Building wealth is a topic I think about on a daily basis.  Creating wealth will lead you to build financial freedom and financial independence.  But creating wealth does not just happen overnight.  With thoughtful planning and discipline, you can build a portfolio that gives you the financial freedom.  However, building wealth starts with a change of mindset.  In this post, we’ll explore some of the reason why you should focus on building wealth, why people fail to build wealth, and strategies on how to build long term wealth. 

Why you should focus on building wealth

1. Financial Security

The feeling of financial security that comes with wealth accumulation is among its most important advantages. You can be assured of your ability to face unforeseen bills or financial losses if you have amassed enough assets. For instance, if you lose your work, you might have enough money in your savings and investments to pay your bills while you look for a new employment.  The results of financial security alleviates the anxiety we get from living paycheck-to-paycheck.  According to CNBC, 58% of Americans are living paycheck to paycheck.

2. Freedom and flexibility

Building wealth can also provide you with the freedom and flexibility to do what you want, when you want. This includes making choices about your life and career. With enough wealth accumulation from cash flow generating assets, you can have the option to retire early, start your own business, travel, or pursue other goals that require financial resources. You don’t have to be tied to a job or a particular location because you have the financial means to make choices that align with your values and priorities.

3. Generational Wealth

Building wealth can also provide a legacy for future generations of your family. By accumulating wealth over time, you can pass down assets and resources that can help your children and grandchildren succeed in their lives. For example, you may be able to provide funds for your children’s education or help them buy their first home.  However, its critical to teach our children the importance of preserving wealth.  According to Fortune, 70% of wealthy families lose their wealth by the next generation, with 90% losing it the generation after that.

4. Philanthropy

Wealth can also be utilized to promote causes that you are passionate about. When you have enough money saved up, you may donate to charities that share your objectives and values and have a real influence on your community. For instance, you may want to assist groups that strive to reduce poverty, advance education, or save the environment.  The Bill and Melinda Gates Foundation transferred $20B of Microsoft stock into their foundation.  Since 2000, the foundation has spent $53.8B to programs such as combating HIV/AIDS and malaria.

5. Better Quality of Life

Increasing wealth can also result in a higher standard of living or purpose. If you have more cash flow, you can afford to partake in events and pursuits that improve your wellbeing and happiness. Having cash flow generating assets that cover your living expenses allows you to do what you want, when you want.  This provides you the flexibility to visit new locations, pursue interests and hobbies, or spend quality time with loved ones without being concerned about the cost.

Why do people fail to build wealth?

The answer here may seem obvious, but one of the top reasons people fail to build wealth is because they put themselves into debt.  According to the Federal Reserve, American households hold $11.67 trillion in debt, which is up $2.36 trillion since the end 2019.  Now I’ll admit that not all debt is bad. But accumulating debt for things that do not provide cash flow is considered bad debt.  Examples include fancy cars, big homes, credit cards, personal loans, etc.  Below we list some of the most common reasons why individuals are accumulating bad debt that prevents them from obtain financial freedom.

1. Lack of financial education

Many Americans do not receive a comprehensive education on financial management.  When we grow up through the US public education system, we did not learn how to balance a budget, or learn about different financial instruments.  Instead we are forced to teach ourselves or to go find a mentor who can teach us these important lessons.  This lack of financial education has resulted in individuals making poor financial choices, such as taking on too much debt or not saving enough money.

2. Pressure to keep up with the Joneses

Americans are often bombarded with advertising and social pressure to buy the latest gadgets, wear the trendiest clothes, and drive the fanciest cars. It’s unfortunate that we now live in a society where we buy things to impress people we don’t even know.  These habits lead to overspending and taking on debt to maintain a certain lifestyle.

3. Access to credit

In the US, it is relatively easy to obtain credit. Credit card companies and other lenders often offer enticing rewards and low interest rates to attract customers.  There is also an increase utilization of “Buy Now – Pay Later” lenders such as Affirm, Afterpay, or Sezzle.  According to the Consumer Financial Protection Bureau (CFPB), loans from 5 Buy Now Pay Later firms originated 180M loans, totaling over $24B in 2022, a 10x increase from 2019. This ease of access to credit has made it tempting for individuals to take on more debt than they can afford.

