– PALADIN EDITORIAL
Money impacts several things you do in life. From education, healthcare, housing, food, gas, and utilities, there is hardly a sphere where you would not need money. This is why most people spend the majority of their lives trying to build wealth. Money not only offers you a chance to live a life of luxury, but also gives you status, success, and respect. However, creating wealth is often seen as a challenge. A lot of people solely focus on getting an excellent job with a high income, ignoring other essential habits. But building wealth is a combination of different things. It starts from your income, but also entails saving and investing in the right instruments to see your wealth grow.
It is essential to understand that wealth creation is not a one-time process. It is a continuing process you must undertake for the rest of your life. Saving, budgeting, investing, and spending your money wisely are fundamental habits that can help build financial discipline. These habits also help you become financially independent and disciplined. However, wealth creation goes beyond these four principles. While these are the foundations of financial security, long-term wealth creation can require a few more steps. Reach out to a financial advisor or a wealth advisor who can help suggest different ways through which you can build wealth and live a comfortable, financially secure life in retirement.
There are several wealth-building strategies out there. The following 17 principles combine them all and offer a clear roadmap of how to be financially secure with adequate wealth at every stage of life.
1. Set clear financial goals
The first step in wealth creation involves setting goals. Every financial plan is unique and formulated on the basis of goals. Your financial goals will dictate the risk, time horizon, budget, etc., of your investment. For instance, while you can spend more time planning for retirement than your child’s college fund, you would also require a higher corpus for the former. The instruments you use for saving or investing will also entirely depend on your goal. For example, a 401k is ideal for retirement savings, while a 529 education plan is suitable for higher education expenses. An Individual Retirement Account (IRA) may be used for both. Still, depending on your overall financial situation and future goals, you would have to plan its use prudently.
When you set goals, it is also important to make sure that you set clear goals with a precise timeline, figure, and purpose. This makes it easier to track your progress. For instance, instead of setting a goal to ‘save for a house’, set a goal to save xx dollars in xx years for the down payment. Next, plan in advance the amount you would need for a home equity loan and the number of years you would take to settle the debt. Breaking down each goal into specifics will make it easier to plan and execute. It will also help eliminate disappointments and discrepancies along the way.
2. Create milestones for your financial goals
When planning for goals, also try to create milestones. This way, you can track your progress and make changes if needed. For example, if you plan to save $1 million, you can break this down into smaller milestones – xx by age 35, xx by age 45, and so on. This makes it easier to achieve such a big goal. Big goals can be intimidating, but smaller milestones keep you motivated.
3. Avoid debt as much as possible
Debt reduction and management are essential wealth-creation strategies. These may not result in capital appreciation, but they help preserve capital. Loans, mortgages, credit card interest, etc., are all guilty of interfering with long-term wealth creation. Also, debt is known to add to a person’s stress, too. Therefore, it is important to keep it to a minimum at all times. If you have debt, e.g., more than one high-interest loan, you can get a credit counselor. Credit counselors can help you get rid of high amounts of debt with debt management plans. They can also negotiate with your creditors and help you get fee waivers. Moreover, you can choose from non-profit and profit credit counselors. However, check a person’s qualifications, reviews, and experience before hiring them. In extreme cases, you can also get in touch with a debt relief company.
An important thing to note about debt management is that while the big loans catch your attention, the small dues on your credit card often go unnoticed and cause the most damage. In fact, many reports show that the average American has at least one credit card. Credit cards can be more damaging to you as they are misleading. You may be spending small amounts and paying relatively lower figures in interest. However, continued usage adds up over the years and impacts you more. Therefore, it is important to make behavioral changes by changing the way you spend when managing debt. This can be done by shifting to debit cards and cash.
4. Create a budget to track your finances
A budget is a simple plan that can streamline most financial tasks and eliminate confusion. A budget should clearly state your cash inflows and outflows. The inflows can include your salary, investment returns like dividends, rental income from a property, inheritance, bonuses earned at work, etc. The outflows can consist of your expenditure on groceries, gas, travel, insurance premiums, etc. The remainder of your income and expenses will help you understand where you stand in terms of your savings. Ideally, your income should always exceed your expenses by a significant margin. This will offer you a higher investment budget and allow you to save for emergencies and other goals.
5. Educate yourself on financial matters
The more you know about finance, the more you can do with your money. Personal finance is one of the most critical topics you can learn to excel in life, yet it happens to be the least explored. Try to bridge the gap in your knowledge by taking online courses, talking to professionals, and creating a network of like-minded people that are willing to share and learn. This will help you spot the right opportunities and save you from scams.
6. Focus on tax savings
Tax saving is one of the most underrated yet potent wealth-building strategies. Tax constitutes a major portion of your cash outflows. The government taxes everything from your salary, business income, rental income, or capital gains from investments. Therefore, using the right measures to lower your tax is essential. Using tax-advantaged accounts like the 401k and IRA can be the first step. This can be a helpful long-term strategy. Additionally, you must also pay attention to your tax filing. Focus on your tax filing status, especially between filing jointly as a couple or separately, and pick an appropriate option that helps you save tax.
Additionally, use deductions like standard and itemized deductions to your advantage and lower tax based on what suits you the best. It is also essential to plan your investment withdrawals carefully to avoid short-term capital gains tax, as they can be higher than long-term capital gains tax. Further, you can use strategies like tax-loss harvesting, too.
