Wealth Accumulation Definition


What is wealth accumulation?

Wealth accumulation means you are building up your wealth and net worth over a period of time. You invest in assets that get a return on your saved amount plus earned interest – and in that way the money grows exponentially.

It is often called the snowball effect and means that even small amounts in the long run can grow to large sums.

What is the key to accumulating wealth and how do you get started? The simple answer to that question is that it requires hard work, patience and long-term thinking.

In this guide, you will get our best tips so that you can realize your dreams of wealth.

How do you accumulate wealth? If we assume that it is from a financial perspective, it is not really difficult at all. There are a few steps everyone should follow to get accumulate wealth.

How much wealth do you need to accumulate to be considered rich?

What counts as being rich is highly subjective – you will get different answers depending on who you ask and what the term means to that person.

As you know, wealth does not always have to be about money. For example, you may feel rich in wonderful experiences, love, or the fact that there are many individuals you care about in your life.

In the same way, financial wealth is a personal question and there is not just one answer. For one person, financial wealth can mean that they can live on their wealth for the rest of their lives without working, for another that it has a substantial buffer for unexpected expenses and the opportunity to travel each year.

The conclusion is that there is not only an answer to when one is rich, but it is up to you to define what wealth is, and if you want to get rich you need to think about what amount it would be about.

How do people accumulate wealth today?

Today, the most common approach to accumulate wealth is to start a business and then run it successfully, or to invest in securities such as stocks or mutual funds.

It is not very common to get rich by chance or luck, it takes discipline and hard work to accumulate wealth.

A common denominator for the rich, however, is that they are good at managing their money – they do not waste more than they have.

Is it possible to accumulate wealth without a high salary?

Yes, even if a high salary obviously facilitates, it is actually not a must. By saving in stocks or mutual funds on a regular basis, for example, capital can grow on its own without you having to do anything.

However, it is a prerequisite that you actually save money, and spend time on your investments.

What are the basic conditions for accumulating wealth?

  • That you work hard and have a well-managed economy.
  • That you have higher income than expenses.
  • That you never make decisions about your finances when you are tired or stressed.

How to accumulate wealth – 13 steps to financial freedom

1. Correct setting

The first step towards wealth is to stop waiting for you to win the lottery, meet an extremely wealthy partner or suddenly take over a business from a relative.

When you wait, you lose valuable time, and even if you are not close to your financial goal at the moment, everyone has to start somewhere.

Start from your conditions and think about what you can do today.

2. Raise your income

If you can increase your existing income, the process of accumulating wealth will go much faster.

There are several options here, such as negotiating your existing salary, working more hours, getting an extra job or changing jobs.

Remember to always do your very best and show your front feet wherever you work – it is something that opens doors to new opportunities.

3. Make sure your expenses are not greater than your income

A prerequisite for you to get money over is that your income is higher than your expenses. To accomplish this, you have two options; you can reduce your expenses or earn more income.

In many cases, it is relatively easy to reduce your expenses, both in terms of fixed and variable costs, but sometimes it is necessary that you get rid of some habits.

Go to your internet bank and check your bank statement from the last month, where you will most likely see a number of expenses you can skip in the future.

4. Know your risk appetite

Before you invest, you need to establish the right balance between risk and return for your peace of mind, but it is extremely difficult to do this effectively yourself.

An experienced advisor is best suited to ask the right questions and use appropriate tools to create a clear and objective risk profile for you.

They can then recommend an appropriate mix of investments to match your specific profile.

Remember: without a certain amount of risk, you may have a hard time overcoming inflation and may lose money, especially in the long run.

Explore your options to control risk, e.g. by shifting the timing of investments to reduce exposure to market movements.

5. Buffer save before borrowing

If you are going to invest in accumulating wealth, it is not time to take out any new loans as long as it does not mean an income-generating business opportunity.

Instead, prioritize saving up a large buffer for unexpected costs so that you can turn to yourself when there is a crisis.

In addition to the fact that the buffer means financial security, one should not underestimate the emotional security that it also brings, with a buffer you will sleep well at night.

6. Pay off your debts

Debts eat up a large part of your income, and if you want to start the journey towards accumulating wealth, it’s a good idea to settle the debts you can as soon as possible.

Review which loans you can repay early, such as personal loans, and make a plan.

Loans you can wait to repay in advance are loans with security and mortgages with fixed interest, because you then most certainly need to pay interest difference compensation.

Student loans are also not necessary to repay immediately, as the cost of these loans is very low.

7. Accumulate wealth on funds and stocks

Investing in stocks or mutual funds is an effective way to make money without having to work.

However, it is important to remember that you risk not getting back the amount you are investing, and therefore you need to read on so that you are aware of how much risk you are taking on different occasions.

When you buy shares, you need to do more research compared to when you invest in funds, because the return is determined entirely by how the company you have shares in is doing.

A fund invests in interest-bearing securities and shares from several companies, and it is the fund company that responsible for monitoring and evaluating their development.

When you save in mutual funds, you simply have experts who take care of the work for you, but for this you often have to pay an annual management fee.

8. Save regularly

One way to accumulate wealth is of course monthly savings. Save 10-20% of your salary every month, preferably more than that if you have the opportunity.

