Wealth building isn’t about get-rich-quick schemes or chasing the trends in the stock market. Often, it just comes down to making the right financial decisions, big and small, over an extended period of time.
An Investopedia.com article from May 2019 entitled, “3 Simple Steps to Building Wealth1” provides some steps that are worth sharing. Sometimes, it can seem like the secret to wealth building is a mystery, when in fact it can be simpler than you think.
Don’t be fooled — these steps are simple to understand, but they can be harder to execute. Still, they’re worth considering. According to the article, in order to build wealth over the course of your life, you need to do three things.
First, you need to Make it: You need to have a consistent source of income that allows you to have some left over after you’ve covered your necessities like housing, utilities, food and transportation.
Then, you need to Save it: Once those necessities are paid for, your next step is to have a proactive and consistent savings plan. This could include a 401(k) through your employer or another type of individual savings strategy.
Finally, you should Invest it: Once you have put aside that savings, it needs to work for you in an investment mix that matches your risk tolerance and long-term strategy.
Let’s dive into each of these three steps to wealth building a bit more in depth, starting with earning income. While earning income may seem like a no-brainer, it is still the most important step. Odds are that you have seen various charts and tables showing the value of compounding interest over time. What those tables and charts rarely show is what you need to be making to cover the necessities of your life. There is only so much you can save by cutting down on your expenses.
You will likely need to increase your income over time to allow for more opportunities to invest. One way to make sure that you are using new income for savings is to automatically increase your savings when you receive a raise or a bonus. You already know how to live on your current income, so don’t simply spend more because you have more.
Some 401(k) plans and individual retirement accounts will even provide you with the ability to automatically increase savings percentages on the schedule that you determine works for you. Are you paying off debt like a credit card or school loan? Schedule an increase for when that debt is paid off, thereby increasing your savings.
Speaking of savings, there are some more ways that you can avoid spending more than your income. Budgeting is an incredibly important and underrated tool to help you spend within your means and save what’s left over. Make sure you are looking at all of your monthly expenses and keeping excess and wasted expenditures to a minimum.
Finally, you need to find the right investment strategy and mix for your risk tolerance. Talking to a financial services professional can help you get a better understanding of what that might mean for you.
Building wealth can seem like a daunting task. But when you follow these three simple steps, you will find yourself on the right path.
Contact us here at Penny Lane Financial for help building your wealth.
1 https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/