This Is How You Build Wealth (7 Simple Steps)

How to build wealth is a question many of us have. Building wealth is totally doable! But, it may seem a bit tricky at first.

You’ll need time, effort, and discipline to make it work. So, don’t fall for those quick and too-good-to-be-true ways to get rich, they usually don’t lead to good things.

The great news is that there are some basic rules and strategies that can help anyone, no matter their income, start building and growing their wealth.

Even better, the sooner you start using these strategies, the better your chances of success.

Here, we’ll break down the essential principles for building wealth. These include setting goals and making a plan, getting more educated and skilled, managing your debts, saving and investing, protecting what you have, understanding taxes, and building a good credit history.

In this article, we’re going to dive into each of these principles and show you how they can help you reach your money goals.

1️⃣ Earn

The very first step in your wealth-building journey is to make money. It might sound obvious, but it’s the cornerstone of financial success, especially if you’re just beginning.

You’ve probably seen those charts showing how even a small amount of money, saved regularly and allowed to grow over time, can become a substantial sum. However, these charts often leave out a crucial question: how do you get that initial money to save?

There are essentially two main ways to make money: through earned income and passive income. Earned income is what you get from your job or career, while passive income comes from investments. Usually, you won’t have passive income until you’ve earned enough to start investing.

If you’re at the beginning of your career or thinking about a change, here are some questions to help you figure out where your earned income will come from:

What do you enjoy? Doing something you genuinely like and find meaningful can lead to a more successful and fulfilling career. In fact, a study found that over 90% of workers would trade some of their earnings for a more meaningful job.

What are you good at? Identify your strengths and talents and think about how you can turn them into a source of income.

What pays well? Explore careers that align with your interests and skills while meeting your financial expectations. The U.S. Bureau of Labor Statistics publishes an annual Occupational Outlook Handbook, which is a valuable resource for salary information and job growth prospects.

How do you get there? Find out what education, training, and experience are needed for your chosen career. The Occupational Outlook Handbook provides information on this as well.

Considering these factors can help you set the right course for your career. To maximize your earning potential, invest in your education and skills.

Pursuing advanced degrees, industry-specific certifications, and training programs can enhance your human capital, making you more valuable in the job market.

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2️⃣ Find Your Why

Okay, now that you’ve got a grip on earning money, the next big step is setting goals and making a plan. What do you want to do with your wealth?

Maybe retire comfortably, send your kids to college, get a second home, or support a cause you care about? Well, setting goals is your launchpad to wealth building. When you have a clear picture of what you want, you can map out the path to get there.

Start by nailing down your financial goals. Do you want to save for retirement, buy a house, or pay off those debts? Be specific about how much money you need for each goal and when you want to achieve it.

Once your goals are set, it’s time to create a plan. This could mean making a budget to save more cash, boosting your income through learning new skills or advancing in your job, or investing in things that’ll grow in value over time.

Your plan should be real, adaptable, and focused on the long term. Check in regularly on your progress and tweak your plan if needed to stay on course.

In a nutshell:

1. Figure out what you want to do with your wealth.
2. Set clear goals, like saving for a house or retirement.
3. Make a practical plan to reach those goals.
4. Adjust your plan as you go, keeping an eye on the long-term prize.

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3️⃣ Save

Here’s the deal: making money is just the first step. If you spend it all, you won’t build wealth. And, before you think about growing your wealth, make sure you’ve got money tucked away for things like bills and emergencies.

Many experts suggest having three to six months’ worth of income saved up for those rainy days.

To stash away more money for wealth-building, try these strategies:

Track your spending: Keep an eye on your expenses for at least a month. You can use a financial app or even a little notebook to do this. Write down every penny you spend, no matter how small. It’s surprising how much you can save just by being aware of where your money goes.

Find where you can cut back: Break down your spending into what you need and what you want. Things like food, housing, and clothing are needs.

Don’t forget essential expenses like health insurance, auto insurance (if you own a car), and life insurance if your family depends on your income. Most other expenses are likely just wants.

Set savings goals: Once you have a rough idea of how much you can save each month, make it a goal. This doesn’t mean you have to live like a hermit or be super frugal all the time. If you’re hitting your savings targets, treat yourself occasionally without going overboard. It’ll keep you motivated.

Automate your savings: Make saving a breeze by setting up automatic transfers. Arrange with your employer or bank to move a specific amount of each paycheck into a separate savings or investment account.

For retirement savings, have money automatically deducted from your pay and put into your employer’s 401(k) or a similar plan. Experts often recommend contributing enough to get your employer’s full match.

