Rich people follow some simple rules in life, in order to create wealth.
Whereas most people seem to thing that it’s confusing and complex. Plus, it’s out the reach for the vast majority of people.
But the good news is that anyone can improve their financial situation. If you take some relatively simple steps and think long term.
The idea of creating riches or wealth, shouldn’t be just for the few or the elite.
It’s more about creating a money mindset, in that you make your money work for you, not against you.
In that you are improving your own financial position and not those of others, such as banks, financial advisors, financial institutions.
Remember – nobody should care more about your financial future and personal finance than YOU !
So make a conscious decision today – to improve your future.
So let’s look at these simple steps in greater detail.
Rule 1: Create an emergency fund
Imagine you have some funds set aside, so you can rapidly fix any unnecessary expenditure.
Such as boiler breakdown or appliance repair. Or a car repair, which may need fixing straight away. Especially if you use that vehicle to commute.
It is so much easier and stress free to call upon funds set aside in an instant access account. Which can be accessed for specific events immediately.
They say you should keep 3 to 6 months months spare funds for such unforeseen events.
However this is beyond the reach of most people, especially if they are living pay-check to pay-check.
You may start off small by saving £ 50 or £ 100 per month, until you reach a target that you are happy with.
I personally like to £ 1,000 set aside for such emergencies, although my wife has a similar amount also.
In the worst case scenario, we could always use a credit card.
But this is only viable and worthwhile, if you pay that amount off in full. To avoid any undue or expense interest rate charges.
If you do set aside an emergency fund, Remember to set it aside in a specific account separate from other savings.
Plus it is only be be used for emergencies and not daily spending or treats.
Rule 2: Housing is no more than a 3rd of your income
You should ideally buy a house / property suitable to your needs.
Why do you need a 3 bedroom house, if only 2 people live there.
Unfortunately, most people live beyond their means, as they may want to live a nice area or suburb.
Or they could want to be closer to work, which is great.
But it doesn’t make sense if you are struggling to pay other bills, and going into debt or negative equity. Just to look good or keep up with friends and colleagues.
In recent years, in the UK we have enjoyed many years of low interest rates and extremely low rates of interest on our mortgages.
If you fixed a deal in the past you may have been rates below 2%.
The mortgage and inflation scenario has changed for the worse in recent times. Most people coming off fixed rates, will be shocked to find new deals around 5%.
Which could mean that monthly mortgage or rent costs have increased by several hundred pounds each month.
I bet these rates have increased more than you annual salary.
So cuts may have to be introduced, such as socialising, holidays, entertainment, treats for the children such as days out.
It could be that you have to extend your mortgage term for a few more years, which could affect your future retirement plans.
Or worse case scenario, you may go from a repayment mortgage onto an interest only mortgage.
So you are able, and can you afford to make monthly payments in future.
Also remember, that as you are making payments on mortgage product, your loan to value (LTV) is being lowered, so you should achieve more attractive rates of interest on remortgaging.
You should ideally start off small, and then as your family grows. You could then move to larger home to suit your needs. When you actually need the extra space.
Most people biggest monthly expense, is to cover mortgage or rent costs.
So make a decision to review these charges by reviewing current deals and shopping around. Especially at the end of any fixed term, that you make be tied into at present.
If you had some spare cash, you could actually make overpayments to reduce future interest rate costs. Or reduce the term of the future mortgage.
Becoming mortgage free, it could free up new opportunities for you in later life. Such as working part time, or retiring earlier than expected.
So it could be beneficial to speak to your existing mortgage lender. Or use free calculators on offer normally on their website.
Rule 3: If you buy something nice, then invest an equal amount
If you are going to buy so called big ticket items, always think do you actually need it. What purpose does it serve ?
Is it classed as essential, or just something that you think you want or need.
A good thing to consider is, say’s it over £ 50. Think about delaying that purchase for say 24 hours, then consider do you really need it, then consider buying it.
One of the biggest money drains is to buy items on impulse.
Everybody will tell you that the daily coffee is probably your biggest waste of money during the month.
But the best savings are to be made avoiding big ticket impulse purchases.
A classic example is always upgrading your iPhone when the latest model is introduced. Normally at increased cost upon each deal, and you are tied in for 2 to 3 years.
So try and avoid something called lifestyle creep.
Imagine if you were given an annual pay award and you invested that money instead of spending it. You will be rewarded many times over in future years, due to the power of compounding.
So a simper step to take – could be if you do buy a coat for say £ 50, then invest a. similar amount into a tax free investment account such as ISA.
Then make that money work for you. You will be surprised at how money that could build up, if you do make some simple changes to your spending.
Another simple thing to do, is to track your monthly spending by recording all items in a simple spreadsheet.
Do you find your yourself wasting lots of money on unused subscriptions that you no longer need.
Or are you eating out several times a week.
It may be that you have far too many clothes which you cannot wear at once.
Over a course of say 3 months, you will be shocked at wear your money goes.
You may even find yourself living pay-check to pay-check in a constant cycle.
