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16 Sep 2015

BUILDING WEALTH

A steady and sustainable way of building wealth begins with a focus strategy. That’s the gist of the message that I have for the reader who sent me an email below recently. Thanks CV for your email.
Here we go:
Hi to the recipient of this email,

Your blog that I just read is very inspiring. Pardon my poor English firstly. I would like to tell you my story.

I am a varsity dropout and started working a year ago. I just turned 21 a month ago and I am earning steady income currently of R10 000. I am living with my parents and my current work circumstances is about to change as I am working in the engineering industry which I also started my studies in but
did not finish. My parents are on the verge of bankruptcy. I do not want to fall into the same "rat race" as described in "rich dad, poor dad".
I have built a reasonably good credit record so far. I haven't made any permanent debt except for a cellphone contract. I am an entrepreneur at heart and I am very interested in letting the little amount of money I have work for me. What would you recommend I do?

I feel exactly as described by your blog. I want to LIVE. I do not want to
work to live.

I hope to hear from you soon and to learn as much as possible.

Kind regards,
C V
As I already mentioned in my introduction above CV, building wealth starts by drawing a focus strategy. Most people fail to recognise the power of being intentional and deliberate in the way they lead their lives. Luck may cut it but taking conscious steps stands a better chance. You are obviously on the right track because you already know where you don’t want to be. And that is in the “rat race”. But do you know where you want to go? You mentioned entrepreneurship and having your money work for you. Those are both causes worth fighting for. For you to reach where you want to go you will need to take the three steps listed below:

Earn Enough

Building wealth starts with earning and earning enough. We all know that any amount saved is better than nothing saved at all. What beats saving any amount is saving more than just any amount. One can only save more when they earn more. And one can earn more when they empower themselves. If you love your current job, get yourself skilled in doing it better to attract better opportunities. One needs to be proactive to get themselves where they want to be.

If you think of a way to earn even more than your salary, explore those options. Side hustles are always a great way of fast tracking growing wealth. Explore your passions, talent and skills and try to monetise those. Opportunities do present themselves when we are busy working on bettering ourselves.

I will not waste your time explaining how you need to take charge of our expenses. You seem to be mastering that one already. Staying with your parents for as long as possible could be one way of cutting costs. It is only when we spend less than we earn that we stretch our rand.

Save More
After having earned enough for building wealth, save at an escalated rate. This is where most people miss it. They earn a high income and spend it all and then some. High income exposes one to higher credit, which can translate to higher debt. The fact that you qualify for higher credit to buy a bigger house, car or whatever luxury does not mean you should go out and buy those. Wise people live below their means.

I have written a few articles on paying yourself first. Draw a budget to determine how much you need for each month. What helps in drawing a more accurate budget is tracking your spending for a few months. In that few month keep the receipts for all your expenses and have them recorded in the spreadsheet. I actually swipe my card and do electronic transfers everywhere possible for my spending to ensure that I have everything on record. I cannot be trusted with keeping small pieces of paper.

Using the monthly records of how much you are spending, draw up a budget. In your budgeting start with shelter, transportation, food and all the basic needs (your must haves). Add a small amount of wants to your budget (your good to have). Cut out wants that are unnecessary like the gym membership and the pay TV. Those are always my favourite victims. Hopefully you can cover all what is in your brand new budget with 60% (R6000) of your income or less. That leaves you with 40% (R4000) or more of your income for saving and investing.

Make a thorough research on interest earned by bank accounts like a money market accounts. Open the highest interest bearing transacting account of your choice at the bank. (Mine earns 5.6% and requires a minimum of R5000 to open and keep). This bank account will keep your short term savings. Some refer to this account as an emergency or contingency fund. Name it whatever you wish, just open and use it.

The purpose of this account is to handle emergencies. Some people prefer to keep 3, 6 or 12 months’ worth of monthly expenditure in their emergency accounts. If you go for 3 months, you will not need R10,000X3 (R30,000) but R6000X3 (R18,000) if we make assumptions based on our example on budgeting above. This has to do with what you need to go through the month and not what you earn. I take this to be the most crucial step at creating, preserving and building wealth. Even at these low interest rates, you are benefiting from the compound interest. See this article on the magic of compound interest.

Invest Even More
Still on building wealth and taking it a step further by investing. Think about LIVING well, attaining financial freedom when you can still enjoy your life and retiring when you want to. I would say that before you even start with different forms of investing, get yourself a good retirement annuity to take advantage of the tax benefits.

Read my recent articles on tax free savings here, here and here and see what vehicle you can use for your long term savings/ investments. I am a fan of exchange traded funds as a passive form of stock investing. You will need to do your own research to see what works for you. Keep empowering yourself on what is available on the market. At your age, you can build a lot of wealth from very little. You have 19 years to 40 and 14 years to 35, if you decide to retire then. Your investment decisions can be planned around the amount of time you have before your planned retirement.

Other asset classes that you may invest in include property, bonds, stocks, etc. Your investment asset has to earn you capital growth and create passive income for you over time. Re-balance your portfolio from time to time as you are continuously building your wealth. A diversified portfolio is generally lower risk.

In conclusion, my own formula with creating, growing and building wealth is in three small stages. Those are earning enough, saving more and investing even more. Thanks for your question again CV. Please read the article I wrote for my sister who was starting out in this link: Building Wealth from First Job.

Note:
Thanks for the amazing emails. I may take longer, but I respond to each and every email I receive. I keep all emails anonymous when I do respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

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