If you haven’t acquired any assets yet, the thought of building wealth may feel overwhelming. This beginner’s guide will show you exactly how to get started.
Most of the wealthy people you can name started with something. They had $10,000, $100,000, or even a million and turned it into immense, lasting wealth that means their great-grandchildren won’t need to work.
Their achievements still mean something, but the simple truth is that many of the people who talk about “bootstrapping” had the boots to strap. Their advice doesn’t account for people who didn’t have the base investment, connections, and education required to become millionaires or billionaires.
A new study published at the end of the summer found that the median American savings account boasts a balance of $4,830.
The rules that made the rich wealthy don’t apply. But that doesn’t mean building wealth is impossible. Instead, the rest of us learn how to build wealth by following a different set of rules.
Do you have the average American savings account with $5,000 in it? Or does $5,000 still look like a lot of money? We’ll show you the rules for achieving financial wealth even if you don’t have a pair of boots.
Building wealth is a long-term goal that requires careful planning, persistence, and discipline. Whether you are just starting out in your career or looking to take your finances to the next level, there are steps you can take to build wealth and secure your financial future.
Here is a guide to building wealth when you are just getting started:
Define Your Financial Goals: The first step in building wealth is to define your financial goals. This will help you create a roadmap for your financial future. Determine what you want to achieve and by when. Do you want to buy a house, pay off debt, or save for retirement? Having a clear idea of your financial goals will help you focus your efforts and make smarter financial decisions.
Create a Budget: The next step in building wealth is to create a budget. This will help you track your expenses and ensure that you are living within your means. Start by listing your monthly income and expenses. Identify areas where you can cut back on expenses and redirect those funds towards your financial goals.
Build an Emergency Fund: One of the keys to building wealth is to have an emergency fund. This will help you weather unexpected expenses such as a car repair or medical bill. Aim to save at least three to six months of living expenses in an easily accessible savings account.
Pay Off High-Interest Debt: High-interest debt such as credit card debt can be a major obstacle to building wealth. Make it a priority to pay off high-interest debt as quickly as possible. Consider transferring balances to a card with a lower interest rate or consolidating debt with a personal loan.
Start Investing: Investing is a key component of building wealth. Start by investing in a retirement account such as a 401(k) or IRA. Take advantage of employer matching contributions if available. Consider investing in low-cost index funds or exchange-traded funds (ETFs) for long-term growth.
Diversify Your Investments: Diversification is important in investing. Spread your investments across different asset classes such as stocks, bonds, and real estate. This will help reduce risk and maximize returns.
Stay the Course: Building wealth is a long-term process. Stay focused on your goals and stick to your financial plan. Avoid making impulsive decisions based on short-term market fluctuations. Remember, investing is a marathon, not a sprint.
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Use a Budget to Find More Money
Before you build wealth, you need to get rid of the two things in personal finance that hold you back: waste and debt.
To grow your money to a state where a budget doesn’t matter, you need to start with a budget.
We recommend starting with a workable budget and then using it to tackle debt. By freeing up wasted money, you’ll find it easier to apply to credit cards and other high-interest debts that hold you back.
Stop Wasting Money
Every one has essential monthly expenses: rent/mortgage, bills, food, insurance, transport, etc.
Create a budget that allows for all those expenses and subtract it from your take home salary. How much money is left?
Now, how much of that do you still have at the end of the month?
If your answer is little to none, then it’s time to find out where your money went. Spend a week saving all your receipts. At the weekend, look them over. Where did you spend unnecessary money? Did you buy an extra coffee because you could? Did you impulse buy at the grocery store?
Stop wasting money by setting out a budget for the rest of your money. Create a budget that makes sense for you to keep your spending in control. As you gain greater control of your finances, start restricting those areas to see how much you can save.
There’s no one-size-fits-all budget, but a few tried-and-tested methods stand out. If you’ve never tried to budget before, or you’ve never succeeded, try one of these budget tips:
- 50/30/20 budgeting
- Envelope budgeting
- Zero-sum budgeting
Each uses a style that works for some but not for others. Play around to find a budget that you can stick to without feeling more stressed at the end of the month.
Pay Off Debts
When you’ve got your finances balanced, start using the excess parts of your budget to pay off your high-interest debts.
Those who already have cash say debt is a helpful tool for building wealth. For most of us, debt is what stands in the way of building wealth.
Start by making more than the minimum payments but not so much more than you turn to your credit cards when things get tight. Find areas of your budget where you can cut back and apply it to your expensive debt. Commit to taking down debt until you’ve minimized or eliminated it.
Don’t be afraid to spend months or years on this project. The benefits of eliminating debt are freedom, happiness, and good credit. All of these open up far more options when you’re building wealth.
If you want to learn about ways that debt makes money, wait until you’ve eliminated your current deficit and started to snowball your wealth.
3 Ways to Take Your Extra Money to the Bank
By creating freedom from debt and missed opportunities, you poise yourself to become wealthy.
One of the most popular philosophies for building wealth today is the “snowball effect.” A snowball only requires a few flakes before it begins to pick up more and more, gaining momentum as it goes.
We like the snowball money effect because anyone can use it. Whether you can save $500 or $25 a month, it applies.
The snowball wealth effect is a way of building momentum and getting rich slowly while maximizing on compounded interest. It’s a method used by professionally rich people like Warren Buffett.
To make the most of your new savings, you want to start investing in instruments best able to grow it.
Here are three investment instruments for those who want to grow their snowballs:
Retirement Accounts
If your employer offers a retirement plan and you’re not already enrolled, get in touch with HR. Employer retirement plans are ideal because they often match contributions and come with low fees.
Already enrolled? Consider increasing your monthly contribution or funneling any bonuses into it.
Remember, the best time to save for retirement was yesterday because when you save longer, you benefit more from compounded interest and grow your wealth.
ETFs and Investment Platforms
Investing has never been easier than it is today. Earlier in history, ground level investors could get involved by investing in penny stocks. Today’s robo-investors allow you to invest $5 contributions and enjoy the same returns as big investors.
Investment platforms open up ETFs to all investors and manage them on your behalf for a small fee. Skip the savings account and invest in the stock market. Just be sure you keep an eye on the tax implications of market investments.
Mutual Funds
Mutual funds are a security that offers simplicity for new investors. All you do is invest a minimum fund – between $500 and $5,000 – and wait.
If you don’t have a small nest egg to put in the fund, don’t worry. Companies like Dreyfus and Transamerica are willing to waive the minimum if you agree to an automatic monthly investment.
Building Wealth Is Possible for Everyone
For the average American, building wealth isn’t about striking gold or making it big. Wealth comes from committing to sound personal finance practices that open up money and opportunities.
It doesn’t matter if you have $50 or $500, you can build wealth that will last the rest of your life. More importantly, committing to good financial habits helps you manage your wealth so you can enjoy it longer.
Ready to learn more about investing your money to grow your wealth? Read more about investing and wealth here.