Whenever we talk about personal finance and wealth, saving and compound interest inevitably come up. We have already given a clear example of the huge difference between starting to save at 25 and at 35.
We also looked at how much money you would need to save, depending on the age you start at and the expected return, to reach €1 million by 65.
But today we won’t focus on the ideas we already know (or should know), such as spending less than we earn or avoiding debt. You can find those in our summary of 15 simple points of financial education.
Setting all of that aside for now, the most effective way to build wealth comes down to one thing: investing.
You don’t necessarily need a great job, nor do you need to come from a wealthy family. You simply need to focus on investing as early as possible.
Millionaires are said to invest more than 20% of their income every year. In the end, the wealth you build isn’t measured by the money you earn, but by the money you invest (and keep over time). Let me explain: someone who earns €30,000 a year can be much richer than someone who earns €75,000 a year, as long as the person on €30,000 saves and invests more.
A high income often isn’t a sign of prosperity, but a sign that we have adjusted our spending to our income.
Sometimes saving even €1 a day can add up to a lot after 10 years, if we manage an average return of 8% a year on that money.
Although, as Tony Robbins says, you get there much sooner if you apply the rule of “more”:
- Earn more money.
- Save more money.
- Invest more money.
- Get a better return on your money.
- Start as young as possible.
And of course, if we are going to set aside 20% of our income for saving and investing, the bigger the income we take that 20% slice from, the sooner we will build wealth.
Saving and living frugally is advisable, but if you focus only on saving, you probably won’t live happily. As Seth Godin put it, “there’s no difference between spending money and not earning more money”. One way to be able to enjoy those small pleasurable expenses is to look for ways to earn more.
See also: Saving alone won’t lead you to financial success
In other words, don’t stress about saving €100 a month. Look for a way to double your income, and those worries will disappear.
And let’s not forget Warren Buffett’s wise advice: the most profitable investment you can make in life is investing in yourself.
See also: 5 books on investing and the stock market to read this summer
Featured image: Julie Ceccaldi, CC0 1.0, via Wikimedia Commons.
