Everyone has a different idea of what wealth is. You could ask 20-somethings what they think wealth is, and they might describe extravagant houses or a private jet. Someone older might mention lucrative investments. Everyone seems to have a different idea because “wealthy” is often used interchangeably with others like “rich” or “secure” or “well-off.” Here’s a breakdown of what “wealth” means from a financial standpoint and how you can build your own. One potentially smart move you can make as you seek to build wealth is to work with a financial advisor, who can help you make a plan.
What Is Wealth?
While we use “wealthy” to describe people with excess money, such as upper-class individuals, the term “wealth” in noun form doesn’t necessarily have that association. To explain, it quantifies what someone owns, but there is no threshold to surpass. So, when you hear someone say another person is rich because of x, y and z, the same can’t be said for “wealth.”
The word “wealth” means the number of assets a particular person, group or entity possesses. It only measures the market value of these assets after any debts have been subtracted. The crux of wealth is associated with gathering valuable or rare resources and saving them. It’s not used as cash flow or income.
How Is Wealth Measured?
Wealth is measured by a total calculation of the number of assets accumulated at any given time. This doesn’t include only income or cash on hand for an individual but it includes all valuable economic goods. A person’s income is essentially the increase in wealth over time. If you have a positive net income over time then your wealth will likely be increasing.
Net worth is a good representation of measuring wealth as it calculates the value of all real resources under a single person’s control. The higher a person’s net worth, the higher we tend to consider their wealth. To define who is wealthy we typically compare individual net worths against each other and the top percentages of the population are generally considered to be wealthy.
Wealth in the U.S.
Although wealth does not have a particular value associated with it, many people have ideas on what that looks like numerically. According to Schwab’s 2022 Modern Wealth Index Survey, Americans hold a personal belief that a “wealthy” individual needs about $2.2 million in his or her personal net worth, which is down from before the pandemic.
That’s significantly higher than the median U.S. household net worth where that number was up to as high as $2.6 million. The same survey found that it currently takes an average net worth of $774,000 in order to be financially comfortable.
The survey also asked participants two personal values-based questions. The first was whether personal values or affinities guide investment choices, with 73% confirming that it did. Then 69% of participants noted that they invest in companies aligning with their personal values. These numbers make it even more of a priority as the age of the participants decreases. This may have a huge impact on future wealth-building.
How to Build Wealth
Wealth isn’t an unattainable goal, and the boat hasn’t sailed just because you didn’t become a millionaire in your 20s. Building wealth is something that anyone at any age should strive to achieve. It will create a stronger financial backbone to rely on in case of emergencies, and it isn’t as difficult as you might expect. When you break down the process, it involves stockpiling funds and careful planning – something you should already consider doing.
1. Create a Financial Plan
There are several things that can eat away at your finances, from taxes to overspending. Creating a financial plan can help you build solutions that limit the amount of money you’re bleeding out on a regular basis. You should map out where you are now and where you want to be, whether that’s a short- or long-term point in the future. Then, create steps that will help you cross that distance.
The specific measures you need to take depend on your current financial situation. If you have lots of debt then it is a wise idea to cut or eliminate that debt – not because that automatically results in debt but because, with debt out of the way, you’ll have more income to invest and save. There are several ways to eliminate debt. You may have to plan which method you want to use: the snowball or the avalanche.
Saving money, like debt reduction, is an indirect but vital way to build wealth. That’s because money saved is money available to invest. Saving could include revising your weekly or monthly budget to ensure there are leftover funds you can put toward the future. Or, you may have to revisit your current tax strategies, such as deferring payment at the end of the year to avoid entering a higher tax bracket.
2. Save for the Future
Living in the moment is fun for a while, but it’s not sustainable. Even in your 20s, you should start considering how to save up for the future. Luckily, you don’t have to have it all in one place within a decade. You can slowly add to your retirement savings over time until you hit your goal. There are tools like retirement calculators that can help you estimate where you need to be and whether you’re on track, or you can use the recommended rule of thumb.
According to Fidelity, you should have the equivalent of one year’s salary saved by age 30. That jumps to three times that by age 40, six times by 50, eight times by 60 and 10 times by the age where you can collect your Social Security in full.
To achieve those savings, you can pursue investing as an option. There may be employer-sponsored retirement programs like 401(k)s that you can use to your advantage. These plans often offer a range of investment options that you can trade-in. Typically, they include mutual funds, individual stocks, bonds and exchange-traded funds (ETFs). Mutual funds and ETFs are popular since they offer relatively lower risks compared to some of the other options.
But, if you want an investment strategy that will pay off, you need to build a diversified portfolio that matches your risk tolerance. Investing in an array of asset classes will minimize your risk of loss.
3. Set Money Aside in an Emergency Fund
The last thing you’ll want is to have an unexpected emergency drain you of your savings. According to Charles Schwab, only an estimated 38% of Americans have an emergency fund in place. That leaves a large vulnerability in many Americans’ lives. However, if you open an emergency fund, you won’t have to fear or dip into your retirement savings.
This may be a vital option if you lose your job or have sudden damages to cover on your property. Usually, your emergency fund should have between three to six months’ worth of expenses held in it. You shouldn’t stash it in any account influenced by market risk, or that will penalize you for using the money. So, you may want to choose a savings account or a money market account.
4. Eliminate Debt
We mentioned debt, and that’s because it’s one of the biggest impediments to saving up money. When you are dealing with debt and growing interested on top of that, it can feel like you’ll never be free of it. However, the sooner you pay them off, the more time you’ll have to put any funds toward your savings.
You can eliminate your debt in a number of ways. For example, you can take a page from Dave Ramsey, a noted and published financial advisor, and implement the snowball method. In this system, you list your debts from smallest to largest, ignoring their interest rate. You then pay off the smallest debt while making minimum payments on the rest. Like this, you eat away at the debts until they’re gone.
However, that may not be the method that works for you. Consider where you can cut back on costs to help pay off that final chunk of debt or where you can find new opportunities for income.
5. Keep an Eye on Your Credit
As you’re paying off your debt, it will be important to keep an eye on your credit. Paying off the debts while overloading your credit card will only hurt you in the end. You only want to put the maximum on your credit that you can pay off completely at the end of the month. Lenders also prefer you stay below a certain usage level when using your credit.
This reminder may be important for those saving for milestones like a new house. If your goal depends on a positive credit history, you may want to explore all your available options to pay off your debt.
The Bottom Line
Your definition of wealth won’t always match everyone else’s, but at least be sure not to confuse wealth with a high income. How you achieve wealth depends on where you’re starting from and what you hope to gain at your finish line. That may mean focusing on eliminating your current debt or finding new ways to get extra cash every month. It’s also up to you to figure out how you’ll see that wealth growth over the years, whether it’s taking advantage of available plans like a 401(k) or finding a brokerage platform to invest on.
Tips on Saving for Retirement
- Consider working with a financial advisor on building your wealth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted 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 today.
- Use SmartAsset’s retirement calculator to see if your savings plan is on track at the rate you’re supposed to be going, or if you need to adjust your current plan.
- They say that by age 35, you should have at least one year’s worth of your income saved up for your retirement. Even still, you may not have much or anything stashed away yet. That’s alright! It’s better to start late than never at all. Get a look at what the average retirement savings amount is so you can get a comparative starting point.
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