Look for high-yield savings: Get the most out of your savings by finding accounts with high interest rates and low fees. Certificates of deposit (CDs) can be a good option if you can lock up your money for a few months or years.

Remember, there’s a limit to how much you can cut expenses. If you’ve trimmed down as much as you can, focus on increasing your income.

One surefire way to save more is to set a spending budget. Cut back on unnecessary spending, and put that cash in the bank. This simple act can help you grow your wealth steadily.

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4️⃣ Invest

Alright, you’ve managed to save some money. Now, it’s time to make that money grow. While saving is essential, the interest rates on regular savings accounts are usually pretty low, and your money can lose value over time due to inflation. That’s where investing comes in.

For beginners, the golden rule of investing is diversification. In simple terms, it means spreading your money across different types of investments. The reason? Investments behave differently at different times.

For instance, if the stock market is down, bonds might be performing well, or if one stock is struggling, another might be thriving.

Mutual funds are a good starting point because they already provide diversification by investing in many different things. You’ll be even better diversified if you invest in both a stock fund and a bond fund (or even several of each) instead of just picking one.

Here’s a basic rule: the younger you are, the more risk you can take. Why? Because you have more time to recover from losses.

Types of Investments

Investments come in various flavors, each with its own level of risk and potential return. Generally, the safer an investment, the lower the potential gain, and vice versa.

If you’re new to the investment world, it’s smart to learn about your options. Start with the basics: stocks, bonds, and mutual funds.

Stocks represent ownership in a company. When you own stock, you have a small piece of that company. You benefit from any rise in its share price and may receive dividends. Stocks can be riskier than bonds but can vary widely in risk.

Bonds are like IOUs from companies or governments. When you buy a bond, the issuer promises to repay your money with interest after a set time.

Bonds are generally less risky than stocks but offer less potential for big gains. However, not all bonds are equally safe; rating agencies give them grades to reflect their risk.

Mutual funds are collections of securities, like stocks and bonds. When you invest in mutual funds, you’re buying a piece of the entire collection. Mutual funds also have varying levels of risk, depending on what they invest in.

Exchange-Traded Funds (ETFs) are similar to mutual funds, but they’re listed on stock exchanges and traded like stocks. There are ETFs that track major stock indexes (like the S&P 500), specific industries, or asset classes like bonds and real estate.

Before you dive into investing, make sure you’ve got enough savings and a financial cushion for unexpected emergencies. Investing is about the long game, and it’s crucial to have your financial basics covered before you start.

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5️⃣ Protect Your Wealth

You’ve put in the effort to earn and grow your money, and the last thing you want is to lose it all to an unexpected twist of fate. A fire could consume your home, a car accident might bring damage and medical bills, or a sudden tragedy could mean a loss of future income.

This is where insurance steps in to safeguard your wealth. It’s a crucial part of building your financial security because it shields you from life’s curveballs. Here’s how different types of insurance can help:

Home insurance: If a fire or other disaster damages your home, this insurance covers the cost of replacing your home and belongings.

Car insurance: After a car accident, this insurance helps you recover, covering damages and medical expenses.

Life insurance: In the unfortunate event of your untimely passing, it provides a financial safety net for your loved ones. They receive a death benefit.

Long-term disability insurance: This policy ensures you still have income if you become unable to work due to injury, illness, or other incapacitating circumstances.

Even if you’re young and healthy, don’t skip out on health insurance. The younger you are when you get it, the more cost-effective it tends to be.

For instance, buying life insurance at 25, when you’re single, can be much more affordable than waiting until you’re 10 years older with a partner, kids, and a mortgage to consider.

In a nutshell, insurance is your shield against the unexpected, making sure you don’t lose the wealth you’ve worked hard to build.

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6️⃣ Save on Taxes

Taxes might not be your favorite topic, but they can significantly affect your wealth-building journey. We’re all familiar with income and sales taxes as we earn and spend money, but there’s more to it.

Your investments and assets can also get taxed. So, it’s crucial to grasp your tax situation and come up with plans to cut those costs.

Here are some simple ways to lower your tax bill:

Invest in tax-advantaged accounts: These accounts, like 529 college savings plans, IRAs, and 401(k)s, offer tax perks. For example, putting money into a traditional IRA or 401(k) can reduce your taxable income and save you money on taxes for that year.

Plus, these accounts grow tax-deferred, so when you retire and may be in a lower tax bracket, the impact is less. With Roth IRAs or Roth 401(k)s, your investment gains are tax-free. You can grow and withdraw money from these accounts without paying taxes on the income or gains.

