How to Build Wealth

The path to building wealth looks different for everyone, but there are some tried-and-true steps you can take to reach your personal financial goals. Starting a budget, automating your savings, paying off debt and investing for retirement are among the key ways to build wealth.
Building wealth can take time, dedication and a fair amount of good fortune. Different people, however, may have different definitions of wealth.
For some, it may mean having enough money to cover the monthly bills without stress, or becoming financially independent so they can stop working. Or, you may have a more luxurious image in your head, complete with high-end hotels, designer goods and first-class flights.
Whatever your vision of your financial future, you can get the ball rolling with these eight straightforward steps to building wealth.
1. Start a Budget
One of the most effective tools for spending within your means is a budget. There are many ways to make a budget, and different types of budgets and budgeting apps. One popular budget plan is the 50/30/20 budget, which assigns half of your income to covering essential expenses, 30% toward your wants and the remaining 20% toward savings or paying off debt.
As with any new skill or practice, it can take time to get into the swing of things. Try out a few systems and tools to figure out which one you like the most.
2. Automate Your Savings
Don’t discount this tried-and-true advice for building wealth: Pay yourself first. In other words, put some of each pay check aside in a savings account before you do your spending for the month.
The easiest way to stay consistent is to set up an automated savings plan. To start, look over your budget and come up with an attainable savings goal. For example, you could aim to set aside 100 from each pay check into savings.
Then, open a savings account and use it only to house that money. You don’t want the money you’ve committed to saving commingling with the money you’ll use for bills and spending. Set up automatic transfers into the account at a cadence that works for you. Or, you could split up your direct deposit so that a portion lands directly in your savings account.
What should you save for first? If you don’t already have an emergency fund, starting one is a sound first priority. That way, a surprise expense won’t derail your budget or force you to rely on borrowing.
3. Beware Lifestyle Creep
High income doesn’t necessarily lead to wealth. Perhaps you’ve seen news stories about celebrities or athletes who made millions and then declared bankruptcy. Or, conversely, the teacher or janitor who slowly amassed a fortune and gave millions to charity at the end of their life.
One contributing factor can be lifestyle creep, also known as lifestyle inflation. Lifestyle creep is when your discretionary spending rises as your income increases. In other words, when you get that raise, promotion or new job, your lifestyle quickly rises to suck up those extra funds.
The danger with lifestyle creep is that spending more on nonessentials can make it difficult to reach your long-term goals, such as achieving financial freedom in retirement. No matter your income, spending less than you earn and putting the difference into savings is a key way to increase your net worth over time. Otherwise, you could wind up living pay check to pay check even if you’re making millions.
4. Find Ways to Save More Money
Learning and practicing money-saving habits can make it easier to live within your means. Ways to save are numerous and diverse, one of the best places to start is by looking at where you currently spend the most. Then, focus on creative solutions to cut back in those areas.
Here are some quick ideas for ways that you could cut back:
• Lower your monthly payments by negotiating lower rates on internet and cable services
• Comparison shop for insurance policies to find affordable coverage
• Make lifestyle changes to use less energy at home
• Shop sales or use a coupon app to pay less for the same goods and services
• Consider using cash back credit cards on purchases you were going to make anyway (and be sure to pay off the balance before interest accrues)
You might find that spending less becomes easier once you get into the habit, and that saving begets more savings. Once you’ve built up your savings, it’s easier to find additional opportunities such as paying for high-quality goods rather than inexpensive ones that you need to replace frequently. Or, getting a discount on a membership or bill by offering to pay the full amount upfront.
5. Pay Off Debt ASAP
If you’re saving and investing, compound interest can help your money grow exponentially. But when you owe others money, the math works against you, the longer you take to pay off debt, the more interest you’ll wind up paying overall.
With this in mind, consider some of the tactics you could use to more quickly get out of debt:
• Use a debt payoff strategy. Try the avalanche or snowball debt repayment strategies to either pay as little interest as possible or stay motivated while paying off debts.
• Take a break from interest. Consider a balance transfer credit card that allows you to transfer other debts and pay off the balance during the promotional period (often 12 to 21 months) without paying any interest.
• Consolidate your debts. A debt consolidation loan could also help lower your costs as you combine high-interest debts into the new, lower-rate loan.
• Boost your income. Look for ways to increase your income, and put the extra money toward your highest-rate debt.
Even with the best tactics in play, paying off all your debts can take time. Patience and perseverance are often the keys to success.
6. Use Credit Wisely
Building your credit and using credit wisely can also be important. Having excellent credit can make it easier to access different types of financial products and help you qualify for the best rates and terms on a new loan or credit card.
An example of using your good credit to build wealth could be when you’ve saved up money to buy a new car with cash, but you also qualify for a 0% financing offer on an auto loan.
You could take the 0% financing offer and put your savings into a low-risk investment, such as a certificate of deposit. Then, you can collect interest on your investment, knowing that you can pay off the loan before the 0% rate ends.
However, whether your credit is poor, excellent or non-existent, you still want to be careful when taking on new debt. Avoid taking out loans for wants rather than needs, and always pay your credit card and loan bills in full each and on time month.
7. Don’t Wait to Invest
Figuring out whether to pay down debts or save and invest can be an ongoing challenge.
In short, if you’re making long-term investments in index funds (such as retirement savings that you don’t expect to touch for 20 to 30 years), you might expect an approximate 8% to 10% annual return on your investments. Focus on paying down debts that have a higher interest rate first, then investing and then paying off low rate debts.
Starting to invest early can be especially important, as you have years of potential growth ahead of you. For example, if you invest 100 a month and earn an average of 8% each year, you’ll have nearly 55,000 after 20 years and almost 136,000 after 30 years.
If you’re new to investing, the best place to start is generally through your workplace retirement account, such as a 401(k), if you’re offered one. If not, you can start investing on your own with an individual retirement account (IRA).
8. Consider Buying a House
Homeownership isn’t right for everyone, but buying a home could be a potential path toward building wealth. If you choose to pursue it, there are first-time homebuyer programs available that can make buying your first home easier.
While you’ll need to pay for maintenance, repairs, insurance and property taxes, you may also be able to deduct some of your mortgage interest and property tax payments from your income and save money come tax time. You’ll also be building equity (ownership) in your home when you pay monthly mortgage payments rather than paying a landlord.
The big benefit comes when you sell your home after it increases in value. As long as the home was your primary residence for two out of the past five years, you won’t have to pay federal income taxes on your first $250,000 of profit (or $500,000 if you’re married and file a joint tax return). The exclusion applies to every home you sell, not just your first one.
Focus on Your Goals for Building Wealth
If you want to build wealth, consider starting by defining what wealth means for you and writing down your personal goals. If you compare yourself to the wealthiest members of society, you might be compelled to spend money to keep up with others but never feel satisfied. Focusing on your personal goals could be the key to building wealth, feeling content and avoiding lifestyle inflation.