Building Wealth: 6 Essential Steps for Success - MagnifyMoney

Building Wealth: 6 Essential Steps for Success

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When you’re staring at a cloud-covered peak from the base of a mountain, you might wonder if you have what it takes to make the climb. Building wealth could evoke similar feelings.

We can’t guarantee it’ll be an easy endeavor, but there’s no day like today to start your journey toward wealth. The tools for reaching a mountain peak and your financial goals are the same: patience, dedication and a map.

Step 1: Building wealth starts with a plan

You wouldn’t hike the Appalachian trail without proper preparation. Likewise, building wealth requires a similar level of attention and planning.

A financial plan helps you identify your next steps wherever you are in your journey. To lay a firm foundation for your wealth-building plan, start with these steps:

  • Develop a budget. A budget tracks your earnings and expenses so you know how much you have to save towards your wealth-building goals. Try using the 50/30/20 rule to kickstart smart saving.
  • Create retirement goals. Retirement goals tell you how much you need to save to live comfortably in the future. Our retirement calculator can help determine if you’re saving enough for your goals.
  • Establish debt reduction goals. Make a list of all your debts, choose a repayment plan, and identify your target debt-free date. You didn’t accumulate your debt in a day, so give yourself time to pay it down.

Don’t hesitate to ask for guidance if the planning stage feels overwhelming. Financial advisors specialize in crafting custom financial plans and can also be an excellent resource for learning tips and tricks to help you with your wealth-building goals.

Step 2: Set your savings on autopilot

Automating your savings is like having a spare battery; it’s one less thing you’ll have to worry about if your flashlight or GPS device dies on the trail. When life happens, you want to ensure your wealth-building system still works in the background.

Emergency fund

Unexpected expenses like a hefty medical bill can set you back thousands of dollars. While frustrating, you can stay ahead by building an emergency fund. Having cash on hand to pay for life’s surprises can also keep you from taking on high-interest debt like credit cards. To help build up your emergency fund, you can:

  • Automate your transfers. Never miss an emergency fund contribution by automating your transfers. Set up scheduled transfers from your bank account to a high-yield savings account on payday.
  • Save as much as you can. The more you save, the faster you can build up your emergency fund. However, saving a little is better than saving nothing at all, even if you can only budget $10 every month.
  • Save financial windfalls. Windfall income is unexpected financial gains (inheritances, tax refunds, bonuses, etc.) beyond your recurring income. Use windfalls to build your emergency fund faster.

Experts recommend saving three to nine months of living expenses, maybe even more. How much you choose to save varies on your lifestyle. Saving an emergency fund can help you avoid debt and build wealth faster.

Retirement savings

Wealth building is a long game. Thinking about your finances before retirement ensures you have money when you stop working. Retirement savings accounts allow you to grow your money tax-deferred or even tax-free, depending on the type of account.

  • Start today. The sooner you save, the more time your money has to grow. So start contributing to your retirement fund, even if you can only budget a small amount each month.
  • Make the most of your 401(k). Ensure you’re enrolled if you have access to a 401(k) at work. If your employer offers a match, you can maximize your 401(k) by contributing enough to get your employer’s matching contributions.
  • Open an individual retirement account (IRA). Take advantage of those tax benefits by letting your money grow in an individual retirement account (IRA). You may even be eligible to pair your IRA with your 401(k).

With tax benefits and the power of compound interest, having a retirement savings account is critical to building wealth in the long run. If you’re not sure what type of retirement account to open, explore our comprehensive guide to individual and employer retirement plans.

Step 3: Manage your debt

Debt often gets a bad rep; however, it’s not all bad. Good debt like student loans and mortgages can have long-term, positive returns on investment. In addition, these types of “good” debts generally have lower interest rates.

However, bad debt is like bringing too much gear on a hike. Debt can be helpful, but too heavy a load can slow your journey to build wealth.

Bad debt, like credit card debt, generally has higher interest rates, which means all the money you pay in interest is money you can’t put toward your wealth-building goals. So while credit cards are a great way to build credit and earn attractive rewards, interest rates can quickly eat away at your finances.

