From the latest crypto meme coin to penny stock flipping, there’s no shortage of get-rich-quick schemes. Don’t be fooled by their promises of quick riches—schemes hide massive risks, and the vast majority of investors lose money.
Spend your time instead learning how to build wealth, which requires you to create an investing strategy and adopt a long-term mindset. Follow these eight simple steps to begin accumulating long-term wealth.
1. Begin by making a plan.
Making a financial plan is the first step toward building wealth. That entails taking the time to identify your goals and plan out how to achieve them.
“Wealth building begins with a vision and a plan,” explains Peter Cassciotta, owner of Asset Management and Advisory Services of Lee County.
Hiring a financial advisor is an excellent way to get started on your wealth building strategy. It’s a more expensive option, especially for those just starting out, but hiring a certified financial planner (CFP) means you’re paying for planning expertise.
2. Create and stick to a budget.
Many people despise the letter “b,” but budgeting is an important component of your wealth-building strategy. Making and sticking to a budget increases your chances of carrying out your plan and reaching your financial goals.
Budgets also help you understand where your money goes each month and prevent behaviours like overspending that can jeopardise your goals.
3. Create an Emergency Fund
If you don’t have emergency savings, where will the money come from if the furnace breaks down or the refrigerator stops working? According to Lori Gross, financial and investment advisor at Outlook Financial Center, credit cards bear the brunt of the burden and incur extra costs and fees, such as sky-high interest rates.
By creating an emergency fund, you can protect your credit while also reaping the benefits of earning interest on an online savings account—all while having the peace of mind that you have money in the bank to cover life’s unexpected expenses.
4. Make Your Financial Life More Automated
Making saving, investing, and bill pay automatic virtually eliminates the possibility that you will forget to set aside money for your goals or make progress toward paying off your debts.
That’s why Michael Morgan, president of TBS Retirement Planning, suggests having the total amount you’ve budgeted for each of your expenses and goals deducted from your paycheck and applied to each expense.
This is especially useful for saving and investing, he claims. “By doing so, you avoid the temptation to spend instead of invest.” Soon, you won’t notice the money being deducted automatically, and your contributions will be made on a regular basis,” he says.
5. Debt Management
You’re not alone if you’re carrying a balance from month to month: According to Experian research, the average American has more than $90,000 in debt.
Of course, not all debt is created equal—and some, such as mortgages, may even be considered “good” debt due to their low interest rates and potential for wealth building. Some experts even consider a mortgage payoff to be a type of forced savings account because you will almost certainly receive a portion of your monthly payment back when you sell.
However, if you carry a lot of bad debt, such as high-interest credit card bills, every month, you may jeopardise your financial goals. That’s why, according to Gross, it’s critical to have a repayment strategy in place, with the ultimate goal of living a debt-free life.
If you’re not sure where to begin, consider the debt snowball or debt avalanche payoff methods. And keep in mind that it is possible (and often preferable) to save money while paying off debt.
As your balances decrease, you’ll have even more money to put toward your emergency savings and investments.
6. Increase Your Retirement Savings
Uncle Sam provides several options for saving for retirement, and experts advise you to take advantage of as many as possible. That means contributing as much as possible to your employer’s retirement plan (think 401(k)) as well as individual retirement accounts (IRAs).
If contributing the legal maximum is too much for you right now, make sure you’re saving enough to take advantage of any 401(k) match your company offers. That is, if your employer matches 3% of your salary, you are contributing at least 3% of your salary each pay period.
Don’t be discouraged if you can’t invest much at first. “The majority of my clients invested a small amount of money over a long period of time,” Casciotta says. The power of compounding then assists in turning these small sums invested into fortunes.
If you’re not sure how to begin investing in your 401(k) or IRA, consider a target-date fund or robo-advisor, which manages a custom portfolio of funds based on the number of years until retirement.
7. Maintain Diversification
Consider loosening your grip if you believe that people only become wealthy by holding highly concentrated positions, such as large amounts of Bitcoin. A diversified portfolio of different types of investments can both protect your wealth and position you to reap rewards even during market downturns.
“A diversified portfolio includes a mix of assets that do not always move in the same direction or magnitude and is designed to help reduce volatility over time,” says Veronica Willis, investment strategy analyst at Wells Fargo Investment Institute.
Increase Your Earnings
While it isn’t something you can do through an online brokerage, investing in yourself by increasing your income is an important step in learning how to build wealth. The more money you earn in your lifetime, the more money you have to invest.
“If you’ve been living comfortably on your current salary and you receive an increase,” Morgan says, “this is the perfect opportunity to start the path to building wealth,” whether that means contributing more to your retirement savings, paying down debt, or increasing your emergency fund savings.
In fact, financial expert Michael Kitces advises saving at least half of every raise you receive to ensure a secure retirement. This allows you to gradually improve your quality of life while also avoiding falling victim to living standards that will be impossible to maintain in retirement.
If you don’t believe you’re in a position to receive a raise, meet with your boss to discuss what steps you need to take to advance in your current position. Consider picking up a side hustle or experimenting with a passive income idea.