The Motley Fool

3 simple steps to building wealth

Investing so often is placed in the ‘too hard basket’ by many Australians. With pop culture images of the Wolf of Wall Street and Gordon Gecko bound to the public perception of the stock market, many people still feel like it’s a place for either crooks and masters of the universe. But the reality is that anyone can invest, and it’s really not that hard. In my opinion, breaking these misconceptions is vital for the future of middle Australia and is something that should be talked about.

Here are three easy steps to start on this path and get ahead with your money:

Step One: Spend less than you earn and avoid bad debt

It sounds simple, but this is really the number one key to building wealth. If you live paycheck-to-paycheck, by definition you are coasting and not building or going forward. In fact, with inflation, you may even be going backwards. Even worse you might be spending more than you earn, maybe by using that credit card from Commonwealth Bank of Australia (ASX: CBA) or putting ‘stuff’ on Afterpay Touch Group Ltd (ASX: APT). Taking control of your money starts with taking responsibility for your spending.

Step Two: Save 10% of every pay-check

By putting aside 10% of everything you earn as soon as it comes through the door, you can ‘pay yourself first’. This is a common and fantastic strategy because it fights our tendency as humans for instant gratification. Instead of ‘saving what’s left’ (which never works), pay yourself first and start a healthy lifelong habit. Remember, for this to work, you must understand this money is for your future self, so don’t think of it as your TV or holiday fund. And if you can save more than 10%, go for it!

Step Three: Find an easy investment

This is when your ‘10% fund’ comes in. To invest, you don’t have to be a stock picker or the next Warren Buffett. There are plenty of options to invest passively (in other words, to let others do it for you). Index funds like the Vanguard Australian Shares ETF (ASX: VAS) are a great pick. ETFs trade on the stock exchange but invest your money across hundreds of quality companies. In VAS’s case, your money is invested in the top 300 public companies in Australia. Sounds like a reasonable bet to me.

You could also try a Listed Investment Company (or LIC) like Australian Foundation Investment Co. Ltd (ASX: AFI) or MFF Capital Investments Ltd (ASX: MFF). These are companies that invest in other companies and both have a long track record of success. All these investments pay dividends as well, so you also get a source of passive income to boot!

Foolish Takeaway

If you implement these three easy steps into your financial life, you are getting ahead of most Australians to start with as well as setting yourself up for a brighter future. Don’t try and do things like ‘time the market’. For passive investing, the best way to do it is to just add money when you can and don’t sell unless you really need the money. Time and regular investing (even if it’s small) work wonders for your money.

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Motley Fool contributor Sebastian Bowen owns shares of Magellan Flagship Fund Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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