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.