Generating wealth is an important milestone in everyone’s life. However, not everyone is able to achieve this goal following the same path. You could either be fortunate to be born into a wealthy family, or you may have to build wealth on your own by following a careful financial planning strategy. While you may find a wide range of books written by people from all walks of life on how you can create wealth and live a luxurious life, it still remains a challenging proposition to successfully grow wealth for most people.
However, building wealth does not need to be so complicated. In fact, it can be simple and achievable if you set your mind to achieve your wealth building goals.
- The primary factors involved in creating wealth include being focused, having a plan and the determination to stick to it.
- The second important factor is to attain the right guidance. This involves choosing a financial advisor who understands you and is effective in guiding you along the way, so that you can increase your net worth and achieve the goals that you desire.
Why is it Important to Build Wealth?
As stated above, not everyone is lucky to be born into wealth. Additionally, financial literacy and financial education is not readily accessible to all. Despite financial planning being one of the most crucial aspects of an individual’s life, it is quite rare that a school or college teaches you to plan your expenditures. Additionally, it was found that household debt had risen to $14.3 trillion by the first three months of 2020 – a value that was $1.6 trillion higher than the record set in the middle of the financial crisis. According to a study done in October 2020, nearly 80% of Americans are caught up in a chain of debt. Many American households also still do not seem to be budgeting their expenses as well.
Many people also do not know to what degree taxes affect their earnings, even though they file their taxes every year. The relevance of taxes – income tax, estate tax, inheritance tax, and capital gains tax – is lost on a considerable amount of investors. There is often a miscalculation or an expectation gone wrong in estimating investment returns, leaving people worried about having enough money in the long-term.
When you embark on the journey to create wealth, you open yourself up to the various components of financial planning. This includes:
- Saving optimally to build an emergency fund.
- Saving for specific goals like retirement, a child’s higher education, etc.
- Investing your money in the right instruments to increase the value of your funds.
- Planning your taxes and using it effectively to your advantage.
Building wealth is important for the following reasons:
1. It helps you to stay afloat in dire circumstances: When you build wealth, you always have enough to counter situations of unpredictability. Short term changes like a job loss, the fluctuating market, or the falling economy have little effect on your personal lifestyle. You will always have sufficient funds to last you till the tables turn.
2. It reduces your financial anxiety: Knowing that you have a significant amount of money gives you peace of mind. It lowers your inhibitions and stress. You are better prepared for what life throws at you. Moreover, you and your loved ones are able to live a secure life.
3. It allows you to take risks: With an adequate pool of funds, you are better equipped to take risks in life. Quitting your job to pursue your passion, setting up your own business, or travelling the world – all become options you can consider.
4. It enables you to fulfil your goals: Having sufficient funds allows you to purchase assets like a home, a car, real estate, expensive possessions, etc., without coming in the way of your routine expenses. You no longer feel the need to depend on credit cards or personal loans.
5. It reduces your dependency on debt: Debt comes with a cost. While opting for a loan is a common practice, it comes with the liability of having to pay it back with hefty interests. Credit cards, too, can set you back with their high interest rates and penalties for late payments. All of this becomes less of a burden when you start building your wealth.
6. It lets you leave a legacy for your kids: Building a sizable corpus not only benefits you but also allows your children to lead a comfortable life. The legacy you leave behind can be used by your future generations. This ensures their financial security.
10 Ways to Build Wealth
Here are 10 effective ways to build wealth:
1. Create a budget
This is perhaps the most simple strategy that you can follow to build your funds. When you create a budget, you ensure that you do not overspend anywhere. Everything has a clearly demarcated limit. For instance, you can set aside a fixed amount for groceries, rent, car or home maintenance, etc. Make sure to not exceed this figure unless there is a pressing need. The remaining money can be carefully saved and invested for the future. This will ensure that you do not settle for less when it comes to the more important aspects of financial planning. Your money will continue to grow in the funds you invest in, and your current lifestyle will not be compromised.
