Learning how to become rich slowly rather than quickly is a time-tested way to avoid falling into the traps of get-rich-quick schemes that have manipulated people untold times.
In 2022, the internet has become rife with so-called financial gurus that promote schemes designed to make people rich in an instant, and with very little effort on their part.
However, the problem with these schemes is that they ultimately continue to fail over the long run – often to the benefit of the scheme’s owner, and the detriment of the “investors.”
Only then do many realise the plain fact that building wealth is a slow and steady process, especially for those who didn’t inherit wealth and build it on their own account.
In fact, all of the wealthy and successful people we celebrate today – from Warren Buffett to Elon Musk to Bill Gates – built their wealth over time.
Consequently, if you are interested in building wealth, you should follow some of the strategies that these individuals have used – that is, the slow and steady approach to wealth building.
1. Create and stick to a financial plan
Every successful venture begins with a good plan, and so it is with wealth building. There are so many money conversations happening all around and it is very easy to get lost in the process.
After hearing someone swear that this crypto or stock is the next bitcoin or Amazon respectively, you might be tempted to just take all your savings and get in on the ride. Who doesn’t want to be the owner of the next bitcoin or Amazon?
The problem here is that in a week’s time, it may be another crypto or stock that is being touted as the next big thing.
This is why you cannot allow your financial life to be unmoored, following the latest new headlines or article from a Youtube “guru” or Instagram “influencer.”
Instead, you have to go back to the basics, bring out a drawing board (not necessarily a literal one), and create a financial plan that aligns with your financial situation and goals.
“The best way to measure your investing success is not by whether you’re beating the market,” cautioned Benjamin Graham, the mentor of Warren Buffett, “but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”
A financial plan involves three broad components:
- Financial situation: Where you are currently.
- Financial goals: Where you want to be. These can be short-to-medium-term goals like buying a new car, making the down payment on a mortgage, or long-term goals like financial independence, retirement, college education for your kids, and saving to start a business, etc.
- Financial strategies: How you want to get to where you want to be, compared to where you are now.
Budgeting is a crucial part of financial planning. A budget is an estimate of your income and expenses for a defined period. By itemising your income and expenses, you can get a handle on your present financial situation. Once you have done that, it becomes easier to create financial strategies to achieve your financial goals.
To start this process, consider using the 50/30/20 rule, a popular budgeting system popularised by Elizabeth Warren, a US senator. In this system, after identifying your income for the month, you divide it into three categories: needs, wants, and saving/investing.
Your needs are those expenses essential to life, including groceries, transportation, rent or mortgage payment, clothing, etc. Wants include entertainment, vacation/holidays, eating out at restaurants, etc. The remaining 20% goes to either saving or investing.
Of course, the 50/30/20 rule is only a guideline and you can tweak the figures to reflect your current financial situation and/or your financial goals.
For example, your goals may require you to save/invest more than 20% of your income while your financial situation, for the time being, may compel you to save only 10%.
[Do you want to supercharge your savings beyond 20%? Read “12 Hacks for How to Save Money in Dubai Like A Resident” for saving tips in Dubai]
It should go without saying (although, it sometimes doesn’t!) that saving a part of your monthly income is a main building block to wealth creation, and this is why good budgeting is so essential.
As Benjamin Graham said, “If you would be wealthy, think of saving as well as getting.” In a study of millionaires, published in his book, I Will Teach You To Be Rich, Ramit Sethi, a personal finance advisor, observed that “on average, millionaires invest 20% of their household income each year. Their wealth isn’t measured by the amount they make each year, but by how they’ve saved and invested over time.”
Remember that saving is not the luxury of the rich, it’s how they got there.
“Try to save something while your salary is small,” said Jack Benny, a legendary US comedian, “it’s impossible to save after you begin to earn more.” Even if all you can save is $100 a month, do it. Build the habit now instead of waiting for a bigger paycheck, by which time it will be more difficult to develop the habit. To become like those millionaires, you must first learn how to save money and become rich.
2. Reduce risk with diversification
In learning how to become rich slowly and exploring the ways to become rich, you must learn to focus on both return and risk. One way people easily lose money to various investment schemes is that they are enamoured by the expected returns without asking questions about the risk.
One of the advantages of passive investing is its lower risk. However, whether passive or active, one way to further minimise risk is through diversification.
Simply put, don’t put all your eggs in one basket. The more your investment is spread out in non-positively correlated assets, the less the risk.
You can diversify by asset class (invest in stocks as well as bonds, REITs, bitcoin), market (invest in the US market as well as emerging markets and non-US developed markets), market cap (invest in large-cap, mid-cap, and small-cap companies), and industry (invest in the finance industry as well as the healthcare and consumer discretionary industries, among others).
Another advantage of passive funds is that each fund already has some level of diversification (for example, VTI, Vanguard Total Stock Market ETF contains 4,136 US companies that are diversified by market cap and industries). When you combine many ETFs in a portfolio, what you get is even broader diversification, which means lower risk.
Again, this is why Sarwa prefers to build investment portfolios with ETFs as building blocks.
Sarwa has also provided the option for investors to include bitcoin in their portfolio (fixed at 5% of total portfolio value for now), providing another layer of diversification at the asset class level.
3. Increase your income level
Now we have come to the last step in learning how to become rich slowly: increasing your income.
While investing for the long term is crucial to building wealth, the more you also invest the better. And one way to increase your investment is to increase your income.
One way to do this is to always invest in yourself professionally– through offline and online courses, certifications, networking, etc – so as to command greater value in your line of work. With greater value comes more money and opportunities to increase your investment.
Furthermore, you can also increase your income through any of the well-established passive income ideas. Many have believed that learning about passive income is learning how to become rich without working. However, that’s not accurate, especially for well-established passive income strategies like affiliate marketing, dropshipping, and the sale of digital products. These require an initial outlay of capital and work.
Passive income by itself is not “how to become rich without working” but how to earn income from work already done (which may even require a small amount of work regularly).
There are even more passive income strategies (The College Investor has a list of 35) you can consider beyond the three identified above. However, ensure you don’t fall to any get-rich-quick scams. Educate yourself and always consider risk in addition to return.
Finally, remember that the purpose of generating more income is to increase your investment savings and build more wealth for the achievement of your financial goals.
Now that you have learned about how to become rich slowly, it is time to start building your own investment portfolio.
Schedule a call with a Sarwa wealth advisor and we’ll help you construct a portfolio well designed to help you achieve your financial goals.
4. Embrace passive investing
One way to focus on the long term is to embrace passive investing. In contrast to active investing, where you regularly buy and sell securities in an (often unsuccessful) attempt to beat the market, passive investing involves tracking the performance of the market over the long term.
Passive investing is cheaper (less fees, less taxes), more transparent, less risky, and in many cases, more profitable than active investing.
The two common passive investing assets are ETFs (exchange-traded funds) and index funds. The major difference between the two is that the former are traded during trading hours (like stocks), which makes them more liquid than the latter.
This is why Sarwa prefers to construct investment portfolios with passive ETFs rather than index funds or through active investing. Nevertheless, we provide a platform – Sarwa Trade – for those who feel confident about active investing and may want to combine it with their passive investing strategy.