If you’ve seen the lavish spending sprees and apartment tours on various TV shows, you’ve probably had a twinge of jealousy over how wealthy some people are - I know I have! After all, most of us want to be rich rather than middle class. But wealth accumulation might be something you haven't thought about.
But how do you create wealth? Is wealth accumulation only for the rich and famous? Not at all!
While some are born into it, many others spent a long time accumulating their wealth. And it is not as difficult as it might seem. In fact, 88% of millionaires made their money on their own without inheriting it.
What is wealth accumulation?
The wealth accumulation definition is simply building up your net worth and wealth over time.
But building wealth doesn't happen overnight. And you definitely don't want to fall for a get-rich-quick scheme. They are just that - schemes and often scams to get your hard-earned money.
There are about 22 million millionaires in the US, according to Yahoo Finance. If you want to become one of the households that are wealthy, you need to take steps to build your wealth. How? By using a wealth accumulation plan!
Why is a wealth accumulation plan important?
Now that you know the wealth accumulation definition, why should you want to do this? There are a number of reasons why it’s a good idea to accumulate wealth.
Having wealth allows you to build up your retirement and have the opportunity to purchase more assets. It’s also mentally beneficial, as you don’t need to constantly stress out about how you will pay your bills each month.
You can work towards your goals, whether it’s home ownership or going on a trip around the world for a year. The more wealth and financial assets you’ve accumulated, the easier it is to plan for bigger things in life.
If you want to be rich, you'll need to learn how to create wealth. Fortunately, there are many concepts that can help you do this.
Key steps to wealth accumulation
The most important thing for increasing household income and becoming wealthy is knowledge.
If you want to know how to build up your wealth from scratch, this wealth accumulation plan will help.
1. Create a budget
Begin by looking at how much you spend and where you spend it. Are there expenses you can cut out? Do you know what's going on with your money?
Try using something like the 50/30/20 budget. That’s where 50% of your expenses go towards things like rent and utilities, 30% is for things you want, like entertainment, and 20% goes towards savings and paying off debt.
It’s an easy way to make sure your basics are covered, and you can also enjoy a night out every once in a while.
There are many other budgeting options, as well, like the 70/20/10 or the 30/30/30/10 budget. You can even create your own unique budget, but the really crucial thing is to organize your money.
2. Pay off high-interest debt
If you have a lot of debt, one of your first priorities should be paying it off, especially if it has a lot of interest.
Things like debt from credit cards or payday loans should be paid off right away. Once you’ve set up a budget and figured out where you can free up some funds, put that money towards your debt.
By paying off your debt, you’re investing in yourself and freeing up future income to put towards wealth accumulation.
3. Create an emergency fund
Once you’ve set up a budget and paid off high-interest debt, it’s time to set up an emergency fund. An emergency fund is for those unexpected life events that can eat into your bank account.
No one likes having to pay to replace the brakes in their car, but unfortunately, these things happen even to the best of us.
The best way to make sure these unexpected events don’t chip away at your hard-earned cash is to prepare before it even happens.
That’s what creating an emergency fund is all about - having savings just for the unexpected.
4. Earn more money
If you want to create wealth, you need to make more money. You could even reach for a six-figure salary. There are lots of different ways to increase your income.
The most obvious one is asking for a raise at work or switching to a higher-paying job. But another simple way to gain more money is to work a side job or two, like pet sitting, selling items on Etsy, or selling your old clothes through places like Vinted.
If you don't mind a study period for a few years, you may also consider pursuing higher education if you can afford it.
A college degree may help you earn more for wealth accumulation, depending on the career you choose. And a college education can give you more options for jobs.
5. Invest
Once you’ve earned money, make that money work for you! You can do this through investing.
While investing in the stock market is the most well-known form of investing, there are other ways to accumulate assets. You can invest in real estate, set up an IRA, and max out any 401(k) matches you get at work.
The investing world can be complex, so do your research about everything from bonds and mutual funds to asset allocation.
The best thing is to start simple. You can start small by investing through a Robo-advisor, which automates your investments into a portfolio of exchange-traded funds that are chosen based on factors like your risk tolerance, age, and financial goals.
Investing can lead to higher incomes over time, but it may take years before you start to see significant returns.
However, it's a huge part of most retirement plans, rather than relying on social security, and a great way to grow your household wealth.
6. Have the right insurance
Once you have a sizable amount of assets, you should get insurance to protect what you’ve worked so hard to achieve. The type of insurance you will need will depend on what the asset is.
For example, if you own a house, you’ll need house insurance. You should also get a good health insurance policy for you and your family to protect you against the financial hardship of medical bills.
You can also take out life insurance, which can help protect your family financially in the event of your death.
7. Have a will and estate plan
Finally, it’s important to know where you want your hard-earned wealth to go once you’re gone.
Only 46% of American adults have a will. While it’s not a fun topic, having a will and estate plan can help your family navigate during a difficult time once you’re gone.
With a will, you can determine who will get your assets, while an estate plan goes into more detail and covers things like paying estate taxes or naming a guardian if you have children.
How to get started accumulating wealth
So now you've learned the wealth accumulation definition and plan.
Remember, if you want to create wealth, take a look at your spending habits. Create a budget that works for you.
Look at ways to invest your money wisely, such as paying off high-interest debt, saving, investing, and diversifying your funds.
Since you likely have some great goals like owning a home (depending on the housing market) or retiring early, a wealth accumulation plan is crucial. It will help you accomplish many things.
Now that you're interested in this wealth idea and making a financial plan, check out how to build generational wealth and how to become a millionaire!