It also helps to live a modest lifestyle. If you go by the example of some of the most successful and rich people in the world, you will see that they live a very disciplined life. Their expenses are a bare minimum, and they focus on creating wealth rather than spending money. Billionaire Warren Buffett still lives in a 57 year old house, even when he has the financial ability to buy a new mansion every year. Facebook’s owner and founder, Mark Zuckerberg, still drives a modest car while he has a ‘bottomless bank account’. It is said Apple’s Steve Jobs owned only black turtle-neck tees so he didn’t have to choose what to wear the next day or to an event. He found that activity to be frivolous and a waste of time. He is said to have told the media, ‘there are more important things to occupy the brain with’.
While creating wealth, it is advised to stay determined and to spend primarily on things of utility rather than on things of luxury. This can be done by learning to differentiate between your needs and wants.
2. Set up a SMART financial goal
The financial goals you set today will determine your future to a great extent. Hence, you must be careful while setting goals. Unrealistic goals may lead to frustration, and you may want to quit midway and settle for less out of disappointment. Therefore, aim to set SMART goals: Specific, Measurable, Achievable, Realistic, and Time-based.
Here’s what this means:
- Specific: Set a goal that is specific and not vague. For example, wanting to be rich is not a specific goal as the word rich can mean different things to different people. So, instead of aiming to be rich, try to fix a sum in your mind and then aim to reach this figure. This will be your ‘what’. Next, fix a ‘when’. This involves setting a time frame within which you wish to achieve your goal. For instance, a goal to save up to $1,000,000 in 10 years. The next thing to understand is your ‘why’. Why do you want to achieve this goal? Is it to pay off a debt, or do you wish to buy a house from the money you save? The ‘why’ will help you stay focused on the goal and not use the money elsewhere.
- Measurable: A goal should be measurable so you can easily gauge if you are on the right track or not. Since liquid cash is not the only form of saving money or building wealth, it can sometimes be hard to measure your growth. Monitoring your market returns can be one way to measure your goal. You can also study the increase in the price of a property if your investment is in real estate.
- Achievable: A goal should be achievable. Some people think that setting an unachievable goal will help them strive for more. While this may be true, it can also create a lack of motivation when you find yourself struggling. It may be advised to set genuine goals that can be achieved. But since everyone works differently, it is important to set goals according to what works for your lifestyle. If setting high goals motivates you to work harder, you may choose to do so. However, if you are likely to get bogged down by disappointments, then setting an attainable goal should be your priority.
- Realistic: The goal you set should be realistic with respect to your current financial situation and its ability to grow in the future. Presuming that you can save up a fortune in a matter of a few months may not be a sensible thing to do. Just the way that a goal needs to be achievable, it also needs to be realistic. For instance, it is highly unlikely that you can double your money within the year. If you come across such a claim, know that it is a scam.
However, wanting to own a home in another 10 years is a realistic goal, as is wanting to finance your child’s college education in another 2-3 years. A realistic financial goal can even be as simple and short-term as aiming to buy yourself a pair of the new shoes or a new designer dress within the following month.
- Time-based: Time-based goals are not limited to fixing a date on your calendar, but also monitoring its performance over time. For instance, if your goal is to save up to $1,000,000 in 10 years, you should also set targets for each year. So, by the end of the first year, you should have at least $10,000, and by the fifth year, your pool should be close to $50,000. Keeping a check on your progress can also help you modify your strategy if you are falling short.
3. Start investing as early as possible
Investing is a great way to increase your money’s worth in the long run. Storing your money in the bank offers benefits such as liquidity and easy accessibility. However, your money stays stagnant, and there is no growth. The interest rate on a bank savings account is also quite low. When you compare this with the rising costs of goods and services, your money loses its value. However, thanks to the power of compounding, investing lets you grow your money with time. The rewards help you beat inflation and create wealth that holds the test of time. In fact, Albert Einstein called the power of compounding the eighth wonder of the world.
