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Published Apr 17, 22
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Understanding 3 Simple Steps to Building Wealth Step 1: Make Money This step may seem elementary but is the most fundamental one for those who are just starting out. You’ve probably seen charts showing that a small amount of money regularly saved and allowed to compound over time eventually can grow into a substantial sum.

Earned income comes from what you do for a living, while passive income is derived from investments. You may not have any passive income until you’ve earned enough money to begin investing. If you are either about to start a career or contemplating a career change, these questions may help you decide on what you want to do—and where your earned income is going to come from: You will perform better, build a longer-lasting career, and be more likely to succeed financially by doing something that you enjoy and find meaningful.

To set more money aside for building wealth, consider these four moves: You might want to use a financial software package to help you do this, but a small, pocket-size notebook could also suffice. Record your every expenditure, no matter how small; many people are surprised to see where all their money goes.

Food, shelter, and clothing are obvious needs. Add health insurance premiums to that list, along with auto insurance if you own a car and life insurance if other people are dependent on your income. Many other expenditures will merely be wants. But take a hard look at both categories. While you can probably eliminate some wants altogether, you may be spending more than you really should on some needs, such as clothing.

While there are all kinds of exotic investments, most people will want to start with the basics: stocks, bonds, and mutual funds. are shares of ownership in a corporation. When you buy stock, you own a tiny slice of that company and will benefit from any rise in its share price, as well as any dividends that it pays out.

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are like IOUs from a company or government. When you buy a bond, the issuer promises to pay your money back, with interest, after a certain period. As a very general rule, bonds are considered less risky than stocks, but with less potential upside. At the same time, some bonds are riskier than others; bond-rating agencies assign them letter grades to reflect that.

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When you buy mutual fund shares, you get a slice of the entire pool. Mutual funds also vary in risk, depending on what they invest in. Perhaps the most important investing concept for beginners (or any investor, for that matter) is diversification. Simply put, your goal should be to spread your money among different types of investments.

For example, if the stock market is on a losing streak, bonds may be providing good returns. Or if Stock A is in a slump, Stock B may be on a tear. Mutual funds provide some built-in diversification because they invest in many different securities. And you’ll achieve greater diversification if you invest in both a stock fund and a bond fund (or several stock funds and several bond funds), for example, rather than in just one or the other.

They sometimes charge lower fees as well. You can also buy them, along with stocks and bonds, through a brokerage firm. The Bottom Line While get-rich-quick schemes sometimes may be enticing, the tried-and-true way to build wealth is through regular saving and investing—and patiently allowing that money to grow over time.

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The important thing is to start.

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(Seriously not kidding here. Here’s more on what to do when the stock market crashes.)As we’ve been saying, when you’re investing for a date far into the future, it’s absolutely fine to let your money just sit there, quietly enjoying the highs (and surviving the lows) of the financial markets.

Here’s why: Thanks to the market’s gains and losses, your original asset allocation — how you divvied up your money among different types of stocks and bonds — will shift, and eventually get out of whack. For example, say that when you opened your account, you decided to invest 70% in stocks and 30% in bonds.

Did we mention that it’s awesome that you’re saving for retirement? It’s awesome. And you’ve already done the hardest part: getting started. The next step is easy: Hike up your savings rate a little bit every year. It’s easy because you can do it if and when your income rises.

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