March 1, 2010 By M. Alden 33 Comments

Step 1- Decide to Build Wealth

Decide to build wealth, and figure out why you want to do this. This is the most overlooked step. Many people want more money, and focus solely on the “how” instead of the “why”. Yet while people tend to want more money, they also tend to look at wealth as somehow immoral. If you want to build wealth, whether through dividend stocks or some other method, you need to figure out why that is, and be comfortable with the concept of being wealthy. Otherwise, you won’t have a wealth-building mindset, you won’t have a logical goal or reason, and you’ll likely begin to waver and fall. It’s important to KNOW that you’ll be wealthy, not hope you’ll be.

I always knew I was going to be rich. I dont think I ever doubted it for a minute.

Step 2- Attain Positive Cash Flow

In order to start building wealth, you need to make more money than you spend. This could involve cutting down on your expenses, finding new ways to improve your income, or both. There are resources on how to save money and how to make more money, and they are helpful, but ultimately you have to sit down, do the math, cut out what’s unnecessary, and figure out how to make this happen. If you’re still stuck, learn from a minimalist.

Step 3- Pay Off High Interest Debt

If you have debt that has a large interest rate, no matter how much money you save and invest, you’ll never catch up with your debt. As an example, if you have debt that has a 15% interest rate, your debt will DOUBLE in 5 years unless you contribute significantly to paying it off.

If you have high interest debt, cut the tree at the roots and start paying it off. Go back to step 2 and figure out how to both improve income and reduce spending.

There are some types of debt that are ok, and even necessary at times. Mortgages and co-signed student loans are typically low-interest types of debt that make sense for some people. Still, make sure this type of debt is at least under control before anything else.

Step 4- Establish an Emergency Fund

In order to start building financial security, we all need some backup in case our plans don’t work out. Somewhere along the line, one of your plans WILL fail. That’s life. Jobs aren’t guaranteed, unexpected expenses come up, people get injured, and so forth. We all need to make sure that we have money set aside that we can access right now if we have to. How much you need set aside depends on your situation, though some sources say you should have at least 6 months of expenses set aside, and that sounds reasonable to me. It may be more or less, depending on your family status, age, and other factors.

Step 5- Contribute to a Savings Plan

If you have a job that offers a 401(k) or something similar, I recommend saving and depositing enough to get full matching from your employer. Tax free, matched accounts are a rather unbeatable investing choice. With simple index funds and bond funds, you should do well over the following decades.

Step 6- Learn about Investing

If you have the first five steps under control, you have a good base to start building wealth. With that out of the way, you have the resources to begin really learning about, and focusing on, wealth building. A good first step here is to understand the power of compounding. Read investing books, read investing websites, and so forth. You may decide to invest in bonds, stocks, real-estate, businesses, or a combination of those things, but whichever you choose, make sure you keep growing your knowledge.

Step 7- Begin Investing in your Chosen Area

Once knowledgeable, the next step is to get your hands dirty. I bought my first stock when I was 18. At the time, I only had a little bit to invest, and brokerage charges significantly reduced my gains because of how little capital I had, but I approached it as a learning experience from the beginning. I knew I wouldn’t make much, and I knew I could even loose some of my money, but if that was the case, I’d consider that my “tuition”. Make sure you don’t go overboard with your first investment; otherwise you might become disillusioned if it doesn’t work out. Approach it with a learning mindset, and whatever happens, you’ll have gained a lot.

For American investors, if you don’t have an IRA, it might be a good idea to open a Roth IRA. This will allow you to contribute money to an investment account that will not be taxed, even when you take the money out. The money put in is after-tax, but everything you gain in that account you get to keep. Most brokers offer IRAs.

If you’ve done that, you can also open a taxable brokerage account. I currently use Sharebuilder.

As far as this site goes, I recommend dividend growth companies as a great investment choice. They have historically excellent rates of return and are fairly good investments for beginners because they are usually less volatile and provide returns right away in the form of dividends. You can check out my stock analysis section for some free ideas to consider, but ultimately choices you make are your own. Then, if you really want to boost your returns, reinvest the dividends you receive back into the company. Many brokerages will allow you to do this automatically and for free.

Step 8- Continued Growth

The journey never ends. As your wealth grows, you’ll have more and more investing opportunities available to you. Once you have a solid understanding of compounding, assets, and liabilities, you have a true wealth-building mindset that will carry over to various types of investments.

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