What Does it Take to Build Wealth?
Wealth creation is a common objective that many people share. It is the foundation for most things in life. The wealthier you are, the more successful you are considered and the more financially secure you can be. While wealth may not be the most important thing in life, it does affect everything that is. For instance, the level of education you get, the quality of healthcare you can afford, and the lifestyle you can adopt all depend on your wealth. Therefore, earning money and saving it for all your future use is significant for all people.
Unfortunately, not everybody is born to money or has their family’s wealth to rely on. Most people struggle throughout life trying to secure themselves and their families financially. Irrespective of all the hard work and intent, many even fail. This is primarily due to the lack of adequate knowledge and expertise in personal finance. Earning an income is only one part of the process. What you do with your income is what really contributes to creating wealth. Therefore, it is essential to know the right wealth-building strategies and implement them at a suitable time. You can also consult with a professional financial advisor who can advise you on which strategies to adopt to build wealth and secure your future.
If you are struggling financially, here are some things you need to know about how to build wealth:
3 steps to building wealth
Briefly, there are only three steps to building wealth. However, there are a number of minute details that you must pay attention to within these three broad steps. Keep reading to know what they are:
1. Maximize your income sources
The first step to building wealth is evidently earning money. The more money you make, the more funds you have to fulfill your needs, save for the future, and secure yourself and your family members. However, it is rare to start your career with a high salary. Most people take time to build up their wealth over the years. But it is essential to do this proactively. This can be done by selecting a suitable career that aligns with your interests and, at the same time, offers the opportunity to make money. Additionally, it is also essential to keep studying or learning new skills as and when required. This can help you speed up the journey and gain promotions at the right time.
Moreover, while you may have an income flowing in from a job or a business, it is also important to look for other income sources. This can be done through part-time jobs, rental income, investment returns, etc. If you have some free time, consider taking on a part-time job to earn extra. This extra money can be solely utilized for saving for the future or for fulfilling specific goals, such as buying a car, saving towards a home, a child’s education, health insurance premiums, etc. Investing in real estate with the intention of creating rental property is also a great step. However, it is crucial to plan well. You would need a substantial amount to buy property. Unless you are able to earn that back through appreciation and rental income, you may be in for a loss. A financial advisor can help you with this decision.
2. Save consistently
While you try to find ways to earn money, it is also essential to use that money wisely. The purpose of earning more is not always to spend more. While a higher income will help you improve your lifestyle, it is vital to save this money for any future contingencies. One of the greatest benefits of saving is the insulation you get from emergencies. In the event of a contingency, such as losing your job, suffering from a health concern, etc., your savings can come to your rescue and offer you security. Savings must be a part of your routine, consistently throughout your lifetime. This can be done by creating a budget and allocating a fixed percentage to your savings. You can start with as little as 5% of your income per month and gradually increase to 20% to 30% as you see fit. However, make sure that you do so without breaks. Continuity is an excellent way to build a habit and be financially disciplined, no matter what. If you struggle with being regular, consider automating your savings. Most banks offer this option. Moreover, with automation, you eliminate errors or procrastination. This method also ensures that you save your money each month and then spend from the remaining amount, not the other way around.
3. Invest your savings
Investing your money is one of the most essential and, more often than not, ignored wealth-building strategies. A significant reason for this is the lack of proper knowledge and experience in investing. However, investing your money can be very helpful in fulfilling diverse goals, beating inflation, and building wealth. The market may seem like unchartered territory, but it may benefit you to start investing from a young age. Investments, such as mutual funds and others, can offer you the benefit of the power of compounding. This helps you multiply your returns over a long period as your earnings, along with the principal interest, are reinvested back into the market, thereby maximizing your earnings. Further, instruments like stocks can offer high returns over the long term. These also carry high risk, which is why it is crucial to invest in them with a long investment horizon in mind to spread out risk over time. You can also invest in Exchange-Traded Funds (ETFs), Real Estate Investment Trusts (REITs), bonds, certificates of deposits, etc., depending on your risk appetite and goals. However, no matter what you choose, make sure to diversify your portfolio well. Diversification refers to not putting all your eggs in one basket and distributing your wealth across different asset classes and sectors. This ensures that you do not depend on a sole investment to make money and instead use multiple tools to create wealth.
If you are new to investment and do not know where to begin, you can start with an employer-sponsored 401k retirement account. This will likely be the first investment that comes your way, as most employers provide it to their employees. A 401k account is a tax-advantaged account that will help you save tax and, at the same time, build wealth for the future. You can select multiple investment options within the 401k per your risk appetite and goals. You can also apply for a loan against your 401k if you need immediate funds in an emergency. Most employers are willing to help you pick investments and understand the pros and cons of each. However, if you still require further help, you can hire a financial advisor, too.
