Wealth creation is a goal that almost every adult American has. But so few people know how to go about it. In fact, many people don’t really know what it means.
In this article, I will discuss what wealth creation is, why so many people struggle to achieve it, and how to make it happen for you. I will also provide more resources for you to continue to delve even deeper into the topic.
Wealth creation isn’t a great mystery. Hopefully, by the time you finish reading this article, you will feel that you can do it, and that you will be able to start to form a plan of how to get where you want to be with your wealth.
So What Is Wealth Creation Anyway?
According to my colleague Corey Mann’s excellent definition, wealth creation is the steady and consistent accumulation of income and assets over a period of time.
Many people confuse getting rich with being wealthy. But those two are not at all the same thing. Getting rich is often fleeting. Building wealth in a sustainable way is the foundation for financial health and freedom for life – for you, and even for your heirs.
Of course, having a large income can be one important step on the road to wealth creation. But in some cases, even a modest income can be leveraged into wealth.
Plus, there are many steps to building wealth. In fact, your income is not the most important factor at all when compared with your spending and expenses, your debt and your investments.
Let’s look at each of these four factors now: income, expenses, debt and investing. Then we will have a better idea of what wealth creation really is and how to go about it.
Income and Wealth Creation
The median household income in the United States is $61,937, as reported by the United States Census Bureau in 2018. If you’re earning that much money, you are definitely not making poverty wages.
On the other hand, you might not think of yourself as anything close to rich. But what may surprise you is that even the median household income can be the perfect springboard for major wealth creation.
Of course, how far this income will go for you depends on your geographic region. The cost of living in different cities and rural areas can be very different.
Plus, you must take state and local taxes that eat into your income into account as well. Nobody likes paying out to Uncle Sam, but your net income after taxes is what really matters for wealth creation.
Two different forms of income are active income and passive income. When building wealth, it is best to maximize both forms of income.
In fact, increasing the number of streams of income you have in addition to your primary salary or wages will enable you to increase your wealth more quickly.
Expenses & Spending
Of course, when it comes to achieving wealth, there is more to it than simply earning a lot of money. Because if you spend more than you earn, you are left with, well, nothing.
When you are engaged in wealth creation, keeping your expenses down is paramount. The less you spend, the faster you can accumulate assets and build wealth.
The average monthly expenses for a household in the U.S. come out to $5,102, or $61,224 per year. If you recall that the average median income is $61,937 per year, that leaves the average household with an annual savings of $713.
This means that the average household is barely holding on to any of their money. Also, they are living paycheck to paycheck. If they haven’t been able to build a substantial emergency fund, then they are one emergency away from financial disaster.
This is not a good situation in the United States. We need to start looking for ways to cut down on our expenses. And this includes cutting back on everything from dining out to clothing to fancy coffee to entertainment.
But the financial situation may be even more bleak than pictured here. Because lots of households not only have a large percentage of their income eaten up by expenses but also face the overwhelming problem of debt.
Debt runs counter to wealth creation. In general, the more debt you accumulate, the less total wealth you have. In fact, your actual wealth can be best represented by your net worth.
Net worth is simply your total assets minus your total debt. So if you have $100,000 in assets and a $100,000 mortgage, your net worth is $0.
Of course, your situation may be even worse than this. If your debt outweighs your total asset value, you will have a negative net worth. So minimizing your debt is absolutely crucial to creating wealth.
The typical American household now carries an average debt of $137,063. This can be made up of credit card debt, personal loans, student loans, mortgages and more.
To build wealth, you need to be paying down and eliminating your debt as much as possible and as quickly as possible. Once you have eliminated your debt, you can really start to see your wealth take off.
To help you lower your debt level, check out our article on how to pay down debt fast. It’s full of tips and tricks to substantially lower your debt and get you back on the road to wealth creation and financial freedom.
Wealth Creation and Investing
When you increase your income, lower your expenses and eliminate debt, you are in a prime position for wealth creation. Now you can add in the magic formula to really generate massive wealth: investing.
The median net worth of the U.S. household in $97,300. If yours is lower, don’t worry. Anyone can improve their net worth over time. And the true magic in building wealth is to be found in investing.
This is due to the compounding factor of interest. In general, the more money you invest, the more you’ll be able to take advantage of compounding returns on your capital and gains. To see how this works, check out our free investment calculator.
As you continue to invest and reinvest your money, and if you do so wisely, after some time you should see your net worth start to skyrocket.
The problem is that many people do not actually know how to invest wisely, or even how to invest at all. There are many mistakes that investors who have no idea what they are doing can make.
That doesn’t mean you should avoid investing. On the contrary, you should start investing as soon as possible. But you do need to educate yourself on the right way to invest and trade stocks.
The Time to Start Creating Wealth Is Now
Now you know the four major components involved in wealth creation. To review, they are…
Tackling these components one at a time can be a good strategy. But tackling some or all of them at the same time can be an even better strategy.
To help you get started with this, my colleague wrote a piece on the steps to wealth creation that you might find helpful. At the end of the day, you choose whether time is your friend or your enemy.
If you start creating wealth today, time will become your best friend. So don’t procrastinate and take the power back when it comes to your money situation.
This will give you the maximum time necessary to prevent debt from spiraling out of control. But it will also help you to take the most advantage of compound returns on your investments.
The responsibility for your own wealth creation lies with you. But luckily, the power to create wealth lies with you as well.
Concluding Thoughts on Wealth Creation
Wealth creation isn’t easy. But it is one key to building a truly rich life. And there’s no time like the present to start creating wealth for yourself.
In fact, if you’d like even more tips on wealth creation, I’ve written another article containing seven suggestions that will likely help you along the path to building wealth.
Finally, enjoy the process. You don’t have to wait until you reach your wealth goals to enjoy managing your money or, more importantly, to enjoy life. Wealth creation is liberating; it is freedom itself. Enjoy every moment of it and watch your net worth soar.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.