You probably heard that getting rich quick won’t work in most cases unless you win the lottery or receive a large inheritance. But, if you are trying to build wealth yourself, if it sounds too good to be true, it probably is.
On the other hand, if you want to build real, sustainable wealth, it’s important to have a concrete plan with defined steps. Then, of course, you must follow through on those steps.
In other words, it’s not enough to have a vague goal of wanting to be rich. Without specific steps to help you achieve your goals, you won’t be able to move forward or — worse — you may even move backward.
Thankfully, our experts have provided their best tips for building wealth, which you can turn into actionable steps. Depending on how you define it, you may not be “rich” in five years, but you certainly can set yourself up for success and be well on your way long before then.
1. Know Where Your Money Is Going
Knowing where your money is going is the first step of any successful financial plan. If you don’t know where your money is going, it may be tough to put it to better use. Typically, this step would involve setting up a budget, but Mark Wilson, founder and president at MILE Wealth Management, has a different take.
“I’m not recommending massive spreadsheets here,” he said. “I’m recommending (roughly) categorizing your spending items. Instead of tracking every line item, he recommends establishing Owe, Grow, Give and Live categories. Wilson gave examples of what each category might entail:
- Owe counts mortgage/rent, student debt, credit cards, taxes (income, property), etc. — nondiscretionary debt
- Grow includes your short-term and long-term savings
- Give is the amount you give to charity
- Live is everything else — your “more discretionary” expenses
Wilson recommends allocating a certain percentage of your money to each category; for example, 25% Owe, 10% Grow, 5% Give, 60% Live. You might adapt those percentages to how you spend your money, but each category is important.
2. Financially Educate Yourself
Something that is arguably not discussed enough is the degree to which formal education and training in finance are lacking. Everyone needs to know how to manage their money, but many people have to learn the hard way, only after finding themselves in precarious financial situations.
“Many things are taught in schools. However, they do not educate you on how to become financially independent,” said Lyle David Solomon, principal attorney at Oak View Law Group.
Solomon recommends studying various aspects of finance, from how to boost your credit score to interpreting profit and loss statements.
“You may study money in a variety of ways,” he said. “The first and most important thing is to read books. Hundreds of good books written by millionaires, billionaires and successful leaders will teach you a great deal about money.”
3. Pay Down Debt
Once you know where your money is going, your next step should be to aggressively pay down debt. In many cases, debt simply weighs people down and doesn’t provide an ongoing benefit. As Laurie Itkin, financial advisor & wealth manager at Coastwise Capital, said: “Rich people borrow money only if there is an opportunity to earn more than they will owe on the debt.”
But buying the latest smartphone model with a credit card generally won’t provide a monetary return. Hence, if you have this sort of “dead weight” debt, Wilson recommends working on this, your Owe category.
“Refinance your mortgage if you can reduce your interest rate,” he said. “Cut up credit cards so you spend more intentionally. Add those reduced Owe dollars to your Grow dollars.”
4. Have Multiple Sources of Income
The mainstream approach to covering one’s expenses is to find a job — in other words, a single source of income. But that is rarely, if ever, the case for those who are able to build serious wealth. Having multiple income sources not only raises the ceiling on the amount you can earn but also eliminates the risk that you will lose all of your income if you are laid off.
“The majority of millionaires have numerous sources of income,” Solomon said.
He puts emphasis on the constant flow of income afforded by multiple income sources.
“If one flow is interrupted,” he said, “you still have other streams flowing in. In other words, you never have to rely on a single source of income.”
5. Increase Your ‘Grow’ Category
Once you have worked on the previous categories, it’s time to start building your wealth. This goes back to Wilson’s categories with the Grow area. He gave more detail on Grow, though, as there are many ways to approach wealth building.
“Increasing the percentage you pay into a company-sponsored 401(k) plan or automating monthly contributions to a Roth IRA are great ways to make this happen,” Wilson said. “As your income grows, put half towards your Grow percentage and enjoy the other half. This step has double benefits: You are building your retirement nest egg and — more importantly — you are reducing your spending, so you will not need to save as much in total.”
Another way to increase your Grow category is by committing a percentage of every extra payment to savings — “say 10% of gift checks from Uncle Gerry at Christmas and 10% of your bonus,” said Carol Schleif, chief investment officer at BMO Family Office. “The earlier you invest, the more the magic of compound interest works for you.”
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