Building wealth is a goal that requires time, effort, and discipline. Don’t get sucked in by get-rich-quick schemes and too-good-to-be-true opportunities that can send you down the wrong path.
Although is seems like an overwhelming task, anyone can accomplish it through helpful principles and strategies. The earlier you begin putting these into practice, the better your chances are of building and preserving wealth over the long term.
Outlined below are several key principles for building wealth, including setting goals and developing a plan, investing in education and skills, managing debt, saving and investing, protecting your assets, understanding the impact of taxes, and building a strong credit history. This is your time to learn how you can achieve your financial goals.
1. Earn Money
The first thing you need to do is start making 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. But those charts never answer this basic question: How do you get money to save in the first place?
There are two basic ways of making money: through earned income or passive income. 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:
- What do you enjoy? 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. In fact, one study found that more than nine out of 10 workers said they would trade a percentage of their lifetime earnings for greater meaning at work.1
- What are you good at? Look at what you do well and how you can use those talents to earn a living.
- What will pay well? Look at careers using what you enjoy and do well that will meet your financial expectations. One good source of salary information, as well as the growth prospects for various fields, is the annual Occupational Outlook Handbook published by the U.S. Bureau of Labor Statistics.2
- How do you get there? Learn about the education, training, and experience requirements needed to pursue your chosen career options. The Occupational Outlook Handbook has information on this, too.
Taking these considerations into account can help put you on the right path.
2. Set Goals and Develop a Plan
What will you use your wealth for? Do you want to fund your retirement—maybe even an early retirement? Pay for your kids to go to college? Buy a second home? Donate your wealth to charity? Setting goals is an essential first step in building wealth. When you have a clear vision of what you want to achieve, you can create a plan that will help you get there.
Start by defining your financial goals, such as saving for retirement, buying a home, or paying off debt. Be specific about the amount of money you need to achieve each goal and the time frame in which you hope to achieve it.
Once you have set your goals, you should develop a plan for achieving them. This may involve creating a budget to help you save more money, increasing your income through education or career advancement, or investing in assets that will appreciate in value over time. Your plan should be realistic, flexible, and focused on the long term. Regularly review your progress and make adjustments as needed to keep yourself on track.
3. Save Money
Simply making money won’t help you build wealth if you end up spending it all. Moreover, if you don’t have enough money saved up for your near-term obligations (like bills, rent, or mortgage) or for an emergency, then you should prioritize saving enough above all else. Many experts recommend having several months’ (e.g., three to six) worth of income saved up for such situations.
To set more money aside for building wealth, consider these moves:
- Track your spending for at least a month. 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.
- Find the fat and trim it. Break down your expenditures into needs and wants. 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.
- Set a savings goal. Once you have a reasonable idea of how much money you can set aside each month, try to stick to it. This doesn’t mean that you have to live like a miser or be frugal all the time. If you’re meeting your savings goals, feel free to reward yourself and splurge (an appropriate amount) once in a while. You’ll feel better and be motivated to stay on course.
- Put saving on automatic. One easy way to save a set amount each month is to arrange with your employer or bank to automatically transfer a certain portion of every paycheck into a separate savings or investment account. Similarly, you can save for retirement by having money automatically withdrawn from your pay and put into your employer’s 401(k) or similar plan. Financial planners usually advise contributing at least enough to get your employer’s full matching contribution.
- Find high-yield savings. Maximize the payoff of your savings by shopping for the savings accounts that have the highest interest rates and lowest fees. Certificates of deposit (CDs) can be a good savings option if you can afford to lock up that money for several months or years.
Keep this in mind, too: You can only cut so much in costs. If your costs are already down to the bone, then you should look into ways to increase your income.
Once you’ve managed to set aside some money, the next step is investing it so that it will grow. Money put in savings is important, but the interest rates credited on deposit accounts tend to be very low, and your cash risks losing purchasing power over time to inflation.
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. That’s because investments perform differently at different times. 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.
As another general rule, the younger you are, the more risk you can afford to take, because you’ll have more years to make up for any losses. Reach out to a financial professional for further guidance on investing strategies.
5. Protect Your Assets
You’ve worked hard to earn your money and grow your wealth. The worst thing could be to lose it all due to a sudden tragedy or unforeseen event. A fire can burn down your house, a car accident can cause damage and medical bills, or a premature death can mean a loss of future income.
Insurance is a key piece of building your wealth because it provides protection from these and other hazards. Home insurance will replace your home and belongings in case of a fire, auto insurance will make you whole after a car accident, and life insurance will pay your beneficiaries a death benefit in the case of an untimely death. Long-term disability insurance is another type of policy that will replace your income if you become injured, ill, or otherwise incapacitated and unable to continue working. Even young, healthy people should consider insurance products since they tend to become more expensive as you grow older. That means even if you are 25 years old and single, buying life insurance then could be a lot more cost-effective than when you are 10 years older with a partner, children, and mortgage.
6. Minimize the Impact of Taxes
Taxes are an often-overlooked drag on your wealth-building efforts. Of course, we are all subject to income tax and sales tax as we earn and spend money, but our investments and assets can also be taxed. That’s why it is essential to understand your tax exposures and develop strategies to minimize their impact.
Reach out to a financial professional for guidance on minimizing the impact of taxes on your financial situation.
7. Manage Debt and Build Credit
As you build wealth, you’ll start to find it worthwhile to take on debt to fund various purchases or investments. You may pay for things with a credit card to earn points or rewards. You might apply for a mortgage for a home or second home, a home equity loan for home improvements, or an auto loan to purchase a car. Maybe you’ll want to take out a personal loan to help start a business or invest in someone else’s.
However, it’s important to manage your debt carefully; taking on too much debt could impede your progress toward your wealth-building goals. To manage debt, be mindful of your debt-to-income (DTI) ratio and make sure that your debt payments are manageable within your budget. You should also aim to pay off high-interest debt, such as credit card debt, as quickly as possible to avoid paying excessive interest charges. Be wary of variable or adjustable interest rate products like adjustable-rate mortgages (ARMs), or those with balloon payments, as changes to the economy or your personal circumstances can quickly cause those debts to become unmanageable.
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. It’s fine to start small. The important thing is to start, and to start early. Earn money and then save and invest it smartly. Protect your assets with insurance, and minimize your tax exposure.
Remember, building wealth is a journey, not a destination. Celebrate your successes along the way, and don’t get discouraged by setbacks or obstacles. With patience, discipline, and a clear vision of your goals, you can achieve financial success and build wealth over the long term.
Consider reaching out to a financial professional about building wealth and your financial journey.
1-https://hbr.org/2018/11/9-out-of-10-people-are-willing-to-earn-less-money-to-do-more-meaningful-work, November 6, 2018.
2-https://www.bls.gov/ooh/, September 2022.
3-https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/, February 23, 2023.
Investment Advisory Services offered through Trek Financial LLC., an (SEC) Registered Investment Advisor.
Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 23-562