Building wealth doesn’t happen overnight. It takes hard work to achieve, but it’s not impossible. There are some tried and true methods that have helped secure the financial futures of lots of people from all walks of life.
Set yourself up to build wealth
A college degree is still one of the biggest keys to financial security. According to the Georgetown University Center on Education and the Workforce (CEW), the average American with a bachelor’s degree will earn approximately $2.8 million in their lifetime.
If a college degree is out of the question, do everything within your power to increase your earning potential, such as:
- Take relevant training courses in your field
- Get certified in your profession or trade
- Make yourself indispensable on the job
- Work for an employer that offers good benefits, such as health insurance and a 401(k)
Identify your financial goals
Think about why you want to start building wealth. Do you want to be able to buy a home, live a more worry-free life, start your own business, buy a second home, retire early, or retire more comfortably?
The Federal Reserve Bank of Dallas’ wealth primer points out that, “Most people who have built wealth didn’t do so overnight. They got wealthy by setting goals and pushing themselves to reach them.” Use their four suggestions for setting your financial goals:
- Be realistic
- Establish time frames
- Devise a plan
- Be flexible as goals can change
Read more: How to Establish a Credit History
Designate your income
Once you’re making money, it’s important to intentionally think about where every dollar is going. All guides to building wealth advise living below your means. In order to do that, you have to create and live by a budget.
As part of that budget, you need to set aside a portion of your income for savings. Shoot for saving 20 percent of your income.
If that’s too much right now, start at a lower rate, but make a goal of increasing your savings rate every year until you’re setting aside enough money to make your financial goals a reality.
Automatically direct a portion of your paycheck into savings. This ensures you’re setting money aside “no matter what’s happening in your life or in the world.”
Start investing early and often
Once you’ve built up an emergency fund in an FDIC-insured bank account, then you can start directing some or all of the money you’ve budgeted for savings into a wealth-creating asset, which can be a house, mutual fund or other investments.
The easiest place to start is with your employer’s 401(k) plan. In addition to providing you with a variety of vetted mutual fund options, many employers match 401(k) contributions up to an average of 4% to 5% of your salary.
Best of all, your contributions are taken out before federal and state taxes, and you only pay tax on your earnings when you withdraw from your account. If that takes place when you’re in retirement (and in a lower tax bracket), you’ll pay even less tax.
Traditional and Roth IRAs are two other tax-advantaged investment vehicles to consider.
Three final tips for making the most of your investing dollar:
- Reinvest your dividends and capital gains
- Diversify your portfolio or choose a target fund that handles it for you
- Stay in it for the long haul and don’t panic when the market drops
Protect your budding wealth
Last but not least, protect your wealth by minimizing your consumer debt, frequently reviewing your goals, routinely rebalancing your investments to meet your goals, and buying adequate health, property, and life insurance.
Very few people get rich without hard work. For the vast majority, building wealth is a long-term pursuit that ideally starts in your 20s when you have the most time and potential to secure your financial future.
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