Building wealth is an integral step in many major life goals: purchasing a home, limiting financial stress, supporting loved ones, enjoying retirement, the list goes on and on. But building wealth isn’t always straightforward. What if you’re early in your career and just barely managing to make ends meet? What if you’re nearing retirement but don’t feel you’ve saved enough? No matter your age or stage of life, here are five ways to help you build wealth now.
Create a Budget
Everyone, no matter their age or income, can benefit from a budget. If the idea of a budget feels limiting, it’s time to change your perspective. A well-crafted budget isn’t about deprivation; it’s about prioritization. Since priorities are personal, budgets should be, too. One person may prioritize traveling far above an expensive car. Another person may prioritize a nice car they can drive every day over spending money on a few weeks of traveling each year. Neither person is right or wrong, they simply have different priorities, and their budgets should reflect that.
Pay Off High Interest Debt
Trying to build wealth when you have high interest debt, such as credit card debt, may be like trying to fill a cracked bowl with water. Let’s say you purchase a $1,000 laptop with a credit card and make a minimum payment of $25 each month. If you have a 19% interest rate on your card, it would take about 48 months to pay off that single purchase and you could end up paying $431.32 in interest on your $1,000 purchase. Any time you make anything less than the full monthly payment on a credit card balance you’re paying more in interest, which eats into your wealth.
What about other kinds of debt? In this case, the answer is more complicated. For example, if you have leftover money each month and must choose between putting it toward your mortgage or investing it, paying off debt may actually keep you from building wealth. This is because depending on the interest rate on your mortgage and the returns you expect from your investments, investing may earn you more than you would save from paying off your mortgage early.
Start a Side Hustle
A side hustle is a great way to build extra income no matter your age. If you’re younger, you could consider options such as picking up serving shifts at night, driving for a rideshare app or selling products on Etsy. The great thing about a side gig when you’re young is that even small amounts of extra income can add up quickly if you invest it, since you have one of the most powerful tools of investing on your side: time.
If you’re older, you may not have the benefit of time, but you do have more experience. Depending on your field, you may be able to put that experience to work in a consulting or freelance side gig. The benefit of more experience is that you have a better chance of earning higher paying gigs, which provides you with more opportunities to invest and build your wealth.
Build an Emergency Fund
Like a budget, an emergency fund is essential regardless of age or income. If a financial emergency would force you to rely on credit cards, you would pay more in interest (as discussed above). If you’ve built enough wealth to handle a financial emergency but would need to take money out of investment accounts or other less liquid investments, you’re also hurting your long-term wealth. Withdrawing funds from accounts unexpectedly could lead to higher capital gains tax, a less tax-efficient portfolio, fees for accessing the money (in the case of retirement accounts) and losing out on potential future returns. Having an emergency fund that’s easily accessible, such as in a savings or money market account, is a great way to keep from spending more, which is key to building wealth.
Finally, a key to building wealth is investing wisely. What does “wisely” entail? First, it involves investing for the long-term. Get rich quick schemes may sound appealing, but the annoying truth is that if it sounds too good to be true, it probably is.
The good news is that thanks to the magic of compounding, investing for the long term can still provide strong returns. Let’s say you invest $10,000 when you’re 35 and each month you add $50 to that. If you had an annual rate of return of 7%, by the time you’re 65 you would have invested a total of $28,000 but your ending balance would be $134,595. No matter how old you are, the sooner you begin investing, the sooner you can begin reaping the rewards of compounding.
Another pillar of responsible investing is diversification. By spreading your portfolio out among different companies, industries, geographic regions, market caps and asset classes, you can help limit risk without negatively impacting returns.
The Final Word
You may have noticed that three of the five ways to build wealth focus more on protecting your existing wealth than creating more. While investing and additional income obviously help build wealth, if you’re not managing your existing assets responsibly, building wealth becomes infinitely more difficult.
Once you’ve built your nest egg, you may want to consider a professional financial advisor to assist with investing and financial planning in more detail. Contact us: We can help you with your wealth management goals.
Debt Repayment Calculator: https://www.creditkarma.com/calculators/credit-cards/debt-repaymentInvestment Calculator: https://www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1000000&cstartingprinciplev=10000&cyearsv=30&cinterestratev=7&ccompound=annually&ccontributeamountv=50&cadditionat1=end&ciadditionat1=monthly&printit=0&x=0&y=0
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