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Updated on Tuesday, February 4, 2020
Setting aside a certain amount of money each month to slowly build your savings is a key financial strategy. Overhauling your entire financial life and setting new priorities across the board is how you start building wealth.
A healthy savings account balance can help pay for your kids’ college education — but having wealth means you’ll be able to live the life you want, and pay for the college education of your grandchildren, too. You’ll need both new priorities and a great savings account to build wealth — below you’ll find our guide on how to build wealth at any stage of life.
6 Steps to Build Wealth
Set investing goals to build wealth
Your wealth-building journey should begin by setting long-term investing goals. If you’re married or share expenses with a loved one, that means having a detailed conversation about how you want to invest your money.
These are only a few points you may need to address:
- If you don’t already have a concrete financial plan, hash it out.
- Create a budget for your monthly spending priorities
- Discuss when you’d like to retire, and talk about how much you feel you need to save for retirement.
- Discuss housing needs and goals.
- Do you have kids? Structure your investments to be able to pay for their higher education.
The more detailed you get about these goals, the better. Because believe it or not, when it comes to investing, sometimes we’re our own worst enemy. As Matt Cooley, a certified financial planner and founder of Inspire Wealth Partners, explained, research suggests our natural biases can prevent us from making sound investment decisions. This is why it’s so important to set investing goals before funneling money into the stock market.
“Whether you’re a personal investor, an investment manager, a financial planner, or anyone else, you can benefit from understanding the internal driving forces behind your investment decisions,” added Cooley.
Invest in the stock market to build wealth
Once you’ve set goals, it’s time to invest your money in the stock market. If the stock market frightens you, Leibel Sternbach, an accredited portfolio management advisor suggests keeping in mind that since its creation in the 1800s, the market has offered an average 6% annual return — meanwhile, the current average savings account interest rate is a measly 0.27%. If you truly want to build wealth, you must be invested in the stock market.
When you invest in the market, your money grows without much effort. This is key to building wealth: passive income. If you need help figuring out how, exactly, to go about investing in the market, you can check out a robo-advisor like Betterment, which makes investing as easy as possible.
One way to break into the market is to research mutual funds that have a good historical track record and stick with them for the first few years. This will allow you to learn about the market while being invested with relatively low risk. You could also try investing in index funds, as they’re low-cost and consistent.
Don’t forget to keep building your savings
You’ll still need to build your savings as part of your wealth building strategy. One easy way to do that is to follow the 50/30/20 rule: this guideline suggests that you budget 50% of your after-tax income to needs (like paying for housing and basic living costs), 30% to wants (dining out and other discretionary spending) and 20% to savings. You might want to break each of these categories into their own separate bank accounts, which could make it easier to track. Keep those savings in a high-yield savings account.
The 50/30/20 rule will help build your savings by painting a clearer picture of your financial habits. For example, if you see that your needs are exceeding 50%, you can dig deeper and figure out why. Perhaps you need a less expensive car so your insurance isn’t so high. The concrete numbers of the 50/30/20 rule will keep you on the right track toward building a healthy savings cushion.
Reduce your expenses to build wealth
The more money you can free up from your expenses, the more you can funnel your investments for wealth. One easy place to cut back? Subscription services. Those monthly charges of $6 here and $12 there add up — and probably to a higher total than you even realize.
According to a study from West Monroe Partners, 84% of Americans underestimate how much they pay each month on subscription services. Start tracking your subscription services and then cut any that you haven’t used within the last two months.
Renegotiate your salary to build wealth
You can build wealth faster if there’s more money coming in, so try to renegotiate your salary. Before talking with your boss, research salary examples for your role and set your goal. You want to be realistic and leave some wiggle room for the actual negotiation process.
Go into the meeting with clear examples of how your performance has helped the company’s bottom line and some ways you will continue this trajectory. Your boss is more likely to give you a raise if they see your benefit.
Build wealth by avoiding lifestyle creep
Once you start getting traction in the stock market and a higher salary, don’t spend the extra money. This is the definition of “lifestyle creep” — the tendency people have to spend more as they earn more. One financial expert we spoke with cited lifestyle creep as one of the biggest mistakes that people make when attempting to build wealth: you suddenly have some extra cash and so, well of course, you buy a bigger car.
Avoid lifestyle creep by living as if you never got that raise, or never saw those extra gains from your investments. Funnel them into your investments and add more to your savings account every month. If you can avoid spending more as you earn more, you’ll turbocharge the wealth building process.
