Some of the most common misconceptions about building wealth are that you need a lot of money to get started, and it is very difficult to build wealth. The reality is neither of these notions are true.
Building wealth ultimately amounts to understanding where your extra dollars are and where one may prioritize using that money. Use these effortless strategies to begin building your wealth as soon as today.
Know Where You Stand
What does your personal financial situation look like at the present moment? Craig Birk, CFP and chief investment officer at Personal Capital, said to start with knowing where you stand.
Understand your cash flows, investments and where you stand for retirement. Once you know where you stand, you can better prepare to set concrete, time-bound short- and long-term financial goals.
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Define Your Financial Goals
If you’re planning to build wealth through investing, Katie Thompson, CFP and wealth management advisor at Wealth Management and Financial Services from Merrill Lynch, recommends defining your financial goals as your first step.
“Depending on where you are in life, your goals will be different,” said Thompson.
Some common financial goals include saving and investing for retirement, college education for your children, paying down debt and saving money to buy a home. Prioritize these goals and set a plan to strike a balance for competing goals. You can set a plan by speaking with a trusted professional financial advisor or utilizing advisory services available from investment firms.
Find Financial Allies
“A financial advisor can provide tremendous confidence related to both your investment approach and financial planning in general. This person will give you the tools and advice you need to know where you stand and will illustrate the trade-offs between various decisions,” said Birk.
Review Your Budget
Once you set financial goals and begin speaking with a financial advisor, Thompson recommends carefully reviewing your budget. Doing so will allow you to think about how you can start to prioritize yourself and your financial goals.
“Many times people find that when they adjust their budgets to save a little more each month, they get used to it right away,” said Thompson.
Establish a set amount of money to automatically move to your savings or investment account at the beginning of the month. If you don’t already have these accounts, open the account for the goals you have set.
Thompson uses the example of someone saving for retirement. They will want to open a tax qualified account, like an IRA or Roth IRA. Those unsure of which types of accounts they should open are advised to speak with a financial professional.
Know How To Use the Extra Dollar
Alex Caswell, wealth planner at RHS Financial, said one of the easiest ways to build your wealth is knowing how to use the extra dollar.
What’s the extra dollar? “The extra dollar is any money that doesn’t go towards your expenses, whether discretionary or not. The extra dollar can be used to save, invest or pay off debt,” said Caswell.
Once you know how much extra money you have, Caswell recommends prioritizing how you use this extra dollar. Some of the most common advice includes building an emergency fund.
What about using the extra dollar to invest or pay off debt? When deciding how to use the extra dollar between debt and investing, Caswell recommends understanding the following three things:
- What is the interest rate on the debt?
- What is the term on your debt?
- What is the average rate of return that you can expect from your investments?
If the average rate of return on your investments is higher than your debt over the same period of time as the term of your debt, Caswell recommends putting the extra dollar into investments — and vice versa. If you can’t expect to get a higher rate of return on your investments, prioritize paying off debt.
“The difference at which your debt interest reduces your wealth and the rate at which your investment return increases your wealth will ultimately build or reduce your wealth,” said Caswell.
Contribute to the Company 401(k)
If you work for an employer that offers a 401(k) matching program, Bill Hampton, tax strategist and financial planner at Hampton Tax and Financial Services, recommends contributing to it.
Self-employed workers can create a Solo 401(k) retirement plan. Remember that if you are self-employed and have employees, these employees must be included in the retirement plan and receive an employee contribution.
Whether you’re using a traditional 401(k) matching program or a Solo 401(k), Hampton said 401(k) contributions can build wealth and significantly decrease taxable income.
Hold Yourself Accountable
Once you begin saving or investing to build your wealth, hold yourself accountable. Thompson recommends setting up time on your calendar to evaluate your goals and review your progress.
Spend 15 to 30 minutes on your financial health and set up more dates on a quarterly basis to continue evaluating your financial goals.
Talk to People Who Have Accumulated Wealth
Many individuals seek financial advice from family and friends, but sometimes this advice can be spotty. Birk said to be mindful of your sources.
As you focus on building your own wealth, look toward people who have accumulated wealth and been successful over many years.
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