Some people inherit wealth and others create it through their own efforts. Those who generate wealth do so by following certain strict rules. Here are three tips to manage and build your wealth just like rich people.
1. Know the differences between ‘needs’ and ‘wants’
Develop an understanding of the difference between a need and a want. As a human being, it is normal to desire many things in life. But unfortunately, we can’t have everything we desire. We must choose a few and sacrifice the rest to keep our wealth from depleting quickly. The decision must be made by checking whether your desire to acquire something is born out of a need or a want. A “need” basically refers to obtaining something that will play a key role in your life. If you work as a graphic designer, buying a high-end computer is a must. This cannot be avoided since it would interfere in your work and affect income.
In contrast, a “want” is a desire to acquire something to satisfy personal tastes. For instance, you might want a Mercedes car. However, a regular car might be sufficient to fulfill the necessities of life. If your savings are low, then the best decision to make is to avoid buying a Mercedes. Spending money for such high-end cars will not only deplete your existing savings but will also increase monthly expenses for EMIs and maintenance, thereby diminishing any future savings. At least in the initial stages of wealth creation, you should always avoid the tendency to blindly fulfilling your “wants.” This will help you build up wealth rapidly.
A classic rule of investment is not to put all the eggs in one basket. This is true even today. Wealth only grows through investment. But you must diversify your investment into multiple areas so that losses suffered in one niche can be offset by profits from others. If you have $50,000 to invest, then tying it all up in a plot of land that you think will rise in price in the future is extremely risky. What happens if the price stays flat or worse falls? Not only will you be stuck with a low-liquidity asset, but you will have no choice but to cash out with a loss. Instead, put $10,000 in a savings account, $15,000 in stocks, $5,000 in gold, and maybe the remaining $20,000 in some real estate. Remember to always keep at least 15 to 20 percent of your wealth in liquid assets like cash, bank accounts, gold, and so on — especially in such turbulent times as these.
3. Avoid unnecessary debt
Another important part of wealth building is to avoid taking on unnecessary debt. Debt comes with interest that will eat into your investment profits. As such, credit must only be taken when absolutely necessary. Even more importantly, never take loans to fund a risky investment. You might feel that the stock of a particular company might surge in the next two years because of a potential merger. You can invest your savings to take advantage of the opportunity. But never use credit to buy the stock. If the merger fails, the stock values will fall. As such, your asset will decline while the debt remains unchanged, forcing you to spend the next several years paying off loans instead of using your earnings to build wealth.