Before you have finished building your buffer, you can invest a small amount in securities monthly, even if it is only a small amount, it is better than nothing.

Once you have a buffer, you can focus entirely on investing the money you save.

9. Reinvest the dividends

By reinvesting dividends, you get a kind of interest rate on interest rate effect, which makes a big difference to the total return.

If you save in funds, the reinvestment goes automatically because the fund company takes care of everything for you, but if you own shares, you need to do it yourself.

Sometimes the dividend can account for half of the return, so do not forget to keep track of when it happens and reinvest the money.

10. Diversify your savings

It is not a good idea to put all your eggs in one basket if you want your investments to be profitable.

No matter how much you believe in a specific company or like a fund’s holdings, it is foolish to expect too much from an individual fund or stock.

As the market is affected by an infinite number of different factors, it is difficult to assess how it will develop, and therefore it is of the utmost importance that you spread out your savings and the risk you take.

This way, it will be easier for you to stay calm if the value falls, and avoid making hasty decisions.

11. Formulate intermediate goals

Having clear intermediate goals makes it much easier to stick to your plan. Therefore, decide on different amounts that you want to have saved up within 6 months, 1 year, 5 years and 10 years.

In addition to knowing exactly how much you need to save each month, the goals will feel more within reach.

For example, if you want to have invested $3000 in funds within 6 months, this means that you need to save $500 a month.

Then you can start from your account statement where you see all income and expenses, and based on them decide how you should proceed to succeed.

You may need to get another job for a period, or it may be enough to order takeaway food less often.

12. Think long-term, but act today

Wondering how to accumulate wealth quick? Then it might be a good idea to rethink. wealth accumulation does not happen overnight, it’s more like an ultra-distance race than a short sprint.

If you are going to reach your goal, you need to keep your motivation up, and you know best how to make it happen.

Some become more motivated by monitoring their investments, while others may be tempted to use the savings even though they know they should not.

If you are of the latter type, it can be good to create automatic transmissions and only go in and watch once a year.

13. Take care of yourself

It is important to be goal-oriented, but at the same time remember that no one else will make sure that you take care of yourself and do not work too much.

Going into the wall does not make you rich, on the contrary.

Therefore, make sure that you have time to do what you feel good about, whether it is to stand out and run, hang out with friends or take a long swim.

In this way, you improve your chances of reaching your goals.

The best path towards wealth accumulation is to start saving right away

There is no better opportunity to start saving than right now. The reason for this is the spelling of interest on the interest rate effect or compound interest rate effect.

Interest on interest means that the return on your savings in turn generates a return if you invest it.

At first it is not so noticeable, but after a while the effect becomes more significant than the amount you save each month.

We take an example: assume that the stock market gives an average annual return of 7 percent *.

If you save $100 per month, your savings capital increases partly by $100 every month and partly with the value development on the stock exchange.

At first, the value growth from the stock market may not feel so remarkable, but after about 10 years, it will probably be as large as your monthly deposit.

Then your savings will probably increase by $200 per month. $100 from you and $100 from the market. It is now that your savings are really starting to pick up speed.

And if you then continue on the same path, your return will probably be greater than your monthly deposit on average.

  • 7% is a simple rule of thumb, where you expect 3% GDP growth + 2% dividends + 2% inflation = 7% average stock market return over time.

Wealth accumulation = Save regularly

Historically, it has proven to be better to invest regularly and long-term than to try to buy and sell at the “right” times.

Following a designed and long-term investment plan usually leads to better long-term returns than letting emotions guide our investment decisions.

Our emotions can not predict the market but are rather a reaction to how the market has already gone.

We like to buy when the market is at the bottom and sell when it is at the top, but it is extremely difficult to succeed for two reasons:

First, we humans are experts at seeing patterns. Throughout history, that ability has benefited us, but in the stock market we may see patterns even when they do not exist.

Or we see the pattern in retrospect, when the event is already over. Studies show that it is not possible to consistently time the market by looking at patterns, although we may be tempted to believe that we see something that everyone else has missed.

Second, our decisions are often driven by emotions. Especially when it comes to something as sensitive as money.

If we have invested in the stock market and the market falls, we can panic, which in turn leads to us selling our holdings.

We will probably not dare to reinvest until the market feels secure again and then the upswing is often already over.

The market has always fluctuated up and down in an unpredictable way and will continue to do so in the future.

Therefore, make sure to save regularly and in the long run, preferably every month. Perseverance has proven to be a successful strategy.

Conclusion

Diversify your savings

Diversifying your savings means that you reduce the risk by combining different types of investment alternatives.

An example is buying several different shares, funds or other securities. Another is to ensure that even securities are exposed to different countries and industries.

In practice, this means that you can reduce the risk in your portfolio more than you reduce the potential return.

Sources

https://academic.oup.com/qje/article-abstract/118/3/1007/1942979

https://www.aeaweb.org/articles?id=10.1257/aer.102.3.300

https://www.tandfonline.com/doi/abs/10.1198/073500103288619007

https://www.jstor.org/stable/2006646

https://www.jstor.org/stable/43236859

https://www.emerald.com/insight/content/doi/10.1108/01443580010341853/full/html

Kevin

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

Recent Posts