Did you know that the average net worth by age 65 in America is roughly $1,216,000? Did that number just make you gasp?
If so, you may be relieved to hear that knowing how to build wealth requires a relatively simple strategy: earning money, saving money, and investing money. In fact, history shows that you can completely change your financial future at any age — like one 38-year-old investor who went from $150,000 in debt to a net worth of $370,000. Even better? She plans to retire in seven years.
So what is wealth, exactly? Wealth is the sum of all financial assets minus the sum of all your debts (also known as net worth). Ideally, this number remains positive at the end of the equation, but it can be negative, and that’s still okay.
While many often wonder how to become rich quickly, building wealth is a long game. It’s about leveraging available tools (and exploring some lesser-known strategies) so that you can make the most of your income — no matter if you’ve just started your first job or if you’re making a six-figure salary.
Here, let’s explore seven simple wealth building strategies so that you can get started today.
1. Adjust Your Mindset
The first step to building wealth is to create a mindset that enables you to actually achieve your financial goals. In studying the poverty gap in the American economy, psychologists point to something known as the bandwidth tax, which describes poor decision-making that happens when you’re constantly surrounded by a sense of scarcity or lack of resources.
In other words, the stress of living paycheck-to-paycheck may cause your brain to get in its own way, preventing you from making choices that could actually improve your financial position, like saving and investing. Instead, you may look to emotional spending habits and waste your resources on things you don’t actually need.
Overcoming a counterproductive mindset is one of the first hurdles in how to build wealth. The process includes:
- Visualizing your personal goals. Do you hope to retire early (before age 65)? Buy a second home? Live in a city? These will all impact your financial decisions.
- Understanding your personal definition of wealth. A recent study found that Americans actually correlate wealth with a state of mind. 42 percent of respondents associated wealth with having freedom, followed by flexibility (23 percent), opportunity (18 percent), achievement (10 percent), and generosity (seven percent).
- Creating an actionable plan. Once you define what wealth means to you, it’s time to take steps to get there, like setting aside a small fraction of your income each month for a high-yield savings account, or doubling down on paying off your debt.
2. Build a Budget
Essential to any wealth building strategy is establishing a budget. According to the most recent data from the Federal Reserve, roughly 4 in 10 Americans do not have enough savings to pay out-of-pocket for a $400 emergency expense.
To ensure that you’re not one of them, you’ll need a plan to start saving, and naturally, you need to make money in order to start saving.
Establish Sources of Income
To start building your budget, first establish your net household income from all revenue sources each month. Tally up your net income, which should include your post-tax take-home pay from your full-time job, a side-gig or second job, and any other monthly income from additional sources like dividends or owning rental property.
Run Your Household Like a Small Business
Think of your household like you’re running a small business: Create an operating budget that outlines your streams of revenue against your expenses. Map out both fixed recurring expenses (utilities, insurance payments, childcare, etc.) and variable expenses (groceries, dining, entertainment, etc.)
A popular budgeting model is known as the 50/30/20 rule. In this rule, you divide your post-tax income into three categories: essentials (50 percent), wants (30 percent), and savings (20 percent). These will help you understand how much you should be spending and how much you need to save.
Create a Contingency Fund
Like any well-forecasted business, create a contingency fund to cover any unforeseen or emergency expenses. How much money should you have saved in an account? Setting aside $1,000 is a good place to start, but ultimately how much you should have in emergency savings depends on your individual lifestyle.
Other models recommend having three to six months worth of expenses saved away for emergency purposes.
3. Pay Down Your Debt
The next step to building wealth is working to eliminate your debt. This includes curbing spending habits, paying more than the minimum balance on the credit you owe, and considering debt consolidation.
Curb Your Spending Habits
Despite inflation rising faster than wage gains, Americans show no signs of slowing their spending in 2022. But, if you’re looking to know how to build wealth, you’ll want to break the trend.
First, gauge whether you’re an emotional spender. Do you use shopping as a distraction when you’re feeling anxious? Do you buy new things to boost your mood when you’re sad? If you want to build wealth, you may be spending far more than you should be each month, and that can have a big impact on your bottom line.
Tips on how to stop spending include finding little reductions in a lot of places. Consider cutting back on a few of those subscription or streaming services, dining out less, and unsubscribing from retail emails that offer daily temptations.
By cutting back a little bit in a lot of places, you could begin to see an improvement as early as your next monthly bank statement.
Pay More Than the Minimum Balance
The minimum balance on your credit card bill is the lowest amount of repayment that lenders will accept without applying a penalty or fee. If you’re only paying the minimum payment each month, your balance could end up costing you far more over time. Due to your accrued interest, you may end up spending hundreds — or even thousands — more than your actual balance.
Another advantage of paying more than the minimum balance is that it improves credit utilization ratio, a ranking factor in determining your credit score.
Prioritizing paying debt with high interest rates first can also help save you money in the long run, as you’ll pay less interest over time.
Consider Debt Consolidation
Debt consolidation may be a great option for those who want to streamline their repayment strategy. It’s the process of merging all of the debt that you owe into a single bill so you can pay it each month with a fixed interest rate.