7. Invest your money
The most important of all wealth creation strategies is to invest your money. Investing your money prepares you for inflation, future goals, emergencies, and more. Investing lets you plan for varied goals in simple and steady ways without seeming like a burden. You can choose from different types of investment strategies, like short-, mid-, and long-term, based on your goals. Moreover, there are several investment options ranging from low to high risk. Low-risk options can include bonds, money market accounts, etc. Medium-risk options can include large-cap mutual funds, hybrid funds, etc., and high-risk options can consist of stocks, equity funds, cryptocurrencies, etc. No matter what you choose, make sure to create a diversified portfolio at all times to lower risk.
8. Reinvest your gains
Apart from investing, you must also remember to reinvest your profits. Any returns like dividends from stocks or exchange-traded funds or gains from the sale of an asset, such as real estate or gold, can be reinvested into the market to earn more. Unless you need the money for a specific need, it may be better to give your money more time in the market and unlock fresh earning opportunities.
9. Consider creating a side hustle
A side hustle can be a great way to earn more. It can also provide you with a safety net in case you lose your primary job. With the rapid transition towards a complete work-from-home working module, it is easier to look for side hustles today than ever. Try to use this to your advantage. You can explore e-selling, setting up a service business, writing, video editing, photography, etc. There is a demand for several diverse skills in the market. Moreover, the boundaries of age and gender are also diminishing, making it easier to find part-time jobs within your interest range.
10. Take your financial management seriously
Ignorance is a major mistake that can come in the way of long-term wealth creation. People who make it to the top often end up undermining what they have. Carelessness or negligence can cost you your hard-earned money. Therefore, make sure to always take your money seriously. Regardless of your income, never forget the basics like saving, investing, and budgeting. Continue investing your money and setting new goals.
11. Spend your money wisely
Creating a good relationship with your money is essential. This does not mean that you need to save or invest all your money and spend nothing on yourself. Instead, it refers to being balanced in your approach. It is good to spend on yourself and enjoy life. Eating out, traveling, shopping, etc., may not be essential expenses, but they add to the quality of your life. Make sure you spend on these indulgences from time to time. However, be smart about your expenses. Impulse shopping or giving in to peer pressure can be detrimental to your financial being. So, plan big purchases. If you have made a big monthly purchase, shift other expenses to the next month. A budget can help you do this more effectively.
12. Be disciplined and consistent
Discipline and consistency are vital financial habits. In most cases, small yet consistent savings and investments have proven to be more beneficial than big investments made intermittently. Therefore, it may be better to focus on continuity over quantity. Prioritize being regular with your savings and investments. You can automate your investments, retirement plan contributions, and savings. You can also use accounts like the 401k that penalize you for early withdrawals to ensure you stay on track. Additionally, it helps to create habits like budgeting, saving, etc., a part of your life. This may be a slow process but can be life-changing if implemented correctly.
13. Stay away from the promise of a ‘quick fix’
Long-term wealth creation requires a long-term investing approach. Even experts like Warren Buffett have repeatedly spoken about the practicality of the buy-and-hold method. It is important to note that time spent in the market is much more important than timing it. Therefore, do not be in a hurry to make profits. Give your money time and be patient. Stay away from Ponzi schemes that claim to double your money or deliver high returns over a short investment horizon. Instead, do your research, ask for data, and look at past performance, expense ratios, portfolios, etc., to gauge the quality and risk involved with an investment.
14. Revise your financial plan often
Portfolio revision and rebalancing are essential to ensure your investments are always in line with your goals. Your goals may change as you grow old, get married or divorced, have children, etc. Therefore, it is crucial to ensure that your portfolio always aligns with your needs. Revising your financial plan and portfolio also helps you identify the weak performers. Investments that may not be serving your purpose can be removed. Likewise, you can invest more in investments that are delivering returns per your expectations. Revising your plan also helps you ensure suitable asset allocation per age and risk appetite.
15. Be prepared for the worst
While you plan for goals like retirement, travel, house purchase, and others, do not undermine unexpected expenses. Emergencies can strike when you least expect them. Recession, loss of job, health issues, accidents, personal issues, etc., can all impact you financially. They may force you to borrow money, liquidate your investments before maturity, and live below your means. Therefore, always keep a buffer for emergencies in your savings. The best way to do so is by maintaining an emergency fund. An emergency fund can be anywhere between six to eight months of your monthly income. Such a sum can be helpful to tackle most situations and help you cover essential needs in the case of unemployment.
Additionally, try to aim for more than what you need. For instance, save 20% more than you need for a home. This will help you cover unprecedented price hikes in properties, realtor fees, property taxes, etc.
16. Get insurance
Life insurance can help secure your loved ones financially in your absence. Health insurance can help you tackle medical inflation and ensure preventive healthcare for a better life. Homeowners insurance can be essential to safeguard yourself from property theft and damage. Likewise, you can also get auto insurance for your car, jewelry insurance for precious stones and metals, etc.
17. Consult a financial advisor
The last but one of the most crucial wealth-building strategies can be to include professional advice in your plan. A professional can bring a fresh yet comprehensive perspective to your financial plan. Financial advisors are qualified experts with years of experience. Their guidance can help you eliminate errors, ensure goal-based investing, and adopt the fastest path to financial success and wealth creation.
To conclude
These 17 principles are the foundation of how to build your wealth and can be adopted by everyone, irrespective of age, income, or goals. However, you must understand that these principles work side by side with each other. For example, saving or investing is useless if you spend this money on wasteful things. Likewise, getting a side hustle or earning investment returns will not help if you lose the money to tax. Therefore, remember to plan well and hire a financial advisor to ensure that you follow these principles correctly.