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Key takeaways:
- Real wealth is not built overnight; here are 12 ways you can start the process.
- It costs nothing to take several of these steps, but the payback from good planning will be worth it.
- Building wealth requires smart planning and smart investing; this is where a financial professional can add real value.
Raise your hand if you want to consider yourself wealthy!
The term ‘wealth’ means many different things to people. For some, it means living in a big house and driving a fancy car. For others, it might mean being able to pay off credit card balances each month or sending a child or grandchild to college. Regardless of how you define it, let’s look at how you can build a nest egg.
But first, avoid the temptation to confuse ‘wealthy’ with ‘rich.’ A rich person has a lot of money at a single moment in time, while a wealthy person is someone who has money that can last over time. Likewise, the process of successfully building wealth isn’t instantaneous; we’ve all heard the stories of people who won the lottery only to end up going broke. Building wealth is a deliberate, step-by-step process you go through over time to give yourself a confident financial future.
Here’s how you can start building wealth potential.
1. Educate yourself about money
By reading articles like this, you’re already on your way. You don’t need to become a financial genius, but it’s important to understand how things like compound interest works, why home equity contributes to your net worth, or the tax tradeoffs of a traditional versus a Roth IRA. When you understand basic principles, you’re well on your way to building wealth.
2. Identify your goals
Everyone has their own motivations for building wealth and achieving financial freedom. Maybe you want to buy your first home, start a business, or enjoy a comfortable retirement. All are valid targets. The process of building wealth will be more meaningful when achieving that wealth allows you to do certain things in life. And it doesn’t all have to be a ‘someday’ kind of target. When you set out to build your personal wealth, think in terms of having both short-term and long-term goals.
3. Make a budget and keep it
Some people roll their eyes at the concept but having and sticking with a budget is a time-tested way to build wealth. Think of your budget as a roadmap for your wealth journey. It points you in the right direction, keeps you on course, and even redirects you when you miss your turn. A good budget also helps make saving a priority, which is one of the major principles of building wealth.
4. Establish an emergency fund
While the thought of setting aside three to six months of expenses for an emergency fund may sound daunting, the approach keeps you from using expensive credit card debt when you need to pay for the unexpected. The key to a smart emergency savings fund? Park your money in a high-yield savings account where it earns interest but is still accessible if you need it.
5. Automate your savings
Several good things happen when you make saving automatic. For one, you pay yourself first, which prioritizes your savings goals and wealth-building efforts. Second, you remove the temptation to spend everything you make, allowing you to break free from living paycheck to paycheck. Talk to your financial institution about setting up automatic transfers.
6. Pay down debt
While having some debt, like a mortgage, can actually help you build wealth, other debt like credit card balances create obstacles in reaching your wealth goals. When you pay down debt, you reduce the amount of money you pay for interest, which leaves you more money to save. You also improve your credit rating, which can lower the amount you pay for things like insurance. It is possible to save and pay down debt at the same time. And once you are debt-free, you’re left with even more money to save.
7. Maximize your retirement contributions
For many, retirement savings are a big part of their overall wealth goals. You benefit several ways by contributing the most you can towards your retirement savings. First, when you put money in a tax-advantaged account like a 401(k) or traditional IRA, you reduce your taxable income along with the amount of tax you must pay each year. If your employer offers matching funds for your 401(k), take full advantage of it—otherwise, you’re leaving free money on the table. When you’re 50 years or older, you can make extra catch-up contributions ; it’s like turbo-charging your retirement fund.
8. Hire a financial professional
Remember when we talked about the fact that building wealth is a deliberate, step-by-step process? A good financial professional will help guide you every step of the way and can help you design a plan that fits your goals and timeline; they’ll work with you to ensure that you stay on track. When your goal is to build wealth, you’ll quickly discover that the investment you make in hiring a financial professional becomes one of the smartest you can make.
9. Invest in a diverse portfolio
Even if it promises big gains, avoid the temptation to put too many of your investment eggs in one basket. A diverse portfolio seeks to protect you against the market’s inevitable ups and downs, preserving your wealth over time. Diversify your portfolio with an asset allocation that includes stocks, bonds, indexed mutual funds, and even good old-fashioned high-yield savings such as certificate accounts.
Another way to diversify is to set up multiple streams of income. For example, you could invest in a rental property that provides extra income and the opportunity for asset appreciation, or you could pick up a side hustle to make extra money on the side.
10. Buy a house
Buying a house is one of the most common ways Americans build wealth. Homeownership gives you the opportunity to build equity, which is the difference between what the house is worth and what you owe on the mortgage. Over time, the increased equity and your home’s appreciation contributes to your overall wealth. Renters, on the other hand, put their money towards other peoples’ wealth.
U.S. data confirms the fact that people who own homes have a higher net worth. A survey from the Federal Reserve1 found that in 2019, the median net worth of a homeowner was $255,000, while renters had a net worth of just $6,300. This means that the median net worth of a homeowner was more than 40 times higher than that of someone who rents.
11. Protect your assets with insurance
As you build wealth, don’t forget to protect it. Homeowners insurance protects the investment you’ve made in your home, liability insurance protects your assets in case you accidentally harm someone, and umbrella insurance provides additional coverage over and above your other insurance policies. Check in regularly with your insurance broker to make sure that as your wealth grows, you’re still protected.
12. Grow your career (and income)
There are several ways you can increase income throughout your career. While a college degree doesn’t always directly relate to higher salary, the median income of someone with a college degree in 2019 was more than double that of someone with a high school diploma—$95,700 versus $45,800 per year.2 Just make sure to balance the extra earnings power of a college degree against the cost of student debt.
Some people find that they can increase their salary more by switching jobs than by staying with the same employer over time. It’s always a good idea to keep an eye on the market to make sure you’re being paid a competitive salary. If you want to just add extra income along the way, consider a side hustle to add extra income. You could even consider starting a business. The number one reason people started a business in 20223 was because they wanted to earn more money.
Final thoughts
You’ve probably heard this a million times—the sooner you start saving, the faster your money can grow. But it’s never too late to start, and there are many other things you can do along the way to build wealth. So, set your goals and get started!