The benefits of debt consolidation include making a single payment (as opposed to keeping track of multiple bills), potentially securing a lower interest rate, and avoiding damage to your credit score.
The downfall for some is that you may be in debt for a longer period of time. You also face the possibility that you wind up spending more on interest than your actual expenses in the end.
4. Invest in Your Retirement
It can be tempting in your 20s and 30s to ignore your retirement savings in favor of freeing up funds for more pressing, immediate needs. In doing so, you may be missing out in the long run. Begin a retirement plan by first assessing your net worth.
Setting up a retirement plan means setting aside money in financial accounts and letting it grow in the background over time. The more time you give your money to grow, the more money you are likely to have in the end. If you start investing in your 20s, you give that money a longer runway to compound over time.
Two of the most popular types of retirement plans are a 401(k) and an Individual Retirement Account (IRA).
A 401(k) is a retirement plan that allows you to choose between being compensated in cash or allocating a fraction of its value to an account under the plan. As a type of defined-contribution plan, both your contributions and the performance of the plan investments factor into your resulting balance.
401(k) plans come with contribution limits, which is the maximum value you are allowed to contribute to your account. Contribution limits tend to vary by age and plan type.
Individual Retirement Account (IRA)
An IRA is a retirement account that can provide tax advantages. There are two types of IRAs: a traditional IRA or a Roth IRA. Traditional IRAs allow you to deduct a portion of your contributions from your taxable income each year.
Roth IRAs are built with income you already paid taxes on. If you choose to withdraw money from your IRA, it’s considered taxable income for traditional IRAs, but is tax-free for Roth IRAs.
5. Leverage Life Insurance Policies
At its core, a life insurance policy is intended as a safety net to help spouses, dependants and other loved ones pay for critical expenses — such as mortgage payments, educational expenses, and more — after your passing. In addition to its primary function, a lesser known benefit of a life insurance policy is that it can be used to help build wealth over time.
There are five key types of life insurance policies, but not all of them help build wealth. In addition to the policy’s death benefit, permanent life insurance policies offer the ability to earn cash value. Some even offer the ability to borrow against the cash value during your lifetime.
Let’s review types of life insurance policies and their fundamental differences to understand using life insurance to build wealth.
Term Life Insurance
Term life insurance policies are less expensive and only provide coverage for a predetermined number of years. After that, you have the option to renew your policy, but typically on an annual basis and at an adjusted rate. Term life insurance policies do not offer cash value.
Whole Life Insurance (Permanent)
A whole life insurance policy is a type of permanent life insurance that offers coverage for the entire span of a person’s life. It differs from term life insurance policies in that you do not need to renew it. In addition, whole life insurance policies are intended to build tax-deferred cash value. As the policy’s cash value accrues, you have the option of borrowing against it during your lifetime.
Universal Life Insurance (Permanent)
Universal life insurance is another type of permanent life insurance, but without a fixed interest rate for its cash value, ultimately causing your cash value to fluctuate over time, all depending on what’s happening in the larger market.
Variable Life Insurance (Permanent)
Similar to universal life insurance, the cash value of your policy changes based on how well your selected investments perform. It differs from whole life insurance in that its cash value can be part of the policy’s death benefit.
Final Expense Life Insurance (Permanent)
This type of life insurance is just as it sounds: It’s intended to cover expenses after your passing, such as remaining debt, medical bills, and burial costs. It typically comes with fewer medical requirements, and its cash value options are similar to that of a whole life policy.
It’s important to note that using life insurance as an investment tool does not replace traditional retirement funds like a 401(k).
6. Consider a Side-Gig
If you really want to send your wealth-building strategy into overdrive, consider a supplementary form of income, like a second job or side-gig. Another option for generating additional revenue is to create passive income like owning rental property, taking on freelance work, or driving affiliate marketing revenue through a published blog.
Ultimately, the more money you make, the more you can save and invest.
7. Don’t Be Afraid to Start Small
You may wonder, “How can I build wealth with low income?” Rest assured that it’s possible to build wealth at any income level, you just have to choose to start.
Building wealth with small levels of income is about understanding your personal definition of wealth, applying the same principles outlined here within the means of your income scale.
What is the Fastest Way to Start Building Wealth?
While you may be tempted to follow a “how to get rich quick” scheme, a natural way to start building wealth is simply to accelerate your ability to save and invest — like dramatically reining in your expenses and doubling down on repaying debt.
The sooner you start, the sooner you can start building wealth.
How Long Does It Take to Start Building Wealth?
There’s no clear-cut length of time that you should expect to start seeing results, but some studies indicate that it may take about seven years for a wealth building strategy to start producing daily growth.
Building wealth is about first understanding your personal definition of success, and then creating a strategy to achieve your vision. It’s more about long-term planning and much less about quick wins, but with a clear assessment of your income, a plan for shoring up your expenses, and wisely investing what remains, you’ll be on your way to building wealth for generations to come.
Use our savings calculator to start your wealth building strategy today.
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