Building money is a topic that may elicit intense discussion, foster bizarre get-rich-quick scams, or compel individuals to engage in activities they would never consider otherwise. But is the phrase “three simple methods to generating money” deceptive? The short answer is no! In the Richest Man in Babylon, George Clason mentions the secrets of investing in yourself. He's also quick to point out that that luck helps those who work hard. Clason sees luck as a good opportunity presented to a worker to make money.

Making Money

This may appear to be a simple step, but it's the most important for people who are just getting started. You’ve certainly seen graphs that demonstrate how a little amount of money saved on a daily basis - and allowed to compound over time - may eventually develop into a sizable sum. However, those graphs never address the fundamental question: How do you earn money to save in the first place?

There are two fundamental methods to make money: earned income and passive income. Earned money is earned through your job, whereas passive income is derived from investments. You might not have any passive income until you have enough money to start investing.

Saving Money

Making money will not help you grow wealth if you squander it all. Consider the following steps to put more money away for wealth creation:

-Keep a spending log for at least a month. You might use a financial software package to assist you with this, but a simple, pocket-sized notepad would suffice. Record all of your expenses, no matter how minor; many individuals are startled to find where all of their money goes.

-Find and remove the excess fat. Divide your spending into two categories: Essentials and Wants. The obvious necessities are food, shelter and clothes. Add health insurance premiums to that list, as well as vehicle insurance if you support others. Many other expenses will be purely speculative. However, take a close look at both categories. While you may definitely remove some demands entirely, you may be spending more than you should on some necessities, such as clothes.

-Set a savings target. Once you’ve determined how much money you can save each month, strive to keep to it. This does not imply that you must always live like a miser or be thrifty. If you’re on track to accomplish your savings objectives, feel free to treat yourself and indulge (in moderation) once in a while. You’ll feel better and be more determined to continue on your path.

Investing Money

Once you’ve saved some money, the next step is to invest it so that it can grow.

However, before you begin investing, make sure you have enough money set aside to deal with any unforeseen financial crises. A frequent guideline is to save enough money in a liquid account to cover at least three to six months’ worth of expenses (such as a bank savings account or a money market fund).

The risk and possible return on investments vary. As a general rule, the higher the prospective return, the lower the potential return, and vice versa.

If you aren’t already aware of the many sorts of investments, it’s a good idea to spend some time learning about them. While there are other exotic investments available, most people will prefer to start with the fundamentals: stocks, bonds and mutual funds.

Diversification is perhaps the most crucial investing idea for novices (or any investor, for that matter). Simply put, your objective should be to diversify your money over a variety of investments. This is due to the fact that investments perform differently at various periods. Bonds, for example, may provide strong returns if the stock market is on a losing trend. Alternatively, if Stock A is in a slump, Stock B may be on a tear.

Because mutual funds invest in a wide range of securities, they provide some built-in diversification. And if you invest in both a stock fund and a bond fund (or multiple stock funds and several bond funds) - rather than simply one or the other - you will obtain better diversification.

This article is part of our Business Coaching blog series. At Dataczar we talk to a lot of small businesses. We’ve found a few books that we keep recommending time and again. To better help our customers, we’ve added a Reading List for Small Businesses to our website. We encourage every small business owner to read and keep these timeless business books on their office shelf.

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