Wealth creation can seem like a daunting subject at first. There's certainly no shortage of books and websites related to the topic. But when it comes to building wealth over the long term, there's really only a couple of simple things you need to do.
And the best part is, if you get these things right, you can't help but become rich.
Step 1 – Start saving early.
As soon as you can manage it, start putting away some of your earnings to be invested. It doesn't have to be much at first, but get the process started, and aim to increase your savings rate steadily over time. Increasing incremental savings is the first basic pillar in building wealth.
Step 2 – Invest simply.
Now, the methods of what to invest in and what's a sensible investment can be debated. But the simplest and easiest way to start investing is by purchasing shares (or 'units') in a low-cost index fund ETF, such as Vanguard Australian Shares Index Fund (ASX: VAS).
By keeping your investment costs as low as possible, you're keeping more of the market's return for yourself. The more you pay in fees, the less you get to keep.
And with this one purchase, you're buying a piece of 300 Aussie companies, including CSL Limited (ASX: CSL), BHP Billiton Limited (ASX: BHP), Woolworths Group Ltd (ASX: WOW) and Transurban Group (ASX: TCL). This means you own a diversified group of businesses in different sectors.
Step 3 – Purchase regularly and let time work its magic.
By tucking away savings and purchasing shares regularly, you'll smooth out the market volatility. When the market is low, you'll be purchasing more shares because they're cheaper, and when the market is high, your money won't stretch as far and you'll be purchasing fewer shares.
Every time you make a purchase, you are increasing your ownership in the largest 300 businesses on the ASX. As time goes on, the list of companies will change around, some will fail, and many in the index will be replaced with new companies which are becoming more relevant over time. It won't matter to you, because you'll simply own the largest companies of the day which will likely be the most profitable too. It doesn't get much easier than that.
Foolish takeaway
Keep it simple and focus on these basic principles. This is really all it takes to become rich. Save regularly and increase your ownership stake in a broad group of productive businesses over time. Reinvest your earnings and watch the magic of compounding at work.
