It's no secret that most people aspire to wealth, especially by the time they retire. But what stops the average person from achieving this goal?
Often it comes down to two things: knowledge and discipline.
Let's explore this today, and try and come up with some mathematically verified solutions on How to Build Wealth Automatically.
There are a lot of myths out there about what it takes to become wealthy. You may have heard that you need to make a lot of money, invest in risky ventures, or obsessively budget where every little bit of your earnings are going.
But the truth is that you don't need to do any of those things to build wealth effectively.
In fact, automating your investments and making small changes to your financial habits can go a long way toward making you wealthy over time.
Knowledge & Discipline
Schools have historically done a poor job at teaching students how to save and invest their money. Only the smallest fraction of students, even in business programs, get a clear picture of how to really build wealth.
Next, most people don't have the discipline to consciously put away a chunk of their income after each pay check. Life is busy so it gets missed.
There are countless high income earners who live pay check to pay check because they live outside their means... and that's crazy if you think about it.
So, Let's Do a Little Math
If you were to invest $150 a month, and had a 10% interest rate, with a 1 year compound interval, after 35 years your investment would be worth $514,418.74 dollars.
That's a lot of money considering you're only investing the equivalent of $5 dollars per day. Even small regular contributions can make a huge difference. So, if a little bit of saving goes a long way, then mathematically, you know if you can save a higher amount each month, you will be far better off.
Compound Interest
The real MVP for creating wealth is using the awesome power of compound interest. Compound interest is interest that is earned not only on the original investment, but also on the accumulated interest from previous periods.
The effect of compounding is that an investment will grow at a faster rate than if simple interest were applied to it. Compound interest is often called "the eighth wonder of the world" because its power seems incomprehensible.
Most people who see the numbers don't believe what they are seeing: "You're telling me I can retire a millionaire by putting away such a small amount every day?!"
Let's do another scenario:
Your initial investment is $30,000.
Each month you add $750 dollars or about $9,000 per year.
The interest you earn is 8.17%.
Over 35 years you will have put in $345,000 of your own money.
You will have earned $1,793,880 in total interest earned.
The total value of the investment will be $2,138,880.
84% of the investment's final value will be from the incredible power of compound interest.
Clearly, making regular contributions makes a huge difference to your wealth at retirement. But people aren't great with delaying gratification and usually aren't disciplined enough to contribute. So, what can be done in order to take discipline and self control out of the picture so you'll have funds for your contributions?
Strategy: Pay Yourself First
So, what's the solution to all this? Well, its actually really simple. What wealthy people do first is make sure they allocate a portion of their income to savings and investments before their money goes to anything else.
The goal should be to work from, say, 5% of your income saved at the start, and could go as high as 20% of your income per month over time going toward your future.
Automate the saving process.
It takes too much discipline for most people to manually make savings contributions themselves. That's why automating the process of saving can be a lifesaver.
You can make a request to your bank or wealth management brokerage giving them permission to work with your work's payroll to automatically deduct a percentage of your pay to an account of your choice.
This way, there's no forgetting about prioritizing savings every month. You won't have to rely on willpower or discipline to make regular contributions.
Some payroll setups aren't ideal for this and it might not be possible. As an alternative, you could have a set amount taken from your bank account each month and placed into your accounts where they will earn interest.
There are apps available as well that can help to simplify and automate the savings process, but these vary based on your country.
So, in Canada what are the best accounts to make regular contributions into?
Use a TFSA and RRSP.
But, where can your money be invested to grow? Two great options are through tax-free savings accounts, and registered retirement savings plans.
With TFSA contributions, your income has already been taxed when you were paid, and can be put in your TFSA to be invested and grow. When taking money out of the TFSA, you won't be taxed at all; not even on the interest you earned on it.
Another beautiful thing about TFSAs is that when you're retired, you can draw on this account and it won't be seen as income by the government.
With RRSPs, you don't have to pay taxes on the money you contribute in the year that you make the contribution, but will be taxed on it when you take it out. This account allows you to make tax-deferred contributions: in the year you make the contribution, that money is not counted as income for that year, meaning you'll pay less tax on it.
For first-time home You can contribute up to $35,000 from your RRSP savings ($70,000 for a couple) toward the purchase of a home with the federal government's Home Buyers' Plan. The funds you're putting into your account must be on deposit for at least 90 days to qualify. You must also sign a contract to buy or build a qualifying home.
Regular contributions to both of these accounts will provide you with plenty of room to contribute, and grow your savings.
In order for your accounts to really grow it's important that the money is invested properly, so feel free to give us a shout and we can recommend some high quality investors and financial advisors that we use and trust ourselves.
Buy a home and pay it off faster.
A final tip is that you should buy a home and make bi-weekly mortgage payments. Homeownership allows you to build a ton of equity in your home, and when its paid off, your housing situation is looked after.
With bi-weekly payments, you will be able to add an extra month of payment onto your mortgage each year, and this ends up shaving years off your mortgage by eating into the principal way faster.
And if you ever need to upgrade your home, try to keep your previous one if possible, as it can make a good source of income through renting. Passive income will allow greater contributions into your TFSAs or RRSPs.