4. Unexpected expenses

Life is full of unexpected expenses, such as medical bills, car repairs, and home repairs. Many Americans do not have enough savings to cover these expenses, which can lead to taking on debt to pay for them.  This why its important for us to create an emergency fund to cover these unexpected life events.  I recommend individuals to have at least 6 months of living expenses saved for emergencies.

5. Cost of education

The cost of education in the United States has risen significantly in recent years. The average cost of college tuition in the US for an undergraduate degree has increased 3.15x over the last 58 years, according to the National Center for Education Statistics (NCES).  Many Americans take on student loans to pay for their education, which can result in significant amounts of debt.  According to the Federal Reserve, student loan borrowers owe $1.76 trillion in federal or private student loan debt.

6. Unemployment and low wages

The last reason why people fail to build wealth is because many Americans struggle to make ends meet due to low wages or unemployment. According to the US Census Bureau, the median household income in the United States in 2021 was $70,784.  You couple this with a high inflationary environment (5.0% in March according to the US Bureau of labor and statistics), it can make it difficult to pay off debt or save money, leading to a cycle of debt and financial insecurity.

How to build long term wealth

Now that we have discussed why you should build wealth and why so many American struggle to build it, lets now discuss the steps you should take to build long term wealth in order for you to obtain financial freedom.

1. Define your financial goals

Identifying your financial objectives is the first step in creating long-term wealth. Ask yourself what creating wealth is? If you have a clear goal in mind, you’ll be able to make more informed financial decisions in order to reach your goals.  Your financial objectives should be quantifiable with clear steps on how to reach them.  For instance, if you want to increase your passive income, how much do you need to invest in order to reach it?

2. Create a budget

The next step in creating long-term wealth is making a budget. You may track your income and expenses with the aid of a budget, find areas where you can reduce your spending, and rank your financial objectives in order of importance. To make sure you continuously save money for long-term goals, incorporate a savings category in your budget.

3. Maximize your income

Maximizing your income is another important step in building long-term wealth. Consider ways to increase your income, such as negotiating a raise at work, starting a side hustle, or investing in stocks or real estate.

4. Invest for the long-term

Investing is a key strategy for building long-term wealth.  The idea is for money to work for us, rather than us having to work for money. Consider investing in a diversified portfolio of cash flow generating assets such as real estate or dividend stocks. Remember that investing entails risk, so do your research and speak with a financial professional before making any decisions about your investments.

5. Stay disciplined

Maintaining discipline is essential for building long-term wealth. Avoid making impulsive financial decisions. Do not take out high-interest debt such as credit cards and stay committed to your financial goals. Maintaining discipline is difficult, especially when we live in a society that praises materialistic items.  But by revisiting your goals and reminding yourself to stay patient will ultimately lead you to building long-term wealth to obtain financial freedom.

Invest in cash flow generating assets

The wealthy continue to build wealth because they leverage cash flow generating assets (also known as passive income). These include investments in real estate or dividend stocks, which pay for their expenses, while still maintaining the asset.  I am a big proponent of these types of assets and I believe every individual should be focused on incorporating them into their investment portfolio.  The benefits of cash flow generating assets include a steady stream of income, inflation protection, diversification, tax benefits, and the potential of capital appreciation.  We recently posted a 101 on passive income with several types individuals can invest in.

The benefits of building wealth and obtaining financial freedom are well worth the effort

Overall, building wealth is an important aspect of your personal finance that can provide. By understanding the benefits of wealth creation, why people fail to build wealth, and by focusing on accumulating cash flow generating assets, you can enjoy financial security and financial freedom. Building wealth requires discipline, hard work, and smart financial decisions; however, the benefits are well worth the effort.

Live well,

Blue