What are the keys to building wealth through investments?
While these three steps mentioned above are the fundamental steps to building wealth, there are some other details that you must pay attention to as well. Some of these have been discussed below:
1. Make a financial plan
Making a solid financial plan is one of the first steps to building wealth. A financial plan is your guide to creating wealth. Without a plan, you may be saving and investing aimlessly and may not always get the financial growth you desire. A financial plan can comprise a budget that helps you understand your income, expenses, essential and non-essential needs, savings and investment budget, and more. A lot of people do not precisely know their net income after paying taxes. Several others also lack information on their monthly earnings, especially if they have multiple sources. So, start by jotting down your monthly household income. If you and your spouse are both earning and filing your taxes jointly, it will help you to calculate your joint income and streamline your expenses better. This should include income earned from a job or business, rental income, inheritance, the sale of land or other assets, investments, etc. Once you have a clear idea of your total income, jot down all your expenses. This will help you identify your essential and non-essential expenses. Once you have these two heads, you will get a clear idea of your lifestyle needs and where and how you can lower your expenses and save more.
Next, evaluate your financial goals. For instance, person A may not have children and could only be saving for a house and a secure retirement. Contrarily, person B may have children and own a home and could solely be saving for their children’s future expenses and retirement. Your goals will determine the instruments you should be investing in. Every investment instrument serves a distinct purpose. A 529 education savings account can be suitable for your children’s higher education expenses. On the other hand, if you are preparing for retirement, you may need to invest in a 401k and an Individual Retirement Account (IRA), along with an annuity plan, long-term care insurance, etc.
2. Avoid debt
In order to ensure that you make the most of your income and use it to save and invest, you must keep your debt to a minimum. It can be hard to completely eliminate debt as many goals require you to depend on it. The most common example of this is buying a home. A house needs a large sum of lump sum funds that can be hard to arrange. Therefore, a loan may be the only option here. Having said that, there are several other areas where taking a loan can be avoided. Goals like buying a car, traveling, education, etc., can be avoided with proper planning, investment, and saving. For example, instead of a student loan, you can invest from an early age to ensure that your child has the necessary funds they need when they grow up. This will help them start their adult lives without the burden of debt. Likewise, auto loans can be avoided by saving and investing in short- to mid-term investments instead. You can also find deals that may offer discounts in exchange for your old car.
If you have debt, try to prioritize settling it at the earliest. Debt adds high-interest payments to your list of expenses that eat into your savings and wealth. Therefore, aim to pay it off as soon as you can. It is also essential to control your overall debt. If you already have one loan, avoid the urge to apply for another one before you settle the first. Credit card dues are also a part of high-interest debt that can be avoided. Wealth-building strategies, such as limiting the use of your credit card unless absolutely necessary, are critical to ensure financial security. Credit cards are very convenient, but they also offer you a false sense of financial adequacy that can be misleading. If you must use credit cards, consider using them only for advantages like cash back, air miles, discounts, and more.
3. Do not undermine tax
Tax is a mandatory expense that is impossible to eliminate from your cash outflows completely. However, you can reduce it or wisely plan it to lower your tax liabilities. You can use tax-advantaged accounts, like the 401k or the IRA. You can also use strategies like tax loss harvesting to use your investment losses in a year to offset your taxes. Additionally, lifetime gift exemptions, holding on to your investments in favor of long-term capital gains tax, etc., can help you with tax planning. You can also use Roth or traditional accounts according to your suitability. The former is taxed when you contribute your money but offers tax-free withdrawals in retirement, whereas the latter is taxed in retirement but offers a tax break on your contributions.
Knowing how to build wealth is not all that confusing, and you can do so in the simplest of ways as long as you are consistent. Creating wealth is still the same as it was decades ago – earn more, save more, and invest more. Try to stick to the basics. While you do so, also ensure that you are focused on your goals and saving and investing appropriately to meet your goals. In addition to this, do not forget about liabilities, such as taxes and debt. These can slow your growth and be a cause of stress. However, with proper planning, you will be able to overcome these hurdles.
Further, if you find it hard to follow these steps, you can always contact a financial advisor and get advice on the right wealth-building strategies for your individual needs, income, risk appetite, and future goals. Use WiserAdvisor’s free advisor match service to find 1-3 highly qualified and vetted financial advisors that are suited to meet your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool can help connect you with advisors that match your financial needs.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.