How to build wealth

In a world of instant gratification, the journey to wealth stands out. It’s about consistent, deliberate choices, not jumping from one financial fad to another.

While many people dream of getting rich, building wealth is something different. Getting rich often implies a sudden windfall, like a lottery win or an unexpected inheritance. It’s an infusion of cash that can quickly elevate your lifestyle, but it doesn’t guarantee long-term financial stability.

Building wealth, on the other hand, is a methodical process that involves accumulating assets, reducing debt and consistently making wise financial choices over time. It’s about creating a strong foundation that will support you and your family for years to come.

While wealth creation may not happen overnight, there are steps you can take to set you on the path to long-term financial success.

In this guide, we’ll explore some key wealth building strategies to help you grow your money over time.

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Strategies for building wealth

Building wealth is a gradual process. It’s not about quick fixes or get-rich-quick schemes — it’s about making smart financial decisions year after year.

Here’s how to build wealth, one step at a time.

Create a financial plan

Building wealth starts with creating a solid financial plan. Think of it as the foundation of your wealth-building journey.

A financial plan is a comprehensive document that outlines your income, expenses, debts and assets.

Once you have a firm grasp on your current situation, the next step is to set both short-term and long-term goals. Why do you want to build wealth? Do you want to retire early or donate a large portion of your money to charity? Do you want to buy a big house or start a college fund for your kids?

Be specific about how much money you’ll need to realize each goal and set a time frame for achieving it. Then, outline the specific steps you’ll need to take to accomplish your goals.

You can also work with a financial advisor to help develop your plan. A trained professional can provide expert insight on complex financial topics, such as investment options, tax-loss harvesting and risk management.

As you search for a financial advisor, look for one with a fiduciary duty, which means they’re looking out for your best interest. Ask them questions about their recommendations and make sure you understand their payment structure, so you’re not hit with any hidden costs.

Start budgeting

Making a budget is essential to building wealth. It helps you understand where your money goes, avoid overspending and identify funds you can allocate toward saving and investing. Here’s how to create a budget in five simple steps.

To start, look at your finances to see how much money you earn and how much you spend. Next, identify changes you can make to increase your income or decrease your expenses. This might mean making small changes, like packing a lunch instead of eating out, or big changes like moving to a cheaper apartment.

One popular rule of thumb for budgeting is the 50/30/20 rule. It states that you should allocate 50 percent of your income toward needs, 30 percent toward wants and 20 percent for savings and investing.

Maximize your savings

To help you stay committed to your savings goals, have money automatically deducted from your paycheck or checking account each month. This puts your savings on autopilot so you won’t be tempted to spend it.

Make sure to establish an emergency fund as well if you don’t have one already. This cash reserve should equal three to six months (or more) of living expenses, and you’ll need it if something unexpected arises, like car repairs or a busted water heater. An emergency fund helps you avoid taking on high-interest credit card debt and protects your credit score.

Where you put your savings also matters. For your emergency fund and short-term savings goals like buying a home, a high-yield savings account is a great option. These accounts are offering their highest rate in years, thanks to a series of interest rate hikes by the Federal Reserve.

Things change, so it’s important to revisit your savings plan at least once a year. Consider putting part of any windfall — such as a tax refund or a bonus at work — toward your savings. Adjust your goals, contributions and accounts as you earn more. This way, you’ll stay on track toward building the wealth you’ve been working so hard for.

Manage debt

Getting your debt under control is essential to building wealth. You don’t have to eliminate all the debt in your life right away, but paying off high-interest credit cards and personal loans should be a top priority.

If you’re trying to eliminate debt, consider picking a debt management strategy — such as the debt snowball or debt avalanche method — and select a debt-payoff date to keep you motivated.

You can also use budget calculators, repayment calculators and financial management apps to track your progress. Another option is trying to negotiate with your creditors to lower your monthly payments or reduce your interest rates.

