How to Effectively Build Wealth at Any Age
There are a few core principles that are universal. The sun rises in the east and sets in the west. The speed of light in a vacuum is 299,792,458 meters per second. To create wealth, you must earn more, save more, and invest with intelligence.
If you’re reading this article, it’s because you have a keen interest in learning more about the principles surrounding wealth creation. Whether you’re starting your journey to building wealth in your 20s, 30s, 40s, or beyond, the core principles of wealth creation remain constant. This article offers a road map to help you obtain the wealth you need to live a Rich Life.
What is wealth?
Wealth can be both tangible and intangible and measured through comparative analyses or life experience. A common measure of wealth is net worth, which is calculated by taking the total value of your assets and then subtracting the amount of debt owed.
To be considered “wealthy” based on this construct, you’ll want to have a net worth that’s comparatively higher than others in your sphere. For example, you might need a much higher net worth to be considered wealthy in New York City than in Kalamazoo, Michigan. That’s because the cost of living in New York is the highest in the U.S., while the Kalamazoo area has the lowest cost of living.
However, for many people, wealth is more about how net worth produces abundance and security to create an ideal life. It’s about getting to a place where you can look at your personal relationships, finances, and ordinary days and say, “Wow!”
However you measure wealth, though, the principles for building it remain the same.
How to build wealth at any age
Regardless of your age or current net worth, it’s good to focus on the fundamentals. That means committing to these core principles of achieving wealth:
- Creating more income
- Managing your savings
- Investing intelligently
How to earn more income
Wealth building begins with how much money you make. If you can increase your income, you can increase your cash flow, which means you’ll have more money at your disposal to save and invest. There are several ways you can approach this.
Get a higher-paying job
It sounds simple, but many people overlook the option of upping their salary expectations. Instead, they believe that they’ll someday have enough money to do as they please if they tighten their belts just a bit more now. While cutting out wasteful spending is always a good idea, stopping all the things you love today in hopes that it’ll reap tomorrow’s rewards rarely contributes to living the fulfilled life you want.
Perhaps you can negotiate a higher salary in your current position or you can think about improving your current skills — or acquiring new ones — to warrant a promotion or move on to a higher-paying job. If you haven’t reassessed your job and salary potential lately, it might be time to do so.
Alternatively, consider that it might be time to change careers to reach your full income-earning potential. Think about your abilities, talents, and interests and then research the types of high-paying jobs that could be a good fit. What would it take to acquire the credentials — such as education and experience — to get that type of job? If it makes sense for your situation, start making a plan to pursue that new career.
Get a side hustle
Do you have a hobby or talent that has income-earning potential? If so, think about turning what you already know and like doing into extra cash in your spare time.
If you enjoy writing and keep a personal blog, why not ghostwrite blogs for others? Are you an extraordinary baker? Are you a whiz at organizing closets? Do you speak fluent Spanish? Consider offering your baked goods for sale, starting a business decluttering people’s living spaces, or tutoring Spanish. From ride-sharing and delivery gigs to babysitting and freelance web design and app development, there are plenty of side hustle opportunities.
Start your own business
Many people find their way to wealth through entrepreneurship. If you have a great business idea, it might be time to take the plunge and start your own business. You can jump all in or take it slowly — people often build their side hustles into full-time businesses. As an entrepreneur, you’re putting yourself in a position to reap all the rewards of your labor, which can be a great way to increase your income.
If, like many people, you’re not quite sure which direction to take or what your earning potential might be, taking this quiz can be a good place to start.
How to manage your savings
Of course, you won’t get very far into reaching your financial goals if you only focus on the income-earning side of the equation. To produce wealth, you need to save money.
You can do this if you create and manage a savings plan, beginning with establishing a conscious spending plan that incorporates a realistic savings goal. Don’t get overwhelmed by the record-keeping, though. Once you establish a monthly savings plan that works for you, there are some easy-to-use budgeting tools and spreadsheets available to help you keep track of your progress.
Manage savings through conscious spending
You can think of a conscious spending plan as your overall wealth management plan. The purpose of a sound spending plan is to help you see your financial situation so you can reel in unnecessary spending while expanding your savings. It helps to understand your own money dials (i.e., why you spend the way you do). Once you have a handle on the “why” of your spending habits, decide how to allocate your income so you can make way for sound financial planning.
Some people adhere to 50-30-20 budgeting. Using this technique, you’d earmark half of your income to food, housing, health care, transportation, and other essential living expenses. Approximately one-third (30%) of your income would be allocated to discretionary (nonessential) expenditures — vacations, shopping sprees, and other luxuries — and the rest (20%) would go into a savings account.
One of the hardest aspects of creating a spending plan that you can sustain is deciding what falls into the essentials bucket and what is purely discretionary. While overspending can have a negative impact on your ability to establish wealth, there are no one-size-fits-all rules regarding what fits into the essentials bucket and what falls into the nonessentials bucket.