Or are forever in debt to say the bank (via overdraft) or credit card and you are paying silly fees to a bank or financial institution.
By all means you are allowed to treat and reward yourself. What’s the point of going to work, if you don’t treat yourself.
However this is what everyone normally does. But if you want to create wealth or riches.
You have to be somewhat different and focused and avoid the crowd and think outside the box and you need to get investing.
You have to get your money working for you, so it’s beat the rate of inflation. Otherwise it’s losing its true monetary value.
Rule 4: If you buy a car, avoid expensive debt.
It is estimated that 90% of all cars are bought through finance, loans or PCP / hire purchase agreements.
Unless you have some savings, it’s the only option for most people.
But there is a sensible way to do it and implement.
You should ideally purchase a newer car under the following rules:
You should put down a deposit of at least 20%.
The loan should be paid off within 4 years.
Total monthly costs should be less than 10% of your net pay.
Hopefully your car will last several years after it is paid off. But most people will normally upgrade to a newer car once that agreement ends.
So they are in a constant and never ending cycle of debt.
It may look good on your driveway. But people buy cars to impress people they don’t know.
Also consider that a car although it may be a necessity to most people. It’s a depreciating asset, in that it loses value over time.
So a simple example:
You may pay £ 10K for a car, but at the end of the payment term, it may only be worth around £ 5K in value.
It’s a double whammy, not only are buying paying fees and interest on top of the original loan. But the car has lost significant value as well.
So before you purchase that next car, consider the finances and cost implications.
Is it viable, affordable to your circumstances.
By purchasing it it reducing your wealth, it’s certainly not increasing it.
You’re neighbour, may be driving an 10 year old car. But it’s paid off, reliable and it’s not flashy or pretentious. But they could be financially free, but give the impression they look poor.
To create wealth or riches, imagine if you put those monthly car payments into assets working for you.
Such as stocks, shares, funds, which will increase your net worth and financial situation.
Rule 5: Buy appreciating assets
If you want to get rich or create wealth. You have to buy appreciating assets that work for you.
These could be simple things like stocks, shares, funds, (ETF’s etc)
You have to buy assets that beat inflation, so aren’t being eroded in real value or failing to keep up with inflation.
By simply saving cash in a bank or building society account. You are unlikely to build real wealth.
Unfortunately though, most people think it confusing and complex. As we have never been taught how to invest, whether that be in school, the workplace or by our parents.
In the UK we consider it taboo to take about investing to the wider audience. So for most people it’s outside their comfort zone.
See blog post of how to create a simple investing portfolio:
https://moneyminted.co.uk/the-world-of-investing-should-be-simple-and-easy
If you do start investing, it can grow too fold, through receiving regular dividends, or capital growth.
Plus, if you re-invest any dividends your portfolio will grow quicker, as they are normally increased each year by the company. Plus the payout is increased as the number of shares you own grows. It’s what we called passive income.
As your confidence and assets grow. You many wish to diversify to other assets such as property, commodities, peer to peer lending, or start-ups, cryptocurrency, premium bonds etc.
Rule 6: Invest in tax free wrappers.
Finally, if you are going to start investing. Take advantage of the tax-free investment wrappers available to you.
These could be in the form of a simple cash ISA, Stocks & shares ISA, personal pension.
Most people are automatically enrolled into a workplace pension by default.
But they never venture any further into other investment products.
If you do invest, any dividends you receive will be tax-free so no need to pay dividend tax to HMRC via self-assessment.
Plus any investment growth or product is tax-free so not subject to capital gains tax rules. Which is limited to £ 3,000 per tax year.
At present, you can pay into £ 20,000 each tax year into a ISA produces across different types.
This can be accessed anytime in future, you shouldn’t be restricted. Plus, any money you disinvest in later years is income tax free.
You can contribute £ 60,000 into a personal or workplace pensions. Or a lower amount up to your annual salary.
You will get free money from your employer. Or if you do it yourself via direct debit or standing order. Your provider will claim tax-relief on your behalf from the government.
In future you can access up to 25% of the pot tax free (limited to £ 268,275 across all your schemes). With funds afterwards then being classed as income and subject to income tax bandings.
However through, you are restricted when you can access. Under current rules the earliest you can access a pension id age 55 (unless you have ill-health, or its inherited),
But this will be increased to age 57 from April 2027.
As a pension is considered a long term investment, due to the power of compounding and getting free money.
It’s probably most people’s biggest asset after their residential home.
By investing in tax free wrappers, you save the need to declare dividends, capital gains etc to HMRC through self-assessment. So it simplifies your admin duties and reporting in future years.
Summary:
If you change your mindset and follow some simple rules. You can dramatically improve your financial situation in the short term. But ultimately in future years.
By following some simple guidelines, and getting a plan in place.
The hardest part for most people is changing your financial mindset.
It may appear daunting and hard as this. But as time progresses and you are reaching goals and improving your situation. It should spur you on to build momentum moving forwards.
If I can do it – so can YOU !
Remember – If you found this blog post useful and informative check our my other posts on pensions, savings, investing and books I recommend on https://moneyminted.co.uk
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