Building wealth can be as simple as how much you invest, how long you invest it, and the rate of return on your investment. The S&P 500 averages about 10% annual returns historically, so wait long enough, and you’ll probably do quite well.
What you can control is how much you invest. Putting more money to work can speed up your journey to financial freedom. Here are three ways to bump up those contributions; your future self will thank you.
1. Look for unnecessary budget expenses
Many people “leak” money from their households and don’t realize it; roughly one in five people don’t keep a budget, making it hard to know what you’re spending your money on.
A survey of 2,500 consumers by West Monroe showed that the average person pays about $273 per month in subscriptions or $3,276 per year. Suppose you don’t need that magazine subscription or the most expensive phone plan. Cutting just $25 per month and investing it instead would grow to $37,242 over 25 years if you received a 10% return on your money.
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Now, what if you cut modestly across your lifestyle? Do you need the most expensive trim package on your car? Do you need to eat out four nights per week? Sure, you need to sacrifice, and it might be difficult to build wealth on budget cuts alone. But it’s a significant first step if you’re not sure where to begin.
2. Generate passive income
Your career is a barter system between your employer and yourself. It’s a trade where you give your job your time and energy, and they give you a paycheck in return. Nobody has infinite energy, and everyone gets the same 86,400 seconds each day.
That’s where passive income can help you grow your income beyond what you’re capable of through your daily activity. Passive income means that you’re earning money without effort. For example, you buy a rental property or dividend stocks. The rent or dividends you receive are passive; you receive them because you own the asset, not because you physically did something.
Many retirees want passive income to pay for their living expenses, but you can use passive income to build wealth by reinvesting it. That rental property can eventually buy another one, and you can reinvest dividends to buy more shares — which pay dividends of their own! Ultimately, you could have as much (or more) passive income coming in as what your job pays you.
3. Begin your enterprise