If you find yourself working harder and harder to make ends meet, or accumulate those extra funds for a holiday, new car or home renovation, you need to know how to accumulate more wealth, without losing any of your lifestyle. Getting richer doesn’t always require a larger income and the key to true wealth is actually passive income, where you are able to earn as much of your income as possible without working.
When you are able to earn passive income it means you don’t need to rely on an employer and you don’t need to work week to week for a pay check. Instead, you can spend more time doing things that you enjoy, and at the same time, have a regular income coming in. You can do this using a number of investment strategies, or by making some minor lifestyle adjustments.
1 – Cut your costs
Being rich doesn’t have to be about earning more money, because to have more money you can simply spend less. Getting into the habit of spending less than you earn will truly make you feel rich because there is no better feeling than seeing a positive balance in your account at the end of the month after the bills are paid, and knowing that you have still be able to save for an emergency.
The most important and effective way you can cut your costs is to get rid of your debts. Your student loans, car loans, mortgage and especially your credit cards will all be charging you interest, so not only are you paying for your purchases, you are continually paying for the cost of money as well. Before you can start making your money work harder for you, you have to make sure it’s not working against you, so focus on repaying your high interest debts, and you will then be in a position to earn passive income.
2 – Invest in your future
The ultimate goal for earning a passive income and becoming richer is so that you can live the lifestyle you want in your retirement. Therefore, the first step to becoming richer is to make sure your retirement fund is correctly set up, so that you can maintain your lifestyle, even when you have stopped working.
Your employer should offer automatic contributions to your retirement fund and your employer pays a percentage of your wage, on top of your income, into your retirement fund. You can also open a separate retirement account which gives you more flexibility, allowing you to make contributions of your own, and shop around for the best rate, rather than being designated a retirement fund by your employer.
The sooner you start adding to your retirement fund, the more chance your funds have to grow and compound, and offer you a healthy income in the future, to make you feel truly wealthy.
3 – Enrich your emergency fund
Being rich also means having enough money to weather any emergency and so you can make sure you don’t need to dip too far into your income if you have an emergency fund. Remember that you can earn more interest from your savings with a larger balance, as the higher the balance, the higher the interest rate you are eligible for in most cases.
Therefore, to build up your emergency fund, set up a direct transfer from your wages each pay day, to a high interest savings account. It makes good financial sense to have savings equal to three to six months of your salary so you can support yourself and your family if you are unable to work, until you find another job. When your income increases, increase your contributions to keep your emergency fund in line with your income and you will find that you can continue to grow your wealth because you won’t have to resort to credit cards, and you are financially independent in an emergency.
4 – Invest in stocks
A savings account can be a good place to keep funds you will need quick access to in an emergency, but remember that the banks are using your savings to invest for their own benefit, making a profit, and passing on just a fraction of that profit to you in interest. Therefore, if you want to make the most of your money and make it earn more for you, not for the bank, instead of savings accounts, certificates of deposit and money market funds, invest for true growth and wealth in stocks.
Investing in a savings account is often seen as preferable because of the security. However, there are a wide range of conservative dividend stocks which can see you earning more, from the same investment amount. To invest in stocks you will need to open a brokerage account and you can do this through a brokerage or your own bank branch.
You now need to choose the stocks in which to invest, and if you start with dividend plays you will receive a dividend for each share you own, and receive that payout for as long as you own the shares. The average dividend for stocks is one to two dollars per share, and if you own enough of these performing stocks, you can receive a strong income stream, which is usually paid every three months.
5 – Real estate investments
Property investment can help you get rich in two ways, through a positively or a negatively geared investment property. A positively geared investment property is one which earns enough rental income to cover all of its expenses, and still make a profit. Since the expenses of an investment property include everything from the mortgage repayments and loan application fees to the water rates and the maintenance costs, it is very rare to find a property which you can positively gear, unless you are able to secure a small mortgage on the property. In this case, you will need to provide a significant deposit, but the result is that those invested funds are now able to help you on the way to being rich, without you having to earn more.
A negatively geared property on the other hand is one which makes a loss, and the rental income does not cover the expenses. However, in this instance, you get richer through capital gains, and tax benefits. Of course a positively geared property appreciates in value too, a negatively geared property allows you to make tax deductions to save while you are working, and cash in at retirement when the mortgage is repaid or the property is sold for example. With a negatively geared property you can not only claim all of the expenses of the property on your tax return, you can also claim the loss amount as a deduction too.
6 – Get rich by keeping more of your income
Imagine home much richer you would be if you didn’t lose so much of your income to tax. Well you can make sure that the money you work so hard for, can work hard for you, not the tax office by looking at ways to shelter your income from tax. And yes, there are a number of legal tax shelter options available to you.
Investments are one of the easiest ways to save on your tax bill because you can claim all of the expenses to do with your investment on your tax return, including the interest on your investment or margin loan, account keeping fees, and in the case of a negatively geared property, the losses you make.
You can also position yourself in a lower tax bracket so that your income is taxed at a lower rate, by using your before tax income for items you need and want. For example, in some cases you can make contributions to your retirement fund which are tax free and help you avoid tax on the invested portion of your income. You can also have your employer reduce your salary amount in exchange for a new laptop or childcare costs so you take home less, fall into a lower tax bracket, but are receiving the same value of benefits, if not more.
7 – Find financial products which pay you
Between set up costs, account keeping fees and interest, you can be paying a lot for your financial products. However, you can cut the costs of your financial products, by finding ones which pay a benefit to you.
For example, search for a bank which is offering incentives to savers such as a $100 deposit to the accounts of new customers, or an extra $5 deposited to your account for every $100 you deposit in a month. Other accounts can offer hundreds of dollars of benefits each year such as vouchers and discounts with partnered stores, however, just make sure that the benefits outweigh any account keeping fees.
You can also get cash back from your purchases with the right credit card product, and while credit card rewards programs can also offer gift vouchers or merchandise, cash back credits can be applied against your balance or account keeping fees to reduce the cost of your purchases. Cash back incentives typically accumulate as a percentage of the value of your purchases, so to get the best value from this financial product, be sure to make only necessary purchases, and pay your balance off in full each month to avoid interest charges. In this way the cash back credits truly are a bonus in your account.
This was a guest post from Alban.