and be by the pool all day drinking mojitos if you want to.
What do we need to learn to know how to become wealthy in the UK? Especially from nothing? Let’s review some practical steps you can make to get your financial life in order and start your journey to wealth.
Develop a financial plan
It does not matter if you are wondering how to become wealthy fast, or in 10 years, or by your retirement age. You always need to make the same first step: developing a financial plan.
You need to understand how much money you are making every month (all your income coming in on your bank account) and what are your expenses: how much do you need to cover all your recurring living expenses and how much do you spend on discretionaries like going out or clothing.
Money Dashboard can help you to create your financial plan. We automatically categorise all your expenses, even across different accounts with multiple banks. In one app you have a full view of your financial life. You can also create budgets and they will be automatically populated by the expenses of your choice. You will save a lot of time by not having to do that manually. This is why more than 500,000+ people created an account with Money Dashboard (It is free).
In less than 5 minutes we will help you to have a clear picture of your finances. The next step is to ask yourself the most important question for every expense. Is it a “Need” or a “Want”?
You have to understand your needs, all the expenses you can live without and will happen every month. Housing, food, transportation, nursery if you have kids, insurance & energy bills, internet and phone contracts are typically in this category. Like the notion of wealth this is very personal and it depends on your personal circumstances. If an expense helps you to feel happier day to day and is not compromising your financial well being, budget it this way.
Then you should have a look at your “wants”. Money Dashboard helps you to quickly identify the others categories where you are spending your money. Are you shopping or going out a lot? It is a headwind on your ability to save and invest money.
Once you have done that you can realistically evaluate how much you can save and invest every month by looking at your income less your “Needs” and “Wants” expenses.
There is no magic number you need to have at the end of the month to become wealthy, this is more of a process. But the more you save and invest, the faster you can potentially achieve your wealth target.
For example, according to the popular budget rule 50/20/30, ideally 50% of your total income should be spent on your needs, 30% maximum on discretionary aka “wants” expenses and allocate the remaining 20% to saving and investing.
This is a generic rule of thumb and it really depends on your circumstances and objectives.
People in the FIRE community (Financial Independence Retire Early) are obsessed about building wealth fast. They do so by reducing what they want as much as possible and investing at least 40% of their monthly income (but sometimes 50%, 60%, 80% or even 99% of their incomes).
Evaluating your biggest expenses like where you live, how much you spend to go to work every day and how much you are eating out (especially at lunch time) are quick wins to get your spending under control.
Live below your means and kill debt
As we saw above, in order to build your wealth, you need to make more money than you spend by living below your means.
Once you do that you will have spare money at the end of every month. Then you start putting this money to work to accelerate the speed at which you are building your wealth.
Debt is a sensitive topic, we all have some: either with a mortgage, a car loan, student loans or debt on a credit card. Debt is a tool to acquire something now by leveraging our future earnings. It makes sense to buy somewhere to leave for the next 20 years but what about a shopping spree every week-end?
Debt has a price. It is the interest rates that you pay on every £1 you borrow. And debt can kill your ability to save and build your future wealth due to compounding interest rates.
If you don’t fully repay the amount you borrowed, the interest you own will accumulate and increase across time. If you don’t repay debt as fast as you can you might end up paying more in interest than the amount you actually borrowed.
This is why that debt is a wealth killer. The only exception is if you borrow money to invest in something which will generate a higher return than the interest rate you are paying. But let’s face it, the majority of us are not getting into debt to leverage our investments but to consume and spend money on “wants”.
Having no debt compounding will enable you to save more money each month.
According to the ONS Wealth and Assets survey, in the UK, the poorest 10 percent of households have debt that is the equivalent of three times their assets. But the richest 10 percent have assets equivalent to 35 times their debt.
Automate your savings and investments by paying yourself first
Whatever the amount of money you can save every month, automation is key.
In the world of personal finance, you can come across this idea of automation through the concept of “Paying you first”. This money habit is about setting up an automated standing order every month going to your savings or a direct debit going straight to your Share ISA account. In the same way you are paying your council tax every month, you are paying yourself as well. By doing so as the first thing when you get your salary you are paying yourself first!
By establishing your financial plan and budget, you understand accurately how much you can pay yourself first.
Focus on increasing your income
To become wealthy you need to be able to invest as much as possible and let your wealth grow thanks to compounding.
In order to maximize your investment capabilities, you have several potential approaches: keep your spending as low as possible or increase your income while keeping your expenses stable (or even decreasing them at the same time).
You have several options to increase your streams of income. Getting a promotion at work and a salary rise is an obvious one, but possibly not the most straightforward.
There are also several things you can do to establish multiple smaller streams of incomes. You can start by selling the stuff you don’t use on eBay, Gumtree or Facebook marketplace.
Taking on a side-hustle in the gig economy and freelancing in your area of expertise are also additional opportunities to make more money.
Make sure to check the tax implication of increasing your income first.
Upgrade your skills and knowledge
Whatever the approach you decide on to make more money, it will very likely involve upgrading your skills and knowledge.
You will need it to get your promotion, to learn how to maximize your revenue on eBay or find ways to make a passive income.
It means that you will need to invest your free time in personal growth activities and dedicate yourself to become a self-learner. Reading books, watching videos or taking a free course online are all practical ways to learn by yourself.
Several reputable platforms are providing free courses, classes and lessons online. You can start by checking The Open University, Khan Academy, or Coursera.
Constantly upgrading your skills and developing your knowledge is a lot of work. It will probably require you to change your mindset to focus on Growth. According to Carol Dweck, a Professor of Psychology at Stanford University, having a Growth Mindset is about approaching challenges and setbacks as an opportunity to progress, having a hunger to always learn more and to consistently seek opportunities to develop new skills.
It is very important to note that a growth mindset starts with a belief in yourself that you can develop your talent thanks to your hard word, developing plans and strategies and collaborating with others.
People with a growth mindset do not worry about looking smart but actually put their energy into developing themselves.
Focus on increasing your return
Once you are in a position to invest at least 20% of your monthly income you will probably want to focus on increasing your return on investment.
Investing strategies depend heavily on your personal situation and your attitude to risk. From investing in low-cost index funds or ETF to futures contracts you have a wide range of opportunities to maximise your returns.
Getting guidance from a professional will probably be beneficial to ensure that everything is tailored to your personal situation and that your plan is tax efficient. Citizens Advice has a detailed guide to help you navigate all the options available.
By balancing risk and your expectations on returns your can optimise the speed of the growth of your wealth. The longer you are invested and the higher your average yearly return, the bigger your wealth will be. This is why it is generally recommended to invest for as long as you can.
On the chart below from J.P.Morgan, you can see the power of compounding interest. A 2% or 6% investment return per year and investing for 10, 30 or 40 years will make a huge difference to your total wealth. The higher the return and the longer you are invested the better, in this case your wealth can be more than 2 times higher.
Apart from inheriting, becoming wealthy overnight is impossible. With a financial plan and a systematic step by step approach you can probably become wealthy from nothing if you have a realistic expectation for your savings rate and expected return.
By creating your free account on Money Dashboard, you can easily analyse how you spend your money and get real insights for your financial plan.