When we think about building wealth, sometimes the mega-rich come to mind, and of course, that can reflect wealth, but you can take steps to build wealth in your own life too.
From your investment strategies and putting together a diversified portfolio of stocks, fixed-income assets, and physical assets like art, to understanding the importance of multiple sources of income, in reality, building wealth is something that’s accessible to nearly everyone. That doesn’t mean it’s easy, however.
When you’re living paycheck-to-paycheck, the idea of building wealth can seem like it’s well out of your reach. You may struggle to have the income even to support your daily life.
You can overcome obstacles by gaining financial education and gaining assets.
The following are some key things that everyone, no matter their income, should know about building wealth.
What Does It Mean to Build Wealth?
The core concept that underlies wealth building is to generate income on a long-term basis through multiple sources. This means that you aren’t just relying on your income from your primary job. Instead, you also have savings and investments, as well as assets that can generate income too.
When your goal is building wealth over time, you need to do three things—make money, save it, and invest it. It sounds simple, but of course, as you know, it’s certainly not easy.
Before you can start investing anything, you need to have a dependable source of income. Then, you can set up a plan for savings, and finally, you can begin to invest once you’ve achieved the first two steps.
You have to be realistic when you’re assessing your current job and determining whether or not it can sustainably provide you with regular savings for the next 40 to 50 years. If you can’t say that’s going to be the case, you may have to make a change.
With income, there are two subcategories—earned and passive. Earned income comes from your regular job, and passive income comes from your investments, whatever those might be.
If you realize you need to increase your earned income, then you might have to change jobs.
You need to find a job that’s well suited to your interests and abilities, but also one that’s going to pay well. If you don’t think you’re going to be able to do this currently, you might need to invest in more training or education.
It’s only once you have the stability from your primary source of income that you can start to save and invest.
Even if you already have financial stability through your occupation, you may not be saving any money. You need to strategize and make a plan to ensure that you’re regularly setting aside a portion of your income.
Then, when you have solid savings explore investing and building a diverse portfolio.
While we can generally discuss what’s meant by the term wealth, of course, it can also mean something different for everyone.
Your wealth, in a calculation, is the assets you own minus any debts you owe.
There are often surveys done to figure out what Americans define as being rich. The majority say that being rich means you can afford the life you want or live a happy life no matter your earnings.
Below, we go into more specific steps and strategies for growing your wealth on a sustainable and long-term basis.
Eliminate Habits That Prevent You from Building Wealth
Sometimes knowing what not to do when it comes to money and managing your finances can be as important as knowing what to do. Avoid these mistakes, or remedy them:
- Not having a budget—one of the single biggest mistakes that people in all income brackets make is not having a budget. When you don’t have a budget, you have no strategy or plan. You need a plan for everything from paying off debt to building savings. You need to ensure that you’re keeping your expenses at a manageable level below your income. There’s not going to be a conceivable way to make any other goals a reality without a budget. It’s tough to create a budget because it forces you to take a hard look at your financial situation, but once you do that, you can find ways to fix a lot of your money problems that might be causing you to live paycheck-to-paycheck.
- Not saving until you feel “ready”—you’re never going to feel ready to start saving. Like most things in life that are worth doing, you just have to jump in. A lot of times, we’ll tell ourselves that we’ll start saving money when we earn more. In reality, there’s no better time than now, even if you’re only able to save a little. If you can put anything aside at this moment, make sure you’re doing it.
- Spending what you earn—if you’re spending everything you’re earning, that’s a long-term mistake.
- Spending all of your money on non-necessities—sure, it’s fine to treat yourself to things every once and a while, but when you sit down and look at your budget and your expenses, you may be shocked at what’s going toward things like eating out with friends or getting drinks.
- Staying in your job because you’re comfortable—it’s very easy to get into a routine with your job and then stay there because it’s what you know. It might even be what you enjoy, but you’re likely going to have to get outside of your comfort zone.
- Avoiding risk—you don’t want to be overly risky with your finances, but you also have to take on some level of risk in your life to build wealth.
- Being deterred by failure—you’re going to meet obstacles, and you’re also going to fail at various points in your life. Don’t let a setback derail you from your overall goals. Understand that every successful person experiences setbacks all the time, but they don’t quit.
- Thinking you know everything—you have to be a person who’s willing to learn in order to explore the opportunities available to you financially and throughout your life. The more you learn, the better off you’re going to be as far as building wealth and having a sense of financial freedom.
Tips for Building Wealth
If you feel like you’re ready to let go of whatever it is that’s holding you back from building wealth, keep the following tips in mind:
- Start your own business. Most of the world’s wealthiest people are founders of businesses. You don’t necessarily have to quit your day job. Start building something on the side when you have time until you get it to a point where you can leave your job. A small business can be anything that you’re interested in or good at. You can do most small businesses entirely online, and you can grow your income and also earn returns on the wealth you accumulate. There may also become a point where you can sell the business or have other people run it for you.
- Improve your skill set. You can work on building new skills so that you can find a higher-paying job even while you are working at your current one. You may need to have a special skill set or a certain designation like an MBA to grow your earning potential.
- Stop putting financial goals off. Again, there is no better time than now to start whatever it is you want to achieve. Create a savings account even if you can only put $20 in it right now.
- Have a budget. We talked about this above, but having a budget and a clear view of what’s coming out versus going in is probably the most important step toward financial freedom and wealth creation. Start a new one every month so that you stay clear on your picture at any given time. The 50/30/20 rule tends to be a good baseline budgeting point of reference. In this model, 50% of your income goes to your essentials, 30% goes to non-essentials, and 20% goes to savings.
- Build an emergency fund. When you have money for an emergency set aside, then you can weather financial storms, and you’re going to have more peace of mind that will then facilitate you taking important, strategic risks.
- Live below your means, no matter what you do. It’s not always fun to be frugal, but it is rewarding ultimately.
- Decide how you’ll invest. A good starting point for most people is contributing to their 401(k) if that’s an option. Your employer may match your contributions.
- Once you dedicate a percentage of your salary to your 401(k), you might consider investing in stocks.
Finally, when you’re ready, investing in real estate is a powerful creator of wealth, particularly if you become a landlord.
When you own property, it’s often an appreciating asset, and you’re earning passive income from having tenants.
There’s not an easy way to generate and build wealth, but there is a path if you’re willing to put in the effort and sacrifice now for long-term gains.
