“Don’t save what’s left after spending, spend what’s left after saving,” says Warren Buffet.
When a man of his stature makes a statement, the world listens. Warren Buffet doesn’t just preach; he lives by his words and maintains a frugal lifestyle. Don’t be fooled, though, frugality doesn’t come easily to many. It needs to be cultivated through discipline.
Discipline and consistency are key to growing wealth. These are two common traits that the world’s richest people share. Consistently saving money and taking a disciplined approach to investing these savings can make even a modest person surprisingly wealthy.
4 Ways to Grow Wealth in 2021
There are a few personal finance best practices one can adopt to ensure that they’re always in a good shape financially. Some require provisioning time to think about money, while others require delaying gratification by limiting unnecessary spending and investing the money.
1. Invest
Investment is the most powerful tool for wealth creation. It’s like sowing a seed and letting it grow, but with a ton of challenges. The challenges, of course, are the risks that accompany investments.
Some critical aspects determine how far a person’s investment journey can take them. For instance, young, risk-tolerant, or shrewd investors tend to grow their wealth much more than someone who starts investing closer to retirement, is risk-averse, or takes a hands-off approach.
Let’s talk about where a person should ideally invest. Youngsters generally, though not always, have a higher risk appetite than someone in their 40s. A larger time horizon allows young investors to benefit from the high return generating potential of riskier asset classes such as cryptocurrencies and equities.
Cryptocurrencies are best suited for investors who can stomach their diabolical volatility. Ideally, the funds invested in cryptocurrencies should form only a portion of the overall portfolio. An investor should never put money that they can’t afford to lose in cryptocurrencies. Investors could buy Ethereum or Bitcoin, again, if they can stomach the volatility.
However, investors that want to gain exposure to cryptocurrencies without bearing the brunt of massive price swings should consider stablecoins like USDC and USDT. For instance, here’s a comparison of price movements in BTC vs. USDC.
BTC
USDC
Notice how different these assets are in terms of volatility.
Stablecoins are pegged to the value of another asset, usually a fiat currency, and therefore aren’t as volatile. While the possibility of capital gains remains slim, investors can get USDC on MoonPay. USDC can then be deposited on platforms like Compound or Celsius Network to earn a generous interest, often as high as 9%.
Investors that have vowed to stay away from cryptocurrencies may turn to equities. Another high-risk asset class (though less so than cryptocurrencies) with the potential to generate massive returns. Directly investing in equities is more challenging than it sounds. Someone without adequate knowledge or experience could make costly mistakes.
This can be remedied through mutual funds. A mutual fund pools money from investors and invests in various asset classes such as equities, debt, commodities, etc. Investors may even choose a mutual fund that invests exclusively in any of these asset classes.
The money pooled by the mutual fund is managed by a qualified investment manager and his team of analysts. They take investment calls based on the mutual fund’s stated level of risk. Since the investments are managed by a qualified individual, investors don’t need to actively manage the invested money.
Historically, mutual funds have managed to do well. For instance, let’s look at how the PH&N US Multi-Style All-Cap Equity Fund D performed over the past five years:
$10,000 invested in this fund would have almost doubled by now to $19,485.
Note that historical returns aren’t a reliable indicator of future performance. However, they are a good starting point for analysis and can give an insight into the fund manager’s capability to minimize damage during times of volatility.
These investment options are ideal for someone with a relatively high risk appetite. For someone who has the responsibility of a family or is closer to retirement, it wouldn’t make sense to invest in extremely high risk asset classes. Instead, they should opt for more stable asset classes that can offer a fixed return, such as bonds, debt mutual funds, and CDs.
Think of investing as putting money to work. It grows wealth while investors get their zs. However, to invest, investors first need to save. Speaking of saving…
2. Reverse-engineer the budget
This is where Warren Buffet’s advice can come in handy. Most people pull up a spreadsheet and start piling on their expenses. Whatever’s left at the end is the savings for the period.
Instead, this process should be more goal-oriented. Rather than starting with the expenses, a budget should start with a targeted amount of savings. The more the savings, the quicker the wealth creation.
This is, in part, because of compounding. Sure, the person will keep piling on money as savings. However, these savings also generate a return when invested.
Assuming an investment generates an annual return, the investment will generate that return on the principal invested plus the first year’s return in year 2. In simpler words, it will generate interest on interest. This can significantly accelerate the process of wealth creation.
For instance, an individual who wants to retire at the age of 40–45 could do it by saving 15% of their income for retirement. Want to retire earlier? No problem – just increase the rate of savings.
Once the budget’s preparer enters the targeted savings in the bottom line, they can check for how much it leaves to be spent towards expenses and draw the budget accordingly.
3. Be mindful of lifestyle creep
Another common mistake people make is giving in to lifestyle creep. For instance, someone who just received a promotion may be tempted to finally buy a bigger car or move into a bigger apartment.
It’s understandably tempting to spend those few extra dollars on something that was previously viewed as “out of budget.” However, there’s a better use for this money. Putting this money towards retirement savings or investment offers the benefit of compounding.
Giving up on that bigger car could mean a person can retire a year early, maybe more, subject to the amount of increase in income, of course.
Now, it’s a personal choice whether a person prefers to retire a year early or to buy a new car. However, putting the surplus money in the bank or investing it would be ideal for someone looking to grow wealth.
4. Pay off debt ASAP
This may sound rather odd at first, but it’s really simple. How does paying a whole lot of money to the lender increase savings? Well, it may be helpful to think of wealth as net worth. When a person has $500,000 worth of assets and an outstanding loan amount of $300,000, their total wealth isn’t $500,000 – it’s $200,000.
The loan also comes with an interest payment. Therefore, paying off the loan eliminates the interest expense and allows a person to save more.
For instance, if the individual with the $300,000 loan pays $15,000 in interest and has an annual income of $100,000, they’d only be left with $85,000 after interest.
Paying off the loan will take out $300,000 from the $500,000 of assets and leave the person with $200,000 – their original net worth. However, they’ll be able to now save $15,000 more each year, i.e., they’ll be able to grow their savings at a faster rate.
Although, what if a person has multiple loans? In that case, it’s best to pay off the loan with the highest APR first.
This is assuming that a person has enough cash to pay off the debt. A fresher who has just started a career may not have enough to close the student debt. However, whenever possible, it’s better to pay off debt unless that money can generate a return greater than the loan’s APR.
Feel Confident About Growing Wealth?
These are some of the most effective ways to grow wealth. This list isn’t exhaustive, of course. Various other things can add a few extra dollars into a person’s savings bucket, but these are the most prominent ones. They contribute the most to a person’s wealth creation journey.
Investing remains the most effective wealth creation tool. The primary reason is that investors take on more risk by investing, and are compensated accordingly.
It’s always good to have a financial advisor look over a portfolio, though. Making a mistake can sometimes be costly in the context of investing, and therefore, investors must always practice caution.
Paying off debt is another major way to increase savings. It may seem counterintuitive to carve a large portion of savings and put that towards closing a loan, but it’s the interest expense that’s important. The principal will need to be repaid over the loan’s term anyway, therefore, paying off the loan doesn’t impact a person’s net worth adversely.
When it’s all said and done, it’s safe to say that those with discipline and consistency will grow their wealth faster than others. The impact of these traits begins to amplify over the long term. This isn’t a baseless claim – billionaires will attest.
Author Bio: Arjun Ruparelia
Email – ruparelia.arjun@gmail.com
An accountant turned writer, Arjun writes financial blog posts and research reports for clients across the globe, including Skale. Arjun has five years of financial writing experience across verticals. He is a CMA and CA (Intermediate) by qualification.
