Building wealth is an essential financial goal for most people, and if it’s not currently, it should be.
Building wealth, in theory, is a simple concept. It’s about making decisions that will allow you to build on the money you earn over time. If you don’t focus on building wealth, you’re only ever going to be able to save the money you earn. On the other hand, by utilizing concepts like compounding interest, you grow your earnings to accumulate and grow over time.
Along the way, there are decisions to make regarding the best ways to invest, how to save more money, how to make more money, and more. Here are a few basic tips to keep in mind about managing your finances and growing your net worth.
Secure Greater Income
Securing greater income is the most difficult tip on this list, but it’s the simplest step to building wealth. You have to be earning enough to cover your expenses, save money, and pay off debt, and you need to make enough to invest on top of that.
If your current job doesn’t offer the income you need, you may want to rethink your strategy. For starters, you could try requesting a raise or negotiating on salary with your current employer.
Alternatively, you could try securing a second source of income. This may involve looking for another job or perhaps adding a side hustle to bring in more cash each month.
Start Investing for Your Retirement
Saving for retirement should be a top financial goal, yet when people are younger, they often underestimate its importance. When you build wealth, you’re doing so for a financially secure future in retirement. It is best to start early when saving for retirement.
There are different ways to start investing for your retirement, and one of the simplest is to participate in a retirement program through your employer. Oftentimes, employees can devote a portion of their paychecks to automatically deposit into a retirement account. This automates the retirement savings process which can help put you on the track. Some employers will even match an employee’s retirement contributions
Aside from relying on an employer plan, there are various ways to manually invest in your retirement through specialized accounts. The first step is to save money and reduce expenses in order to deposit extra savings into a retirement-focused account. Start doing this early in your career. If you are able to build a retirement fund early on, it will grow at a greater rate down the road.
Save Money in General
Before you can focus on a specific strategy to build wealth, you need to have a clear view of your earnings as well as what you’re spending each month. You should sit down and map out income versus your expenses. This should all help you figure out how to save money.
Then, once you’ve taken an honest look at where your money is going, you’ll have a better idea of where you can cut expenses. Once you cut expenses, you can put more money toward your savings and wealth-building objectives.
As a side note, it is important to put an emergency fund in place before you invest. If you have an emergency fund and something does come up, such as a lay off at work, you can use that money instead of dipping into your retirement.
The recommended amount for an emergency fund is at least three months of living expenses. As you’re looking at your budget and how much you spend each month, you’ll have a better idea of what this might be. If you have a family, the recommendation is having at least six months of living expenses.
Reduce Your Debt and Liabilities
Having high amounts of debt is one of the primary obstacles to building wealth. It’s difficult to set money aside and invest if you’re drowning in debt and interest payments. You should work on a strategy to pay off any outstanding debt as soon as possible.
The Avalanche Method: The avalanche method requires you to pay off your debt starting with the highest interest rate and gradually moving down to the lowest. You make minimum payments on all accounts, but you pay more on the highest-interest debt each month. Then, once you pay that debt off, you repeat the procedure with the next high-interest account.
The Snowball Method: With this debt repayment method, you start by devoting extra cash to the lowest-balance account while making the minimum payments on all other accounts. When that low-balance account is paid, you repeat the procedure with the next low-balance account. Paying off a small loan or credit card balance can be a motivational victory.
Debt Consolidation: Consolidating debt usually involves taking out a personal loan to pay off multiple debts. This is a common use for personal loans, which are known as debt consolidation loans in this case. You make payments on the remaining loan under a new interest rate and payment schedule. Ideally, this new loan has a lower interest rate compared to the previous debts which would save money over repayment.
Explore Passive Income Opportunities
Once you’ve done the steps above, you can start thinking about ways to build wealth by adding to your revenue streams. Aside from your full-time job and side hustles, passive income is the other side of the wealth building that can lead to greater opportunities. There are various ways to secure passive income.
Owning real estate is a great example for building wealth passively. By renting out properties, owners can collect monthly rent payments without much manual input. Alternatively, investing money is another form of traditional passive income. If you can put your money into an investment account that grows with decent yields, then your money can be put to work over time. There are a couple different examples of investment accounts. A retirement account that earns interest over time is a perfect example of passive income, but there are other more immediate opportunities.
For instance, another way to earn passive income is to invest in P2P consumer lending. P2P lending platforms allow individuals to invest in other individual consumers looking to borrower a loan or line of credit. An investor can select from different opportunities of varying risks and returns. Due to shorter loan repayment terms, these investment vehicles should yield short-term returns compared to a retirement account.
While the tips above are useful to build wealth, keep in mind that building wealth is a long-term process. There are no shortcuts. It’s not something that happens overnight.
Building your net worth involves strategic planning and patience. Start with earning more, saving more, and paying off debt, eventually you will be in a position to make a significant move with your money.
You can also shift your priorities depending on your current age and financial situation. For example, if you’re in your 30s retirement savings might be more important, while someone in their 20s might focus on reducing debt and setting aside an emergency fund.
This guest blog post was prepared by Andrew Rombach, who is a Content Associate for Lendedu – a website that helps consumers, small business owners, investors, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat Colby.