Wealth Accumulation Definition: Step By Step Guide

Wealth accumulation is one of the topics that require many years to kick in

That's why I convince people who are debating that those wealthy ones around us inherited their money

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I reply with if you invest 15% of your income into mutual funds with 8%-12% dividends and reinvest your dividends within the next 15 years you will be wealthy

Of course, I prove my theory with calculator

Usually it ends up with a conclusion it is to late to start especially if they are not investing any money yet and I accidently depress them

Also one more thing you can do right now, if you as individual or a couple invest your money into a rental properly

You can join with another person or couple, just pay the down payment and mortgage the remaining amount – do it in a way that your rental amount pays your mortgage

You are accumulating a wealth as the value of the property is saved for you at the same time the properly itself is increasing in price year after the other

wealth accumulation
wealth accumulation plan

That's why in this post, I will discuss wealth accumulation in details

What is wealth accumulation?

Wealth accumulation is simply a process of building up your net assets and wealth over time

A recent survey shows that there are 11.8 million households with $1 million net worth and that's equivalent to 3% of U.S.

Again, it doesn't happen overnight as this survey above does not reflect how long it took them to accumulate their wealth to the one million

Is wealth accumulation important?

Imagine you and your wife spend all of your income

What would happen when you retire?

Either you end up selling your home and move to a cheap city and rent a humble property with barely minimum to survive

According to Yahoo Finance 64% of Americans are not ready for retirement

You are not only building wealth for your retirement but also to pass it to your next generation

Any accumulated invested money in mutual funds that yield decent dividends will always stay intact as you are spending the profit and not the principal

You can pass it to your children and believe it or not, they will appreciate the fact that you did not live for yourself but you thought about them

Is it possible to accumulate wealth quickly?

This topic is controversial especially for those who postpone saving money and investing it

But to accumulate and build wealth fast like really fast, you have to consider investing in mutual funds and ETFs (Exchange Traded Fund) under one of the following accounts

Either under Roth IRA as called in the U.S. or TFSA (Tax Free Saving Account) in Canada, both Roth IRA or TFSA will let you invest money where your earnings are tax free, hence you can reinvest your profit

Other option is to invest your money into retirement saving account for long term investment

Keep in mind that both Roth IRA or TFSA is limited to a certain amount annually

I believe it is a fixed amount and not a percentage to your income

That's why to boost your wealth building process, I suggest to invest while your cut your spending and build a budget for your household income

Does investing in real estate build wealth?

People ask me if they are building wealth within their living home

I always tell them, as long as you live in a home you cannot consider it an investment

You have to have a shelter and even if you sell it, you will buy another one

The only exception to this rule when you sell you home when you retire and downsize or rent an apartment

Back again to the question if investing in real estate build wealth, short answer is yes

But there are few types of real estate investment, I only like one type which I consider the best wealth accumulation option

Purchase property for rental

This is my favorite type because when you buy a rental property your tenant is paying your mortgage through your rent

If the house market crash, whatever your rental property is worth, its value was paid for you

Flipping houses

Flipping houses is simply buying low and selling high

It is risky but in some states like New York, New Jersey in U.S. and in Great Toronto Area in Canada, houses are always on the rise

House hacking

Similar to flipping house but you buy a duplex where you live in one and rent the other

REIT

REIT stands for Real Estate Investment Trust where you invest your money in real estate stocks similar to mutual funds

How do you build wealth from nothing?

I heard this percentage but not sure about its source, around 67.7% of millionaires are self made

To effectively build your wealth, here are the steps to follow

  1. Educate yourself about money and acquire financial knowledge
  2. Get a regular income as you don't want to waste your hard earned money to cover your unemployed periods
  3. Stick to a budget
  4. Insure yourself against the unexpected like dental and life insurance
  5. Cut your spending and practice saving money
  6. Build an emergency fund
  7. Work on your skills to seek higher income
  8. Explore passive income ideas that can make you money while you sleep, like renting part of your house

What is the best way to accumulate wealth?

Although what I list below is similar to the above

I will use this opportunity to elaborate more on the best way on building your wealth

1- Start with the concept of creating a budget

I give credit to my first budget which I made with with wife

The end result, I found 2 bills I completely not using

I discovered many ways to cut my expenses like I started using VOIP phone which costs me $2.5 a month

I also replaced my cable which used to cost me $25 a month to $30 a year

Start now by building your budget

2- Pay off your debt fast

I believe what is the point of paying interest and leaving the principal

You will end up paying interest for infinite time

Take an action now and start with paying high interest debt first and use the same energy to keep the debt ball rolling

3- Build an emergency fund

After paying off your debt, it is time to think about build your emergency fund

You don't want to fall in debt again and the best way is to have a reserve to pay any unexpected sitiuation

4- Seek high income jobs

I always recommend job seekers to stretch their income opportunities and look for the highest income for your skills

I know it is hard for many to ask for raise at their work

But if you find a competitive opportunity you can take it to your employer either to match it or you leave

5- Invest your saved money

Investing part of your income into mutual funds and ETFs under your retirement saving account

You not only build wealth but you also get a good tax deduction when doing your taxes

Actually in U.S. and Canada you get a tax deduction for the amount invested from your taxable income up to 18% in Canada of your total income

For example, if you annual income is $60,000

You can invest $10,800 in mutual funds and ETFs under your retirement saving plan

When you do your taxes, your taxable income drops down to $49,200

You get back a refund of your taxes paid on $10,800 (something around $4,000)

6- Choose the right insurance

Choosing the right insurance whether a medical, dental or life will protect you against inevitable life emergencies

I was hospitalized in 2017 for what is called one day operation

I know in Canada medical is covered by the Government but at least all the miscellaneous expenses like drugs were covered by my insurance

Bottom line, you don't want to spend the rest of your life paying a medical bill

7- Have a will for your next generation

Imagine you have done all the above but with no will

GOD forbids you don't want your hard earned wealth to go to the Government

In fact, without a will, part of your wealth will go to the Government

But why you that if you are a good citizen paying taxes

How do you calculate accumulated wealth?

The formula is very simple

Your wealth = your net wealth which is equivalent to Assets – Liabilities

What is Asset

Asset is anything that puts money in your pocket

Your income for example is an asset

What is Liabilities

Liabilities on the other side is anything that takes money out of your pocket

That's why car loan is a liability that can stay with you even after selling your car

Do you know your car loses its value day after day?

If you sell your car earlier before you pay all your monthly loans, your selling value will not be enough to pay the remaining monthly loans

Final thoughts on wealth accumulation

Buildiing wealth is an ongoing process, you cannot start investing and stop

As long as you work and save money, you have to invest your money

Also it is not a quick process, it takes long time to reap your rewards

This is the power of compound interest


Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.