Building wealth and having fun aren’t on opposite ends of a spectrum. In fact, building wealth can be one of many sources of enjoyment in your life.
Have you ever found enjoyment from completing a goal? Perfect, the same is true for saving for the future and building wealth.
In its simplest sense, “building wealth” means increasing your net worth. Continuing to build your net worth isn’t just important to obtain more money; it’s important because it will increase your time freedom and your ability to retire earlier. It’s stewarding the money you’ve been given well.
So, you want to build wealth without sacrificing enjoyment in life?
Good news: that’s easy. Here are six ways to build wealth without sapping all the fun in life. Spoiler alert: the building blocks to these wealth building strategies is having a using a monthly budget.
1. Pay Off Debt
Are you sure that paying off debt counts as building wealth?
Yes! Anything that increases your net worth counts as building wealth, remember?
Listen up – if your goal is to build wealth (and it should be), paying off debt should be your first step. Credit card debt, car loan, student debt…all of it needs to go. If you go after these debts first, your liabilities will be decreased (hopefully all the way to 0) which means your overall net worth will be INCREASED by the same amount.
It’s just like saving money! Plus there is an added kicker to this plan: you’re SAVING the interest on the debt that you would have paid had you taken much longer to pay off the debt. It’s better than just saving money.
One exception would be a reasonable mortgage. If you have a house that you own a decent percentage of, go ahead and move to other ways to build wealth before you pay off that debt entirely.
However, if you only put down a small percentage on your house and you still have a large mortgage compared to the house value, then you should think about putting a portion of your savings into paying down your mortgage faster.
2. Create An Emergency Fund
I know that I’m starting you off with two things that don’t feel like building wealth. Investing is the thing that builds wealth, right?
Well, think of an emergency fund as a way to protect your wealth. Having a well established emergency fund will build you a small amount of wealth and then protect your high priority wealth vehicles.
What are your high priority wealth vehicles? We will discuss them next, but they are interest earning investments, especially those that are tax sheltered.
But how does an emergency fund protect my wealth?
Great question. An emergency fund protects your wealth by being the account that is used in case of emergencies or financial hardship! Did you lose your job and you have a spouse and kids at home? Is there a large car repair that needs to happen immediately after an accident? Unexpected large healthcare bills? Use your emergency fund.
By using your emergency fund, you’re able to protect your investments by NOT using them! You should avoid taking out any money from any investments and retirement accounts. Don’t even view this as an option.
Why? Because those investments are supposed to be working hard for you. The more money that’s in those investments, the better. And your greatest ally is TIME – which turns into interest for you. Don’t take away time already built by tapping investments.
Long story short, build up 3-6 months of expenses in your emergency fund, use it for only emergencies, and then slowly refill the account back to your goal amount afterwards. This will give you peace of mind, and protect your high priority wealth vehicles, which I like to call investments.
3. Open A Tax-Advantaged Retirement Account
Retirement accounts are absolute must haves for building wealth. I might actually suggest that you open one or more of these accounts before you’ve paid off your debt.
Why? Because time is so important for compound interest and your eventual retirement!
You’ve likely heard of a 401k or a Roth IRA (there are others as well). These are tax-advantaged retirement accounts. At their core, they are investment accounts where your money is invested in the stock market. However, the “tax shield” around these accounts is different depending on which account you are dealing with.
The 401k (or 403b)
A 401k is typically an account set up by your employer, and you are able to contribute to this account with payroll deductions BEFORE that money is taxed. This is a big advantage.
The second advantage is that this money will grow year after year without being “seen” as your personal income and being taxed.
Some companies will even “match” your contributions or give you money. Please, I beg you, say “yes” to your 401k benefit and contribute the minimum for the match at the very least!
P.S. You’ll pay taxes on this money when you take it out of the account when you “retire”, but that’s okay. Worth it!
The Roth IRA
The Roth IRA is one you can set up yourself at any brokerage firm or online broker. It’s an investment account in which you contribute “after-tax” money. This means that the money you are putting in it has already been taxed because it came from your paycheck likely. It’s money you already own.
The amazing thing about the Roth tax advantage is that this money will grow tax free just like the 401k, BUT when you take it out to support yourself in retirement you won’t pay taxes on it!
How exciting is that? Very.
So, these are just the two tax-advantaged accounts I would suggest starting with. If you contribute religiously to these accounts, you’ll build wealth quickly and be totally set in retirement!
4. Invest In Appreciating Assets
Now comes some of the fun stuff in building wealth.
Once you’re out of debt, you have an emergency fund, and you’re contributing strongly to at least one tax-advantaged retirement vehicle, then you’re ready to start investing in appreciating assets!
There’s a lot of room here for your own research, but I will list some popular things to invest in that can help you build wealth. Note: this list doesn’t include things like cars. That’s because cars LOSE value over time, therefore they are not appreciating assets. Buy cars as cheaply as you can.
The Stock Market
You don’t have to be a stock market genius to use the market to your advantage. If you boil it down and take out all the confusion, the market increases over time. You could pick individual stocks, OR you could buy low cost index funds and keep them for a long time.
There are many different types of real estate investing, but one income-producing approach is to buy a condo/townhome/home and rent it out. This will give you real cash flow and could eventually lead to financial freedom if you are wise with your purchases. Do you research before jumping into real estate investing.
Start a Business
Another slightly more risky way to invest your money is to invest in a business you know well, or start your own! If you’re counting on the business to grow, it could end up being a great investment. Clearly this route involves more work on your part, and definitely more risk.
5. Spend Less Money
If you are new to budgeting, most people find it fairly easy to “trim” their spending. Using a monthly budget makes it abundantly clear to you what you are spending your money on each month.
If you want to build more wealth, why don’t you cut down on your spending? If you put the money you save each month towards the investments listed above, you’ll be increasing your wealth monthly.
Here are some common things people can cut out of their budget: cable tv, eating out frequently, multiple coffee shop stops, going out to movies, or you could get a haircut less frequently!
There are numerous ways to save money. Have some conversation with your spouse or a close friend about the difference between “needs” and “wants”.
6. Make More Money
Eventually there won’t be much more you can trim from your budget once you’ve optimized for the lifestyle you want.
If you’re trying to maximize your future life, you may STILL want to build more wealth each month. And that make leave you with this: make more money.
If you can make more money and use it all for investing and wealth building, then you are on the fast track! The key is not changing your lifestyle or the expenses you need to live on each month.
How can you make more money?
You could pick up a part-time job, you could ask for a raise at your current job, you could start consulting in a skilled area of yours, or you could start your own business.
There are many ways to make more money, but you also have to account for your time as well. If you are making more money and building wealth, but your spouse and kids are suffering because you’re never around, is it really worth the extra money?
Get your priorities in order and start optimizing your time for maximum profit. Did I miss any of your favorite wealth building strategies? Leave a comment!