Everyone is different when it comes to determining what they want and what they need. For instance, you may need to get weekly massages to relieve stress and maintain your mental health. If that’s the case, weekly massages would fall into your essentials bucket. For someone who looks at massages as a luxury that they’re happy to enjoy a few times a year, massages would fall under their discretionary (nonessential) bucket.
Establish an emergency fund
If you don’t already have one, think about establishing an emergency savings or checking account, even if it means dipping into one or more of your budget buckets to fund it. Should something unexpected occur, you may need to tap into this bank account to cover any unplanned expenses.
If you don’t put money aside for the proverbial rainy day, you could end up incurring credit card debt at high interest rates (and then having to pay off that debt) and/or selling investments (and losing the earnings on those investments).
How to invest intelligently
Now that you’ve explored ways to manage your personal finances — upping your income and managing your spending so you can amass savings — think about investment strategies that will propel those savings to start building wealth.
Define goals, assess risk tolerance, and allocate accordingly
Intelligent investing begins with knowing yourself. What are your goals for investing and what is your timeline for meeting them? Are you looking to retire early? Do you want to be able to quit working for a few years so you can focus on raising children? Is the plan to leave the working world to write your first novel before you turn 40?
Once you figure out what your end game is, determine how much risk you’re willing and able to tolerate to get there. Both personality traits and life stage will come into play when answering these questions.
For example, a person nearing retirement age will have a markedly different risk tolerance than someone who is just out of college and pursuing their first job. Someone who likes to play it safe and can’t bear the thought of a huge dip in portfolio value — even if they know, from an intellectual standpoint, that it’ll probably come back up — might be more comfortable with fairly conservative investment tactics, even if it means rethinking their investment goals and timelines.
Once you know your risk tolerance and you’ve determined your time horizon, it’s time to figure out what to invest and where (often referred to as asset allocation). It’s important to apportion your investments in a way that moves you in the direction of your desired financial future without pushing you too far out of your investment comfort zone.
Regardless of how you allocate your investment portfolio, financial advisors agree that it’s important to create a diversified portfolio. When you diversify your investments, you manage risk by spreading your money out among several different investment types so your money has a chance to grow through different avenues (some with higher risk than others).
The idea is to avoid putting all of your eggs in one basket. Should one investment stream go into decline, your portfolio will remain strong because your money is invested in other streams that continue to grow.
To build wealth over time, look to creating an investment portfolio that works for you. For instance, many people choose to fund retirement accounts, invest in the stock market, and put money in real estate investments to keep their portfolios diversified as they grow their wealth.
- Pre-tax retirement accounts: Many companies offer employees the opportunity to automatically move a percentage of each paycheck to a traditional 401(k) retirement account. These retirement plan contributions are not subject to taxes before they’re transferred to the employee’s account and lower the employee’s yearly taxable income. Often, a company will match the employee’s contribution up to a certain amount. The account manager offers contributors a variety of investment choices, such as different mutual funds. Accounts are allowed to grow tax-free until the employee takes a qualified withdrawal from the account.
If your company doesn’t offer a 401(k), you might want to consider opening another type of retirement savings account, such as a traditional Individual Retirement Account (IRA). Like the 401(k), you can use pre-tax money, which is invested in different funds and allowed to grow tax-free until you withdraw funds at retirement age.
- Roth IRA and Roth 401(k): Unlike a traditional 401(k) and IRA, a Roth IRA and Roth 401(k) are funded with after-tax dollars. This means qualified withdrawals don’t count as income and aren’t subject to tax.
- Stock market: While riskier than other types of investments, stocks can provide the highest returns. You can reap some pretty substantial rewards and reduce risk by buying stocks through exchange-traded funds (ETFs). ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. They’re considered less risky because of their built-in diversification, as they track specific markets rather than focusing on one company to invest in.
- Real estate: Real estate investment trusts (REITs) offer the opportunity to take advantage of hot real estate markets without having to buy and sell properties on your own. Instead, you can buy stock in companies that do the buying and selling and then share in their profits, which are paid out in the form of dividends.
Of course, this is merely an overview of a few types of investments you can make with your savings. Each investment type has its own rules, regulations, and complexities, as well as its own risks and rewards. While some people are more comfortable seeking investment advice from experts, you might want to explore options for managing your own investment accounts, starting with this beginner’s resource.
What does it mean to live your Rich Life
While some people thrill at the idea of amassing a fortune, most of us pursue wealth-building strategies as a means to an end. Ultimately, our goal is to live a Rich Life, however we define it.
For some people, living a Rich Life means following certain conventions — you buy big houses, drive expensive sports cars, acquire a wardrobe to die for, and take regular five-star vacations — while to others, these Rich Life traps have nothing to do with living the Rich Life. Rather, to them, living a Rich Life means having enough financial security to maximize their enjoyment in the activities, things, and relationships they value most.
As you continue to build wealth and explore what living a Rich Life means to you, I Will Teach You to Be Rich offers plenty of free resources to give you the know-how you need to move forward in your journey.