Timing and location of investments: Holding onto investments for more than a year can land you the lower long-term capital gains tax rate, which is usually lower than short-term capital gains and income tax rates.

Think about where you put your assets. Income-producing ones, like dividend-paying stocks or corporate bonds, are better in tax-advantaged accounts, such as a Roth IRA, where you won’t trigger taxes on these earnings.

Growth stocks that generate capital gains might do better in a taxable account.

Working with a tax pro, like an accountant or CPA, can help you navigate the tax world and create a strategy tailored to your financial situation. Understanding taxes and finding ways to cut them will help you build wealth effectively and hang on to more of your hard-earned money in the long run.

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7️⃣ Manage Debt and Credit Score

As you work on building your wealth, you’ll find times when taking on debt makes sense, like using a credit card for rewards, getting a mortgage for a home, or borrowing for investments. But be cautious – too much debt can slow your progress toward financial goals.

To handle debt wisely:

Debt-to-Income Ratio (DTI): Keep an eye on your debt-to-income ratio. It’s how much you owe compared to how much you earn. Make sure your debt payments fit within your budget.

High-Interest Debt: Focus on paying off high-interest debts, like credit card debt, as quickly as possible. The interest charges can add up fast.

Watch out for variable or adjustable interest rates, like with adjustable-rate mortgages or balloon payments. They can turn unmanageable if the economy or your circumstances change.

Dealing with too much debt can damage your credit score, and defaulting on debts may lead to personal bankruptcy.

Maintaining a Strong Credit Score

A good credit score is crucial for preserving your wealth over the long term. It means lower interest rates and better loan terms, saving you thousands in interest charges over time.

Here’s how to keep your credit score in great shape:

Timely Payments: Pay your bills on time. Your payment history heavily influences your credit score. Late payments, even a few days overdue, can hurt your score.

Credit Utilization: Keep your credit utilization low. It’s how much credit you use compared to what’s available. Aim to use less than 30% of your credit limit to maintain a good score.

Check Your Credit Report: Regularly review your credit report to ensure it’s accurate and up-to-date. Many services offer free credit reports. Errors can harm your score, so dispute any inaccuracies.

New Accounts: Be mindful of opening too many new credit accounts in a short time. Each application can slightly reduce your score. But don’t avoid credit entirely; you need a sufficient credit history.

By following these steps and practicing good credit habits, you can keep a strong credit score and maximize your borrowing power over the long haul. This sets you up for a more secure financial future.

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➤ How to Build Wealth FAQ

Pay off debt or invest?

If you’re facing high-interest debt, like hefty credit card balances, it generally makes more financial sense to prioritize paying off that debt before diving into investments. The reason is simple: credit cards often charge interest rates that exceed what you can expect to earn through investments.

Once you’ve successfully tackled your debt, consider reallocating the funds you were using for debt repayment into savings and investments. Additionally, whenever possible, aim to pay off your credit card balance in full each month to avoid future interest charges.

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Mutual funds minimum investment?

Different mutual fund companies have varying minimum initial investment requirements to get started, typically starting at around $500. Once you’ve made your initial investment, you can usually contribute smaller amounts.

Some mutual funds may waive their initial minimums if you commit to making regular monthly investments.

If you prefer more flexibility, you can also purchase mutual fund and exchange-traded fund (ETF) shares through a brokerage firm, and some of these firms don’t charge any fees for opening an account.

ETFs?

Exchange-Traded Funds (ETFs) function as investment pools, similar to mutual funds, but with a distinct feature. Unlike mutual funds, which are bought and sold through specific fund companies, ETF shares are traded on stock exchanges, much like individual stocks.

ETFs often offer lower fees compared to traditional mutual funds. You can buy and sell ETFs, along with stocks and bonds, through a brokerage firm, providing a diverse range of investment options. This flexibility can make ETFs a popular choice for many investors.

➤ Final Thoughts

In the world of finances, the road to building wealth isn’t paved with shortcuts or get-rich-quick schemes. Instead, it’s a proven path of consistent saving and smart investing. The key is to patiently let your money grow over time.

Starting small is perfectly fine; the crucial thing is to start, and ideally, start early. Begin by earning money and then wisely saving and investing it. Protect your hard-earned assets with the safety net of insurance and be mindful of your tax obligations.

Keep in mind, building wealth is not a quick destination; it’s a journey. Along the way, celebrate your achievements and stay resilient in the face of challenges and setbacks.

With perseverance, self-discipline, and a clear vision of your financial goals, you can attain lasting success and construct wealth for the long term.

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〝Don’t look for the needle in the haystack. Just buy the haystack.〞

— Jack Bogle