How to build wealth at any age
The first thing to keep in mind when starting to build wealth is that it’s a big picture effort. But you make that big picture happen by taking many small steps: making a budget, scheduling monthly deposits in savings, learning more about the stock market whenever you have free time.
“Above all, focus on making small incremental changes,” said Sternbach. “Don’t worry about how much you need to retire, [and] focus instead on just setting aside the savings. Any amount will do; try to increase that amount each year and two. [And] once you invest, don’t look at your investments for another few years.”
When starting out, keep a strict budget, reduce expenses and maintain your savings rate. Add additional revenue streams if you can — maybe there’s a side-hustle like selling items online that could help boost your income. Do plenty of research on the stock market and be sure to max out any retirement plans, especially if your company offers a 401(k) matching program. Remember, these small first steps will form the path that eventually leads to wealth.
Strategies for building wealth in your 20s
The sooner you start saving, the more time you’ll have to build wealth. When you’re young, don’t be so worried about setting aside huge chunks of change every month. Instead, save as much as you can and pay down debt. Stick to a detailed budget and invest in yourself through higher education. Be consistent.
“Consistent discipline is the key to building wealth,” said Cooley. “For most, it can take decades of savings to build real wealth. Building good habits and automating your saving and investing is critically important.”
How to build wealth in your 30s
Your 30s are when you should be ramping up your rate of saving and investing. Make sure you’re maxing out your 401(k) at work, as well as investing in the market outside of your retirement account.
Sternbach recommends investing in things that will eventually reduce your expenses. This includes buying a house or purchasing life insurance: “These are things that over time get more expensive, so buy them early on when they are cheap and you will save a bundle.”
Wealth building in your 40s
Be mindful of lifestyle creep in your 40s, since you’re likely making more money than ever. Increase your savings rate and diversify your investments. Make sure you’re prioritizing yourself.
“Save for your retirement first before you save for college,” said Cynthia Meyer, a certified financial planner and founder of Real Life Planning. “There are many ways to pay for college, but only one way to pay for retirement.”
Keep building wealth in your 50s
As you close in on retirement, it’s time to get a bit more protective of your money.
“Start shifting your investments to more conservative investments that have less volatility, so that if you do need to retire early you have the financial ability to,” explained Sternbach. “Few people retire when they plan to — layoffs or medical issues are a leading cause — and the last thing you want is to have to start draining your nestegg while the market is down, locking in those losses permanently.”
Where should you stash your wealth?
Build wealth by choosing the right online broker
Because investing in the market is one of the primary ways you’ll build your wealth, it’s important to choose the right investment broker. Look for one that matches your needs as closely as possible.
Hands-on investors are people who like reading about a broad selection of investment options. They like to pick their own assets, and build a portfolio themselves. The best choice for hands-on investors is an online brokerage account.
Hands-off, or passive, investors are people who want to put their money to work in the market, but would prefer not to get too involved in the details of their investment portfolio. They may not know as much about markets as a more hands-on investor, or they may have too many other things going on in their lives to devote extra time to managing investments. Hands-off investors should check out our listing of the best robo-advisors, special brokerage platforms that make investing easy.
How to choose the right savings account for your wealth
When stashing your wealth, look for savings accounts that offer you the best savings rates, and, typically, online banks have the highest rates. If you don’t already have an HSBC account, check out its HSBC Direct offering. This online-only account comes with a 0.50% APY on all balances. The catch, like we said, is that it must be your first HSBC account.
If you’re a fitness buff, check out Fitness Bank. It ties your savings rate to your monthly step count. If you log 12,500 steps or more, you’ll get the highest rate — 0.95%. However, make sure you keep your steps up, as the rate drops as your steps drop.
Credit unions also offer robust savings options. Digital Federal Credit Union offers a staggering 6.17% APY, but that’s only on the first $1,000 in the account; after that, you’ll earn 0.25% APY.
Build a CD ladder
Another strategy for stashing your wealth is to create a certificate of deposit (CD) ladder. A CD ladder is a collection of several CDs that have varying terms. You might break it out by opening a 1-year CD, a 2-year CD, a 3-year CD, a 4-year CD and a 5-year CD — all with $1,000 each. By staggering the CDs, you’re guaranteeing each CD will complete its term at predictable intervals. And because CDs carry higher interest rates than savings accounts, you’ll be sitting on a nice money generator.
The downside of a CD ladder? It’s a lot of cash locked away and, should rates increase, you won’t be able to take advantage of them if your money is tied up. However, if you’re interested in this nuanced approach of building wealth and can make it happen financially, a CD ladder could be a smart strategy.