In order to benefit from compounding, you need to choose the right products. For example, you can buy life insurance to ensure that your loved ones are secure in your absence. You can also consider endowment plans, unit-linked insurance plans, or life annuity plans that have an investment component along with protection for life. Long term investment instruments help you take advantage of the power of compounding. Moreover, long term capital gains tax is a lot more favourable than short term capital gains tax.
4. Use tax-advantaged accounts to save and grow money
Apart from life insurance plans, you can also consider investing in a tax-efficient account such as a Roth Individual Retirement Account (Roth IRA) and Roth 401(k) account for retirement, or a 529 education savings plan if you are looking to save up for a child’s higher education. These accounts allow you to save for specific goals, grow your funds in a safe place and take advantage of tax benefits. Here are some characteristics of these accounts:
- Roth IRA: A Roth IRA is a tax advantaged retirement account that lets your money grow tax free. The qualified withdrawals that you make upon maturity are tax free. The income tax is charged on the contributions and not the withdrawals. Hence, if you think that your taxes will be higher in retirement, you can consider this option to invest and save a considerable portion of your money in retirement. For 2021, the annual income limit is $140,000 of the modified adjusted gross income (MAGI) for single taxpayers filing individually and $208,000 of the modified adjusted gross income (MAGI) for married taxpayers filing jointly. The contribution limit stands at $6,000 or $7,000 if you are 50 or older.
- Roth 401(k) account: This account is an employer sponsored retirement plan. In simple words, a Roth 401(k) account gives you the features and benefits of a Roth IRA and a traditional 401(k) account. The contributions as well as earnings can be withdrawn tax free. For 2021, the yearly contribution limit for a Roth 401(k) is set at $19,500. If you are 50 or older, you can also contribute an additional sum of $6,500.
- 529 education savings plan: The funds from a 529 savings account can be used to cover the costs of post-secondary as well as K-12 education for your child. Your money grows in a tax-deferred manner, and the withdrawals are not taxed as long as they are used for qualified educational expenses such as tuition fees, buying books or course-related equipment, etc. The contribution limit for this account varies from state to state. However, as per federal law, the account’s balance should not be more than the expected cost of education.
5. Harvest your luck
It is likely that you will have many opportunities to generate income in your life, such as through a year-end bonus, a raise in your salary with a new job, a promotion, through company shares, a gift from a family member, an inherited estate, etc. All of these opportunities must become a part of your wealth rather than a chance to spend. While it is advised to enjoy your life and not restrict yourself or curb your happiness, it is also vital to keep your eye on the bigger picture. Any extra income that you earn can be an opportunity to invest. For instance, if you get a Christmas bonus, you can use this money to invest in stocks. Since you don’t want to lose money, but grow it, invest in large growing companies that have strong balance sheets with great management teams . If you have a pending debt liability, you can also use the extra money to pay off your debt. Every dollar accounts for your wealth in the long run. So, the more prudent you are, the wealthier you are likely to be.
6. Aim to be debt-free
Debt can be your wealth’s biggest enemy. High interest debt can make it difficult to balance out the rewards from your investments. Therefore, your aim should be to stay debt free for as long as possible. You can start by clearing your student loans. A student loan is perhaps the first loan that most people encounter in their lives. Additionally, since it is a loan with a high interest, it has the potential to obstruct your financial growth early on in life. Hence, it is advisable to pay off your student loans as early as possible. This will also improve your credit score so that you may get a better interest deal on your next loan. A point to keep in mind is that unless absolutely necessary, it always helps to stay away from debt. Instead, invest in short term investments for any short term goals that you may have.
