Wealth. Just the word has a certain gravitas and power, doesn’t it? We all want to build wealth, regardless of our age. No matter what stage in life we find ourselves in, prosperity is a worthy goal. Of course, what it means to live a wealthy life is different for everyone. From a purely financial perspective, there are some general guidelines for building wealth over time. Basically, to accumulate wealth over time, you need to do three things: after earning and saving, investing is key to long-term success and financial freedom. But while the basic steps to building wealth are simple to understand, they’re much more difficult to follow.
1
Make Money
This step may seem elementary, but for those just starting out or in transition, this is the most fundamental step. And a crucial question you have to ask yourself is: Am I making enough to pay expenses and save in the first place? Keep in mind that there’s only so much you can cut in costs. If you’ve already cut unnecessary costs, then you should look into ways to increase your income. (Financial advisors suggest evaluating your income situation periodically, but at least once a year.)
There are two basic types of income—earned and passive. Earned income is sometimes called active income. This is the money you earn from working a job, side-hustling, or any other activity that requires your active participation. While passive income is money that derives from some other investment and requires little to no maintenance to generate indefinitely. In most cases, there’s usually some sizable up-front investment in the form of either time or money to generate a reliable stream of passive income.
So if you’re looking to make more money, you could be proactive and take on more work or invest small amounts of money to generate a modest passive income. Any combination of these will lead to a greater surplus for your discretionary use every month.
2
Save Money
If you want to save more, you’ll want to track your monthly expenses. You can do that via a simple spreadsheet or an app. That way you can identify any places you can pull back in order save more. Make sure you’re putting away savings before you get access to your money. Contribute to your employer’s 401(k) or 403(b), and try to get the maximum your employer is matching. You can also allocate an amount to go directly into a separate IRA, savings or investment account.
Putting your saving on auto-pilot is a smart way to stash away money without feeling like you’re “going without.” But it’s also smart, to reevaluate at least once a year. Perhaps there’s a savings account with a higher interest rate or if you’ve decided to invest 70% in stocks and 30% in bonds, the market may have shifted requiring an adjustment to your holdings.
3
Invest Money
We think investing money is the final—but undoubtedly most critical—step in the process of building wealth. If you’re saving plenty but putting it all in more conservative investments, like the regular savings account at your bank, it could be incredibly difficult to build a sizable nest egg. Investors may have to take on some risk to gain larger returns. More risk-tolerant investors might have more money in assets, such as stocks and cryptocurrency, while more risk-averse investors might opt for more cash and bonds.
One keen way to mitigate risk, according to The Motley Fool, is to have a globally diversified portfolio that adheres to a pre-determined asset allocation, or how your portfolio is divided across different investments. Your asset allocation should represent the bedrock of your investing strategy. An asset allocation is usually described in percentages. A sample asset allocation might be 40% U.S. stocks, 20% international stocks, 20% bonds and 20% real estate. But you also have a slew of options to choose from when it comes to investing. There are stocks, bonds and mutual funds, along with more modern options like cryptocurrencies, non-fungible tokens (NFTs). Just remember that investing is a long-term strategy. And when it comes to wealth, you’re in it for the long haul.
