The Secret to Building Wealth

by Joseph · 6 comments

in Finance 101

I’ve had many people ask me over the past several weeks what the secret is to building wealth.  Today I am going to share the answer with you.  Before I do though, I want to tell you what it’s not.  It’s not a great investing tip.  It’s not a can’t-lose business idea.  It’s not even related to how much money you bring in or how you can bring in more.  It’s simply the idea that wealth building is a state of mind and cannot coexist with poor financial choices, especially those related to debt.

Let me explain.

Many of you may be aware that I currently work in banking.  I help anywhere from 10 – 50 people in any given day and quite often they are in some sort of financial distress.  Whether their situation is as extreme as the inability to make their loan payments or as simple as not having enough cash to pay for gas for their car, they all have one thing in common.  They don’t have any cash set aside for emergencies. The fact that they haven’t put any cash into an emergency fund tells me something else about them.  They aren’t building wealth. Quite the opposite in fact.  They’re living paycheck to paycheck always saying that next time they’ll save a little, but next time never comes.

It’s a sad situation really.  It’s a never ending cycle of all talk and no action.  Just as I said earlier, it’s a state of mind.

Let me throw out a blanket statement here (which as anything might have some rare exceptions).  If you can not manage your money well enough to save six months worth of expenses in an emergency fund and keep it there, you will never be wealthy.  The emergency fund is critical in any wealth building program because it accomplishes two important goals.

  1. Building an emergency fund will help keep you out of debt.
  2. Building an emergency fund will get you into the habit of saving.

A Credit Card Is Not An Emergency Fund

Many people use credit cards as an extension of their paycheck.  Do not do this.  If you can not afford to live with only your paycheck then you need to cut back on expenses.  Likewise do not think of a credit card as an emergency fund.  This type of thinking will get you into debt and take away from your financial well-being every single time.  Start building an emergency fund now so you don’t have to resort to using your credit card if something goes wrong.

Start Saving Now So You Can Save Your Future

The sooner you begin on building an emergency fund the sooner you will become financially independent.  All it takes are a few good habits and some emergency reserves to avoid unnecessary debt and you will be well on your way to riches.  Don’t talk yourself out of it with excuse after excuse.  Start small if you have to, but start saving right now.  If you don’t you’ll never reach your goals and you’ll never get to go on those vacations or buy those toys that you’ve always wanted.  By setting aside money today you’ll get yourself into the habit of saving and once you’ve built up your emergency funds then the real wealth building can begin.

For some further reading on wealth building check out My 33% Savings Plan and Starting On The Road To Wealth.

{ 6 comments… read them below or add one }

Tim September 11, 2008 at 10:06 am

“debit” – did you mean to write “debt”?

Nice article. I’m not sure specifically having an “emergency fund” is the key, but “saving” certainly is.

Reply

Joseph September 11, 2008 at 10:52 am

Tim,

Thanks for the comment. I’m not quite sure what you’re referring to with the typo. I can’t find it anywhere.

As for your comment about “saving” being the key but you’re not sure if the “emergency fund” is… what I meant by that is that if you can not get yourself into the habit of saving by building up an emergency fund you’ll never have a chance with saving for retirement.

Thanks again!

Reply

SpEdLaw2 September 11, 2008 at 11:23 am

Hi,

I just voted for your excellent blog for the Bloggers Choice Awards.

Could you please return the favor at:

http://www.bloggerschoiceawards.com/blogs/show/21620

Thanks,

SpEdLaw2

Reply

Blake September 15, 2008 at 6:55 am

I agree that the discipline required to build an emergency fund is a vital key to long-term wealth. To build any type of wealth, people have got to learn to pay themselves first.

Have you heard of Parkinson’s law of finance?

Reply

Joseph September 15, 2008 at 7:39 am

“as the supply of a resource increases, so does the demand for that same resource”

It’s natural to spend more when you make more. Unfortunately this will never make things better for those who aren’t disciplined enough to save.

Reply

Ray The Money Man November 12, 2008 at 12:41 pm

I personally feel that your credit card should “only” be a emergency fund. I know that saving money is the only option for most people but I have always viewed it as dead money, losing ground.

Great post!

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