Invest

Investing puts the money you save to work, increasing your wealth. It’s also the most effective way Americans can build their net worth and achieve long-term goals like retirement.

The stock market is an ideal place for long-term investments. While saving money is important, you risk losing purchasing power over time due to inflation, which is why it’s vital to invest as well.

In many ways, investing is more accessible and more affordable than ever. You can open a brokerage account online in minutes and start investing with very little money. Most brokers no longer charge commissions, and you can even hire a robo-advisor for a low monthly fee to pick the investments for you.

To protect your wealth, ensure your portfolio is diversified. This means owning a mix of different assets that don’t necessarily move in the same direction at all times. A financial advisor can help you pick investments that align with your goals.

Here’s more information about different investments and their role in a diversified portfolio.

Stocks

Stocks offer you part ownership in a business, and they’re one of the best wealth building strategies. In the short term, however, stocks can be very volatile, so it’s best to hold them in your portfolio for at least three to five years. Here’s a primer on how to invest in stocks.

Bonds

Bonds are considered a less risky investment than stocks, but they come with lower gains. Bonds tend to be much less volatile than stocks, making them ideal for balancing out a portfolio and generating an income stream. Here’s how bonds work and how to use them to build wealth.

Mutual funds

A mutual fund is a collection of investments owned by many different investors. You buy shares in the fund, which is diversified among various stocks and/or bonds, reducing your risk and potentially even increasing your returns. While mutual funds offer diversification, they often carry higher fees than ETFs or index funds.

ETFs

Exchange-traded funds are similar to mutual funds in that they spread your investment dollars across multiple stocks, bonds or other assets. However, ETFs offer a few advantages over mutual funds, namely very low management fees.

Understand tax impacts

If you’re investing to build wealth, pay attention to the taxes you’ll owe on your investments. Thankfully, there are several legal ways to reduce, defer or even eliminate taxes on your investment gains and keep more of your profits.

Contributing to a tax-advantaged retirement account, such as a traditional IRA or workplace 401(k), is one way to defer taxes until retirement. You’ll also enjoy a tax dedication in the current tax year for any contributions you make.

Another option is a Roth IRA or Roth 401(k). Roth accounts don’t offer a tax deduction for the current tax year, but investment gains within these accounts are tax-exempt, meaning you can withdraw money from a Roth account without owing taxes.

If you’re contributing to a 401(k) plan, make sure you’re contributing at least enough to receive the match — it’s essentially free money. Over time, aim to max out your retirement contributions to the legal limit.

Another strategy to reduce investment taxes is to buy and hold your investments for at least a year. The IRS taxes long-term capital gains at 20 percent, 15 percent and 0 percent. These rates are usually lower than what you’ll pay on short-term capital gains, which are taxed at your ordinary income rate.

Insure your wealth

After working hard to build your wealth, you need to protect it. Insurance is one of the most affordable ways to safeguard against financial disasters.

At its core, insurance is simply a promise of reimbursement for a loss in return for a premium paid. You can buy insurance to cover many different kinds of risks, but you can cover your basic needs with home, health and life insurance.

• Homeowners insurance: Homeowners insurance covers your home and possessions. The personal liability coverage in a homeowners policy protects you from loss resulting from any injuries that may occur on your property. You may also need special insurance for flood, earthquake or other geographic-specific risks.
• Health insurance: Your health is an asset. Protecting your health by purchasing the appropriate amount of health insurance can give you peace of mind to focus on other financial goals. Many employers offer additional insurance at a low monthly cost that may also be beneficial, such as long-term disability insurance and critical illness insurance.
• Life insurance: In the event of your death, life insurance pays money to your beneficiary, which can be a child, spouse or anyone else you choose. Term life insurance, often available through your employer, can offer suitable protection at a low cost.

Bottom line

Building wealth requires discipline to stick to your budget, resist impulsive spending and stay committed to your long-term goals. Don’t worry if you’re starting out small. The important thing is to make a plan and get started. Remember, building wealth is a marathon, not a sprint.