To keep “bad” debt under control, you can:

  • Pay your cards in full. Only use your credit card to pay for expenses you can already afford. If you carry a balance for one month, try not to use the card again until the balance is back to zero.
  • Use the snowball method. Pay off your smallest debt first and your largest debt last. Then, ensure you make minimum payments on all your accounts to avoid late fees.
  • Use the avalanche method. Pay off your debt with the highest interest first and the smallest interest last. Ensure you make minimum payments on all your accounts to avoid late fees.

If you want more debt-management resources, check out our in-depth guide to slaying your debt once and for all.

Step 4: Increase your earnings

If your current income is lower than you’d like, you might wonder how you’ll ever build wealth. While your savings today might be small, you can set a plan to boost your savings by boosting your income.

Now, increasing your income won’t happen overnight. But you can draft a plan today to increase your earnings — which can help increase your savings — over time. You can:

  • Boost your skill set. Increase your salary at work by developing your soft and hard skills. LinkedIn Learning is a great place to start.
  • Add an income stream. Start a side gig to supplement your primary source of income.
  • Change jobs. According to a recent report from the Pew Research Center, 60% of workers saw an increase in their salary after switching employers. If your earning potential is capped at your current job, a new job could be the ticket to earning more.

A word of caution: When your earnings increase, resist the temptation to spend more. Maintain your current standard of living and use those additional funds to build your savings or tackle outstanding debt.

Step 5: Regularly revisit your progress

If you’re on a multiday hike and realize you have less food than anticipated, you’ll ration your resources differently. Similarly, there are moments in your wealth-building journey where you’ll have to pause and revise your plan.

  • Review your budget. Adjust your budget based on lifestyle changes like starting a family or getting a raise. Determine if you’re still on course to hitting your wealth-building goals.
  • Revisit your investment strategy. Changes in the market can impact the value of your assets. Adjust your portfolio’s asset allocation and rebalance your portfolio based on your risk tolerance.
  • Set a “money maintenance” day. Pick a day of the week or month to review your progress. Take this time to review your budget, investment strategy and financial plan to identify what’s working and isn’t.

While most aspects of your wealth-building system should be on autopilot, it’s wise to look back and evaluate your progress. It is also a time to take well-deserved kudos. A consistent review process empowers you to make small changes today that can significantly impact your long-term goals.

Step 6: Keep fees in check

Investing in good hiking gear can enhance the quality of your experience. Similarly, paying for good advice or reasonable investment fees can help ensure your assets are well managed. However, fees can add up and take an unexpected bite out of your hard-earned savings.

For example, a 1% annual fee for an initial investment of $100,000 amounts to almost $28,000 in fees over 20 years. If you kept an eye on fees and could bring that down to 0.75%, you’d save $13,000.

To help keep your fees reasonable, make a plan to regularly review:

  • Per-investment fees. Some investment fees to review include expense ratios, trading commissions, and brokerage fees like wire transfers and ACAT fees you’ve paid. Then, consider switching to investments with lower fees if necessary.
  • Banking fees. Banks usually have monthly maintenance fees. However, your bank will typically waive this fee if you open a checking and savings account or maintain a minimum balance.
  • Borrowing costs. Take a look at interest rates on outstanding debt (auto loan, mortgage and credit cards). See if you can refinance or transfer balances to a lower interest rate credit card.

Minimizing your fees will allow you to optimize your portfolio and maximize your savings. Don’t let unchecked fees hold back your wealth-building progress. But remember: Sometimes you have to spend a little money to make money.

If you need help starting your wealth-building journey, consider talking to a financial advisor. They’re more affordable than you might think, and they can work with you in many ways so that you only pay for the level of advice you need.

Frequently asked questions

A qualified retirement plan is a retirement plan that grows interest tax-free or tax-deferred. Some examples include individual retirement accounts like Roth and traditional IRAs and 401(k), 403(b) and SEP-IRA plans.

A financial advisor most commonly charges clients based on a percentage of the assets they manage. Our comprehensive research on financial advisor fees shows that a typical asset under management (AUM) fee ranges from 0.59% and 1.18% of your assets.

You can open an IRA through an online brokerage, your bank or a financial advisor. After choosing where to open your IRA, you’ll complete an account application, fund your account and make an opening deposit (if required).

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.

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