7. Challenge the status-quo
Bill Gates, the founder of Microsoft, is known to wake up at 7:00 am every day. He spends an hour exercising and keeps aside an hour for learning. It is believed that he reads up to 50 books in a year. Jeff Bezos, the founder of Amazon, too leads a disciplined life. He wakes up at 6:45 am. Their discipline and focus is said to contribute to their success, as it helps them be more efficient with their time. Having a fixed schedule helps you economize time, leaving you with extra hours to work on building your wealth. This can include taking up a part time job to earn some extra money, acquiring a new skill to improve your employability, understanding the inner workings of the market and knowing when and where to invest your money, and much more. These little steps can help build wealth over time. It may be advised to also never settle in your comfort zone and to always strive to improve your net worth, no matter where you stand in life. Working hard and most importantly, working smart, can be a great approach to be wealthy.
8. Create income sources
It is harder to be wealthy if the only source of your income is from your salary. While your primary job should be used to cover essential expenses like groceries, rent, gas, etc., you can consider a second job for investing purposes. Freelancing, having a side business, or taking up a part time job can act as your passive income. This money can be contributed to tax advantaged accounts, invested in stocks, or be used to pay off debt. You can also consider renting out a property (if you have one), driving an Uber or lending your car to taxi services, getting into affiliate marketing, running your own blog, or even teaching a hobby to the children in your neighbourhood. However, it is essential to keep in mind that these side ventures should not come in the way of your primary goals. It can be challenging to work full time and have an additional hustle. Any additional income source that you create should contribute to your earnings along with your happiness. If it ultimately hampers your peace of mind and adds to your stress, it may not be worth it.
9. Invest in yourself
While investing your money in the right instruments is crucial to creating wealth, it is also vital to invest in yourself. Give yourself time to grow and focus on the things that facilitate personal development. Warren Buffett once said that the best certification he holds is on public speaking. This helped him approach the world better, and hence gain the popularity that he has today. You too, can look at courses that can help you in your line of work. This could be on public speaking, writing, improving body language, etc. You can also consider taking up a short degree or certification at a college if it can add value to your resume.
Investing in yourself is not only limited to improving your knowledge. Reward yourself from time to time if that contributes to your personal growth. However, be careful to not go overboard and spend all of your money. Remember, the idea is to invest in yourself. When you invest, you do so to earn a return. So, the things you choose should bring in a reward for you in the end. If they do not, they are likely to be an expense and not an investment.
10. Talk to several financial professionals
It may be challenging to keep yourself acquainted with every savings and investment option out there. This can lead to bad decisions that may bring in low profits. However, talking to a financial professional can help you understand the various instruments at your disposal. Additionally, you can talk to your peers, seniors at your office, or take advice from your family members who you think are doing well financially. The idea is not to mimic their strategy but to learn about the various ways to invest or save your money. The more people you talk to, the wider your exposure. Each person’s choices are dictated by unique factors, such as age, income, risk tolerance, needs and wants, etc. What suits another person may not suit you.
Additionally, you can consult a professional financial advisor for tips on investing too. Hiring a learned professional can be instrumental to your monetary growth. A financial advisor can be your partner in your financial journey, assisting you every step of the way on where to invest and how to improve your net worth. He or she can suggest the most viable investment options based on your risk appetite, future goals, income, age, and family composition. It is vital to pick a financial advisor who aligns with your needs and understands what you are looking for. An open and honest communication with your financial advisor can be a precursor to your success.
To sum it up
If there were a formula to build wealth, it would be to earn more, spend less, invest well, and save better. However, despite knowing the basics of financial planning, it can still be a challenge to build the wealth you desire. Following the 10 points mentioned above can help you in your journey to reach the preferred financial place in your life. Additionally, help and guidance from a financial advisor along the way can help you stay focused and follow the right approach suited to your unique requirements. A qualified and well experienced financial advisor can help you pick out tax advantaged savings accounts, change your investment strategy as per your current life stage, reduce your tax liability, rebalance your portfolio, and do a lot more towards wealth creation, growth and protection. Financial advisors not only focus on your future goals but also guide you to achieve your short term goals.