Many people dream of becoming rich but don't have any idea how to make it happen. There's no magic formula, but there are many steps you can take to gain an advantage.
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We asked our experts what the "secret" to getting rich is, and they came up with four different ideas that, if incorporated in your saving and investing strategies, could help you achieve the financial freedom you dream of.
When it comes to getting rich, protecting your money in hard times is just as important as raking in the dough in a booming market. Yet too many investors focus too little on controlling their risk.
There are many ways for investors to keep risk in check. They can focus on owning proven, tried-and-true companies for the long haul. They can use dollar-cost-averaging programs that invest a specific amount at specific intervals in order to smooth out their average cost over time. Investors should also review their holdings every year to ensure that they only own their best ideas. Another prudent idea is to institute a sell discipline to limit positions to a certain percentage of their portfolio to prevent one or two investments from having an outsize impact on their overall returns.
Regardless of which risk-control strategy an investor embraces, investors are best-served by focusing on investing proactively and consistently over the long haul. That means controlling greedy impulses to invest in second- and third-tier companies during bull markets, but it also means sticking with best-in-breed innovators through thick and thin during bear markets. A disciplined approach with a long-term investing horizon will dramatically reduce your risk of capital losses.
One of my favorite books about money is Thomas Stanley and William Danko's The Millionaire Next Door. One of the book's core messages is that the secret to being rich is not caring about looking rich.
Stanley and Danko's research showed that millionaires didn't often live in the largest houses in the most expensive neighborhoods, nor did they drive the most expensive cars on the market. In fact, the opposite was often true: They lived in modest homes located in safe yet modest neighborhoods and bought used cars that they would own for years.
For younger people in particular, this is a crucial lesson. Spending more than you can afford on status symbols that make you seem rich is one of the easiest ways to become poor and crushed by debt.
As Brian notes, most people who seek to get wealthy ignore the positive aspects of controlling your expenses. Being mindful of opportunities to boost your savings as you age can go a long way toward accelerating your portfolio growth and making your nest egg last longer once you reach retirement.
The most successful investors put a high value on saving whenever they can find spare money to set aside. That means not only living below your means, but also seeing any boost in income as an opportunity to save even more. One way you can exercise that discipline is to commit to setting aside the full amount of any annual raise you get from work toward your savings, essentially leaving your take-home pay unchanged. That might seem unnecessarily stingy, but if you've already demonstrated that you can live on your pre-raise amount, there's no need to spend more just because your paycheck got a little bigger -- and your savings will grow even faster as a result. Similarly, reinvesting your dividends into additional shares and regularly making additional contributions to various financial accounts will assist the compounding process, helping you get rich that much faster.
Unless you inherit a gold mine, you'll likely get rich the old-fashioned way: waiting for it. Warren Buffett, the best investor of all time and one of the world's richest men, generated 99% of his personal wealth after his 50th birthday. (He's currently 84 years old.) The fact is that wealth comes from the compounding power of letting money work for you over very long periods of time.
And it's hardly a steady race to the top. Someone who invested in the stock market in the 1970s would have watched their stocks rise and fall due to massive inflation, several wars, terrorist attacks, and dot-com booms and busts, not to mention the most recent global financial crisis. But had they started then with just $5,000 invested in the market and made absolutely no more contributions at all, they'd have more than $350,000 today -- 70 times their original investment. And it's all because they had the patience to see it through. The secret to getting rich is simply doing what most people can't: be patient.
The article What Is the Secret to Getting Rich? originally appeared on Fool.com.
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