How To Build Financial Wealth Month by Month

To achieve your dreams and goals, the odds are that you will need to learn how to build financial wealth. Not all goals involve money but many do. This website does not offer investment advice but one of my key aims is to guide you on your personal budgeting, so you have money to build wealth by investing for the long-term.

But where will you find this money to invest? Some people have the good fortune to inherit financial assets or win a large amount on the lottery. But for most of us, saving month by month is the main strategy.

The formula for how to build wealth is easy to understand, but can be a challenge to implement.

• Spend less than your income each month
• Thereby making a monthly cash surplus
• Invest this surplus wisely for the long term

Also, it’s vital to set a target for the cash surplus you want to generate each month. Any positive figure is good, but you might like to aim to build towards 10% or 20% of your take-home income. If you have no consumer debt and you’re putting a decent chunk into your savings and investments each month, you’re greatly improving your chances of long-term financial security.

Before we go further, a quick word on using debt (instead of or in addition to a monthly cash surplus) to invest. Robert Kiyosaki is one financial expert who has written about this idea of debt financing to buy cash flow assets. For example, you may think about buying a property to rent out and, to buy this property, you take out a business loan or mortgage.

But whenever you take on debt, you inevitably increase your financial risk. A loan may look fine today but could become a nasty burden if your income drops, interest rates increase, or the value of the assets you buy decrease.

Assets can drop to below the figure at which you purchased them. For example, anyone who purchased rental properties shortly before the 2008 credit crunch would have seen the market value of their portfolio drop by a significant amount when the crunch hit.

If you feel sufficiently confident in your money knowhow and skills to deal with business debt, using debt finance may be a strategy you want to follow. But it’s not the focus of this website. There is lower risk approach available…

…generating a monthly cash surplus.

If you manage to live within your means each month, you will spend less than your income. If you learn how to save money, you can use this surplus cash flow to improve your finances. It’s a slow-drip strategy rather than a get-rich-quick plan.

Month by month, you save a proportion of your income to put it towards your dreams and goals.

• Building an emergency fund to deal with unexpected bills
• Short-term savings (sinking funds) for major purchases and annual costs
• Longer-term investments

If your income is relatively high, you may find it easy to spend less than your income. But do you have a good grip on your finances? Could you maintain the lifestyle you want while saving and investing more than you do now?

If your income is lower, it will be tougher to make a monthly cash surplus. But if you are mindful of your spending – and maybe find ways to increase your income – you may be surprised what’s possible.

Either way, whatever your circumstances, setting financial goals can be a big help. Then, making a budget for each month ahead of time, and tracking and reviewing your spending, can make a huge difference.

This website does not offer investment advice. But there are a couple of insights I’ve learnt over the years. I lay them out here in case you find them of value. After several failed attempts to ‘pick winners’, I’ve come round to the idea that it’s good to diversify my investments between different asset classes.

Ray Dalio, one of the most successful investors of modern times, advocates this idea, with a balance between stocks, bonds, real estate and commodities. Some years, one asset class might do well. Other times, it will be a different class of asset.

Going back to my example of buying real estate shortly before the 2008 credit crunch, anyone 100% invested in property didn’t fare very well. Likewise, many stocks crashed when Covid hit in early 2020. It’s a bad feeling when you have all your eggs in one basket – and that basket tips over.

Broadly speaking, you can take two approaches to investing.

• Make your own investment decisions
• Hire an expert advisor to make the decisions

If you opt to make your own decisions, you can then:

• Choose your own individual investments (specific properties, stocks etc)
• Choose investment funds managed by a professional

One of the issues is that, even if you hire an expert advisor, or if you choose an investment fund managed by a professional, you still need to make an initial decision. Who will you trust with your hard-earned money? There are quite a few websites where you can find detailed guidance on these topics. Another idea is to ask people you know, who are good with their money, to recommend their financial advisors.