The idea of becoming rich can hit us in the extremes. We can find it very easy or dramatically difficult. In reality, wealth building is usually more nuanced and defies being categorized as either “easy” or “hard.” One thing can be certain, if you do not currently own a large amount of wealth, it is mysterious. What do you really need to do to get rich if you haven’t inherited millions? What are the lesser known steps?
In a video posted on the YouTube channel she co-founded, The Financial Diet, Chelsea Fagan explored eight things about getting rich that you probably haven’t heard much about because they’re just not openly discussed.
Feeling guilty about your weekly run to Starbucks for a decadent latte? Regret that $5 bracelet you bought at Marshalls on a whim? Of course, small expenses can add up and take a toll. But these are the important things to be concerned about when building wealth.
“Just because you buy avocado toast once won’t buy you a house,” Fagan said, adding that you should look at major lifestyle expenses instead of dwelling on the little things.
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As you get older, you may start to see peers who are ahead of you (or so it seems) financially. People move in their careers, buy property, start a family, travel more luxuriously, etc. And you might start to feel a bit of unspoken pressure. Why are you not on the same level? Stop right there. If you continue with these types of thoughts, you risk succumbing to lifestyle inflation.
Lifestyle inflation, also known as lifestyle evolution, is when you increase your expenses as your income increases, often resulting in a higher standard of living that can affect your financial goals and put you in a position to accumulate debt. The main issue here is that it is possible to earn more money, but is it enough money to justify leveling up that much?
“Many Americans are living beyond their means,” Fagan said.
“One of the key aspects of saving money is automating it so you don’t have to think about it,” Fagan said. To automate effectively, make as many costs in your life “fixed costs”—meaning that even if you make more money over time, it stays the same (think mortgage or rent payments, car insurance premiums, or childcare expenses).
Savings automation is more than just a technical banking move. It’s a way to make savings a fixed cost, too, but one that you increase as your earnings grow.
Although self-made millionaires are becoming more common in an age where entrepreneurship is also becoming more common, the bottom line is that most millionaires are heirs. They were set up with wealth by their parents and because of that, they have more opportunities to become even richer.
“Having money makes it easier to make money,” Fagan said. “Wealth begets and perpetuates wealth.”
But here’s the good news: self-made wealth will beget wealth. For example, the more you save, the more you can invest, and the more you invest, the more you’ll benefit from compound interest.
“And once you get to a certain level of wealth, it’s easier to stay rich,” Fagan said.
This point ties in with the one mentioned above about how small purchases won’t hurt your finances like big expenses might. Instead of focusing on cutting expenses and then cutting them further, focus on ways to increase your income. This is what will have a considerable impact.
“You can cut expenses as much as you want,” Fagan said. “But at the end of the day, unless you’re making enough money to save a significant amount from cutting back, it’s much more important to focus on making more.”
In times like these, when inflation is high, this point hits hard. Making a lot of sacrifices to save, say, $50 a month isn’t going to be nearly as effective as making time sacrifices to generate, say, $1,000 a month with a side hustle.
Another bottomless fact: not everyone makes the same amount of money even if they work the same hours and put in the same effort. And some industries will give you annual bonuses that you can use to invest without having to deal with your savings.
Fagan singled out the technology sector and the finance and banking sector as bonus-friendly. Corporate jobs can also give you lump sums in the form of bonuses or fat raises. You can also get share compensation from your employer. So if you’re just starting out in your professional life or making a career change, look at roles in industries where you can expect bonuses or stock options.
You need to take advantage of compound interest – and that means having a long-term investment strategy and riding through tough market times.
“You have to make sure your money is invested on the most profitable days, which are almost totally unpredictable,” Fagan said. “We also have to remember that the stock market bounces back from periods of turbulence.”
Home ownership has long been touted as a pillar of the American Dream. But it’s not at all what it was in, say, the 1950s. It’s become much more financially complex and expensive. Buying a home may be considered the “thing to do” once you reach a certain age or start a family, but it can be a mistake that gets in the way of wealth.
“Despite the old boomer advice that renting is just throwing money away, or people who treat owning a home as essential to building long-term wealth, not only is that not always true, in some cases it can work against you,” Fagan said.
Renting can be the smarter and healthier financial option. There are situations (and locations) where renting a home over time is much more affordable than owning.
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This article originally appeared on GOBankingRates.com: 8 Things You Don’t Know About Getting Rich, According to Chelsea Fagan
