Building wealth might look easy, but it’s not. Amassing an impressive net worth requires a great deal of planning, patience and sacrifice.
The good news is, you can create a brighter financial future, no matter where you currently stand.
“I think the biggest barrier for most people is that they need to fix their mindset,” said Carla Adams, CFP, founder and financial advisor at Ametrine Wealth.
To do this, she said you’ll need to focus on your finances instead of keeping up with the Joneses.
“I’ve worked as a financial advisor for over 15 years and many of my millionaire clients have fairly ordinary salaries, but they are frugal, they save and they invest,” she said.
Ready to get to work? Here’s seven financial issues you need to fix before you can start building wealth.
Poor Budgeting Habits
“So many people have no idea how much they spend,” said Adams. “It’s also so incredibly easy to increase your budget right in line with your income increases.”
You might think you have money to spare, but she said spending can easily catch up with you.
“I liken a budget to a closet — no matter how big you make it, you’ll surprise yourself how quickly you can fill it,” she said. “I think it’s so difficult these days to exercise discipline given social media and all of the FOMO we experience.”
Adams advised taking a hard look at your spending habits.
“Tracking your spending using an account aggregator like Mint.com is incredibly helpful,” she said. “See where your money is going each month and find ways to cut back.”
However, she said it’s still important to try to find room in your budget for at least one expense that might be unnecessary, but brings you a lot of joy.
“Going too bare bones on your budget will set you up for failure when it quickly becomes too hard to stick to,” she said.
No Emergency Fund or Retirement Savings
If you don’t have an emergency fund, Adams said you’ll likely be forced to use high-interest-rate credit cards in the event of an emergency, which can lead to a cycle of debt. Beyond that, she said not having adequate retirement savings is a huge obstacle for building wealth.
“So many people, even high earners, are living paycheck to paycheck,” she said. “So many people tell themselves that there’s plenty of time to save later in life, but the sooner you start, the more quickly you can build wealth through the power of compounding returns.”
To get your emergency fund or retirement savings underway, she recommended starting small.
“Set aside a small portion of your income each month, ideally by automatically transferring money into another account — a savings account and/or your 401k,” she said. “While you work on slimming down your budget, try to increase the percentage of your monthly savings over time until you are saving at least 10% of your income.”
“High debt is devasting to building wealth, especially ‘bad debt,’ like credit cards that charge very high interest rates and cause your balances to balloon,” Adams said. “The best way to attack debt is the ‘snowball method.'”
Using this approach, she said you’ll apply any extra money you can spare to your lowest debt balance.
“Once that debt is paid off, put all of the money you were allocating each month paying off that debt towards your next smallest debt balance,” she said. “You will gain momentum quickly and feel great as you knock down your loans one by one.”
Low Credit Score
“One of the keys to long-term financial success is a strong credit history — reflected by high credit scores,” said Rod Griffin, senior director of public education and advocacy at Experian. “A long, positive credit history unlocks financial opportunity and opens doors to achieving financial goals throughout a person’s lifetime.”
He said your credit score dictates activities like buying a car or home, approval for loans with lower interest rates and qualifying for affordable insurance rates and credit cards with the best terms.
“A strong credit report and a resulting good credit score makes accessing these opportunities easier,” he said. “A lower credit score makes it more difficult and more expensive.”
He said there are many steps you can take to help improve your credit score.
“For those working to increase their scores, there are a few basic steps they should take first like creating and following a budget, paying all their bills on time and in full and paying off any remaining debt,” he said.
He recommended checking your credit reports and credit scores regularly to stay informed on items in your credit history and your overall credit health. Additionally, he said people can find a number of tools to help consumers build credit and improve their credit scores.
For example, Experian Boost is a tool that allows you to build your credit score by reporting on-time payments that don’t usually factor into credit scores. This includes rent, utility bills, your cell phone bill and more.
Another effective tool is Revolv by CreditStrong, which allows you to get the benefits of on-time credit payments without the risk of debt. It’s set up like a savings account, where you choose the amount you want to deposit each month. Each on-time deposit gets reported as an on-time credit payment to all three major credit bureaus. At the end of your chosen term length, you get all your deposited funds back, plus interest — and often a higher credit score.
Lack of Investment Knowledge
“Investing without adequate knowledge can result in poor decisions and potential financial losses,” said Michael Simon, CEO at wealth manager NDVR. “While you should certainly invest time in learning about different investment options available to you, it’s impossible for an investor to know everything.”
Therefore, he recommended working with a financial advisor to receive guidance tailored to your unique financial situation.
Your Savings Isn’t Automated
“The biggest hindrance to building wealth is actually human behavior,” said Kendall Meade, CFP®, CFT-I, certified financial planner at SoFi. “One way to overcome the challenges of human behavior is to automate your finances as much as possible so that you aren’t relying on willpower alone.”
She said this allows you to make a tough decision once — i.e., opting to save money you might rather spend — then reap the rewards on an ongoing basis.
You’re Spending Your Savings
Saving money is great, but you’re defeating the purpose if you constantly dip into your accounts for unintended purposes.
“Savings should be used only for what they are designated for, whether that’s vacation, emergencies or a major life event, like buying a house,” said Cody Sparks, executive vice president, director of retail banking at UMB Bank. “Keep those funds safe from everyday spending, no matter how enticing the sale, item or experience.”
If you’re trying to change financial habits you’ve had it place for years, realize it might take time to fully make the shift. Building wealth doesn’t happen overnight, so if you encounter roadblocks along the way, refocus and commit to getting back on track.
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