Building wealth can seem like an impossible goal, especially if you’re just getting started. In the early stages, both your income and investment returns may be small, and that makes it easy to get discouraged. However, it’s important to remember that building wealth takes time. Rarely do get-rich-quick schemes actually work. But the good news is that once you have a plan in place, you won’t have to think about it quite so much. In fact, your plan will likely be more successful if you don’t think about it, because your emotions will be less likely to cloud your judgment.
If you’re looking for smart ways to build your wealth, a financial advisor could help you create a financial plan for your goals.
7 Steps to Help You Build Wealth
Wealth building focuses on making money, saving money and investing money. Here are five steps to help you build wealth:
1. Set Up a Budget
Setting up a budget is one of the most important parts of building wealth. You might think a budget isn’t necessary if your finances are simple or you’re a high earner. However, one survey revealed that 48% of Americans earning over $100,000 live paycheck to paycheck. One reason for this could be lifestyle inflation, where people increase their spending as their income increases.
Setting up a budget can help you keep lifestyle inflation under control. There are several different types of budgets, but the reason for doing this step first is to know where you stand. Once you find the problem areas (if any), you can start addressing them in the next step.
2. Reduce Expenses
Reducing expenses may be necessary depending on what you find when setting up your budget. Take a look at your budget and see if there are areas that need attention. Many popular budgeting apps will sync with your financial accounts and recommend how much you should be spending based on your income. Hence, they make it easy to see which areas need attention. Reducing your expenses can leave you with more money at the end of the month which you can put toward building wealth.
3. Increase Your Income
If you don’t have enough room to cut expenses, the other way to build wealth is by increasing your income. At a certain point, this is necessary for almost anyone who wants to build wealth because there is only so much that you can reduce your expenses. Eventually, you will have to earn more if you want to build wealth more quickly.
The common ways to increase your income include:
- Asking for a promotion
- Learning a new skill or earning a certification that demands higher pay
- Picking up a second job or side hustle
- Moving to an industry with higher pay
- Starting a business
These items are roughly in the order of how much of a time commitment they are. In the case of moving to a new industry, that may not take a lot of extra time once you settle into a new job, but it could take a few years to learn new knowledge and skills needed to make the transition. No two people will take the same path toward increasing their income, but doing so is one of the most powerful ways to build wealth.
4. Start Saving and Investing
By now, you should have some money left over at the end of every month. But because your goal is wealth building, you want to save and invest that money instead of spending it. That doesn’t mean you can’t splurge every now and then, but saving and investing should be the primary goal here. There are many different strategies when it comes to saving and investing, but firstly, you should be sure you have a large enough emergency fund to cover a job loss or big expense. Six months is the common recommendation.
After that, you should contribute to your employer’s retirement plan, at least up to the amount of the match. The next step is to open an IRA. The Roth IRA has great tax advantages because you don’t have to pay taxes on growth. That makes them ideal for those who are young and just getting started.
If you don’t like your employer’s investment options, or they have high fees, you can work on maxing your IRA or Roth IRA next. Ultimately, you should keep contributing to both of these plans until you maximize your contributions because they both have tax advantages. If you are able to maximize your contributions to both, you can then consider contributing to a taxable brokerage account.
Types of Investments
Investments come with varying levels of risk and potential return. Generally, the higher the risk, the higher the potential return – and conversely, safer investments often yield lower returns.
If you’re new to investing, and especially if you’re planning on putting together your own investment portfolio, it’s helpful to get familiar with the different types of investments. While there are many unique and complex investment options, most people start with the basics: stocks, bonds and mutual funds.
- Stocks represent shares of ownership in a company. By purchasing stock, you own a small portion of the business and can benefit from increases in the stock’s value or dividends paid out by the company. Stocks tend to carry higher risk than bonds, but the level of risk varies depending on the company.
- Bonds are essentially loans you provide to a corporation or government. When you buy a bond, the issuer agrees to repay your investment with interest over a set period. Bonds are generally considered safer than stocks but also offer lower potential returns. However, bond risk can vary; credit rating agencies assign grades to indicate risk levels.
- Mutual funds pool money from multiple investors to buy a diversified portfolio of securities, such as stocks, bonds, or a mix of both. Buying shares of a mutual fund gives you access to a broad range of assets, with the fund’s risk level depending on its underlying investments.
- Exchange-traded funds (ETFs) are similar to mutual funds in that they hold a portfolio of securities, but ETFs trade on stock exchanges like individual stocks. ETFs may track stock indexes, specific sectors, or asset classes such as bonds or real estate, offering a range of investment opportunities.
5. Stick to Your Plan
As mentioned in the introduction, successfully building wealth takes time, to the order of many years. One way to make that happen is by automating everything. You can make contributions to your retirement plan at work automatically via payroll deduction. In addition, you can automate contributions to an IRA and brokerage account.
Remember that the goal is not to save every last penny. Your budget determines how much you will save for retirement – if you have money left over, that money is yours to spend however you choose. The important thing is to set realistic, achievable savings goals that you can repeat month after month, year after year.
6. Minimize Taxes
Taxes can significantly impact your wealth-building efforts, often more than people realize. While income and sales taxes affect everyone, investments and assets can also be taxed, which is why understanding your tax exposure and developing tax-minimizing strategies is crucial.
One effective approach is investing in tax-advantaged accounts. Options like 529 college savings plans, IRAs and 401(k) plans offer substantial tax benefits.
For example, contributions to a traditional IRA or 401(k) are tax-deductible, reducing your taxable income for the year. Additionally, these accounts grow tax-deferred, meaning taxes are postponed until retirement when you may be in a lower tax bracket. Roth IRAs and Roth 401(k)s also offer tax advantages: while contributions are not tax-deductible, all investment gains are tax-free, allowing for tax-exempt growth and withdrawals in retirement.
Another way to minimize taxes is to strategically manage the timing and location of your investments. Holding investments for over a year enables you to qualify for the lower long-term capital gains tax rate, which is generally more favorable than short-term capital gains or regular income tax rates.
7. Manage Your Debt and Credit
As you work toward building wealth, you may take on debt to support purchases or investments. For example, you might use credit cards to earn rewards, apply for a mortgage to buy a home, or take out an auto loan. Additionally, you may consider personal loans for business ventures or other investment opportunities.
However, managing debt carefully is essential; excessive debt can slow your progress toward financial goals. Monitor your debt-to-income (DTI) ratio to ensure debt payments are within your budget. Prioritize paying down high-interest debts, like credit card balances, as quickly as possible to minimize interest costs.
It’s also important to be cautious with variable or adjustable-rate loans, such as adjustable-rate mortgages (ARMs) or loans with balloon payments, as economic or personal changes can quickly make these debts harder to manage.
Bottom Line
Building wealth can seem impossible, especially if you are just getting started. Still, saving and investing money every month, however small the amounts, will put you on the right path. You can always increase your contributions later, either by reducing expenses, increasing income or both. Remember that with investing, the longer your time horizon, the more room your money has to grow. Automate your plan and stick to it over the course of your career, and you will be able to build significant wealth over the years.
Tips for Building Wealth
- Consider working with a financial advisor to create a financial plan for your wealth managing needs. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free budget calculator to see how much you are spending every month compared to people in your city.
- See how much your investments will grow at your current pace with SmartAsset’s free investment calculator. If you aren’t where you need to be, consider increasing your contributions.
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