6 Essential Steps to Building Wealth

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October 7, 2022

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6 Essential Steps to Building Wealth 

The steps to building wealth are similar to those for any other financial goal. To grow wealth, be mindful of spending habits and investments. Between reading up on investments and learning about how the market fluctuates, a successful investor needs to know what their purpose for saving is, such as to fund their education, health insurance, or a comfortable retirement. Let’s dive into the fundamentals of wealth building.

Step 1: Create a Sustainable Budget

Budgeting is a great tool for growing wealth and establishing financial stability. It helps you keep track of your income and expenses and helps you save money for short-term goals like large purchases or long-term ones, such as retirement. However, adjust your budget as needed. The goal of budgeting is to increase your savings and avoid debt.

How Do You Make a Budget?

The first step to budgeting is to create a spending plan. Map out your spending plans for the next six to 12 months. You can even plan ahead for the next year to see how much extra money you'll need to make it through the next six to 12 months. Make adjustments as needed, but remember to revisit your budget regularly so you can achieve your financial goals.

When creating a budget, identify your fixed expenses and your variable expenses. These include your regular monthly bills, such as rent, utilities, and car payments. You can also list any interest payments you may have on credit cards or loans. These bills are a good starting point to budget but don't forget to add in a little "fun money" in your monthly spending plan.

After developing a realistic monthly budget, identify areas where you can save money and reduce expenses. For example, you may be able to cut back on certain expenses like going out to eat. Also, consider meal prepping and shopping with a list to avoid impulse buys. By making these adjustments, you potentially save money to put toward the principal of your debt.

Step 2: Learn the Basics of How To Invest

Investing involves setting aside money to be used to buy equities and debt securities, such as certificates of deposit (CDs) and bonds. While risk varies from one investment to the next, a diversified portfolio can help reduce volatility. There are many ways to invest, and most people start with stocks, bonds, and mutual funds.

Though investing in a financial instrument like stocks comes with risk, it can also be very rewarding. But before investing, make sure your finances are sound. For example, you should have an emergency fund of three to six months of living expenses. And if you owe any high-interest debt (e.g., credit card bills, personal loans, etc.) you should pay off those first.

What Should You Consider Before Investing?

In order to begin investing, you need to decide what kind of investments you are comfortable with and what time horizon you have. The goal of investing is to increase your wealth. This can be accomplished by purchasing investments that will increase in value in the future. 

Investing involves conducting thorough research and doing your due diligence, though, as you must choose investments wisely. Good investments will increase your wealth, while bad investments may only cost you money.

Step 3: Pay Off Outstanding Debt

While some types of debt are good for your credit in the long run, eliminating debt that you cannot afford is a solid strategy for wealth building. Unfortunately, paying off debt is not a quick process, but it can give you a better chance of building wealth in the future. 

Plus, with debt out of the way, you may qualify for financial products with favorable terms. For instance, if you want to buy a new car, your excellent credit score could allow you to take advantage of zero percent financing offers.

Consider refinancing your debt or transferring your balances to credit cards with lower interest rates. By minimizing these fees, you will be able to optimize your portfolio and maximize your savings. Unchecked fees can slow your wealth-building progress, so it is crucial to keep a track of all fees.

Step 4: Start Saving Money

Saving is an essential step in building wealth, whether you have a plan for an emergency fund or want to build up a nest egg for your retirement. Saving as much as 10% of your income each month can make a big difference over the long run. Then, you can start investing your savings to earn dividends and interest, which will grow into real wealth over time.

In addition, saving funds is a good way to avoid paying high-interest credit card or mortgage fees. These fees are usually charged each month, but some banks waive these fees when you maintain a certain account balance or minimum balance. 

Ultimately, saving is a habit developed over time. By putting aside a small portion of your income each month, you could create an emergency fund and an investment fund to use when you need them. The more money you save each month, the more you will be able to invest. There are free online tools like Mint that make it easy to track your spending habits and save as much as possible.

How Can You Start Automating Your Savings?

Saving regularly and investing your money are essential components of a solid financial plan. Automating your savings and investment activity can streamline the process and leave you with more time to focus on other money-making activities. With your savings and investment activity under control, you may enjoy greater returns on your retirement assets.

When setting up a savings account, financial experts recommend a goal of saving at least 15% of your income. However, you can begin at a lower amount and work your way up. For example, if you have an automatic deposit set up for monthly expenses, update your settings to split your pay check between a checking account and a savings account. That way, you'll be able to use the money in your checking account to meet your expenses.

Once you have set a savings goal, begin automating your deposits. Automatic savings transfers are convenient and easy to set up. They fit into a budget seamlessly and help you meet your financial goals. Check your savings goal every quarter to see if you're on track.

Step 5: Consider Earning Extra Money From a Side Hustle

One of the most common ways to earn extra money is through a side hustle. This is a great way to supplement your income and build your wealth at the same time. One popular side hustle is vehicle rental. There are several apps available on the market that let you list your vehicle for rent in various cities. Another popular option is to post your car for rent on a website like Turo.

Regardless of the side hustle you choose, it is important to budget for it so you can afford the initial start-up costs. A side hustle can earn you thousands or even tens of thousands of dollars per year. Subject to tax write-offs, certain gigs can be an enjoyable, fun way to make money. You may even discover a new passion for yourself.

Step 6: Build Up an Emergency Fund

A good emergency fund is crucial if you ever find yourself in an emergency situation. While we can't always control what will happen in the future, it can help you avoid financial disaster and build your wealth in the long run. 

While the Center for Global Development estimates a global pandemic could occur in the next 10 years, there are many other, less dire, scenarios that can lead to the need for emergency funds. It's best to set up a savings account that's separate from your checking account so that when an emergency arises, you can access your funds. 

Another good idea is to keep your emergency fund in an interest-bearing account — either a savings account or a money market account — so that your money will grow. The goal for building an emergency fund is to have enough money saved to cover six months' worth of expenses, but this amount can vary depending on your budget and other factors. The fund can also help if you lose your job and need to find a new position.

What Is an Easy Way To Start Investing and Saving?

An individual can easily build their wealth by using innovative financial products provided by industry leaders like Compound Banc. As shown by historical data, bonds and assets in the real estate industry are among the most stable investments. Compound Banc empowers individuals to begin their investment journey or diversify their portfolio with real estate bonds starting at a mere $10 each. 

Backed by actual real estate, including industrial, commercial, and residential properties, the bonds offered by Compound Banc result in consistent returns at a fixed rate of seven percent annual percentage yield (APY). Plus, Compound Banc’s smart technology enables users to monitor and manage their bond investments from an intuitive and secure app, which includes functionality to automate savings. Join the Compound Banc community today to potentially increase your wealth at a steady rate. 

Sources:

Making a Budget | Consumer

Financial Goals | MyCreditUnion

Credit Cards | Federal Trade Commission 

Research Before You Invest | Investor 

Dealing with Debt | USA 

‘Should it stay or should it go?’ Consolidating retirement accounts could help you save time and money - Healthy Boiler | Purdue University 

The Next Pandemic Could Come Soon and Be Deadlier | Center for Global Development 

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