Regardless of what stage of life you're in, building wealth is always a great goal to have. When you have access to ample savings and cash reserves, you'll be prepared in the event of an emergency and will be able to more effectively maintain your lifestyle during retirement. While everyone has different levels of wealth that they wish to build towards, there are some basic guidelines and suggestions that should help you get started. Below is an in-depth guide on how to build wealth over time.
What It Means to Build Wealth
If your monthly expenses don't leave much room to build wealth, you may believe it to be an impossible task. However, anyone can accumulate wealth with enough time, discipline, and effort. It's not going to happen overnight. Keep in mind that utilizing wealth building strategies as early as possible will help you accumulate a substantial amount of wealth over time.
There are three distinct steps that should take place when building wealth, which include earning enough income, managing your expenses, and investing your money. Sticking to these strategies on a long-term basis and working with a professional financial advisor like Attentive Investments should help you reach your financial goals.
Understanding Passive vs. Earned Income
If you haven't received an inheritance or a sizable windfall from another source, your first task will be to make money, which can be done via earned income or passive income. Earned income is any money you make from your job, a freelancing career, or side jobs. If something that you actively participate in earns you money, it's considered earned income.
You could also focus on making passive income, which is income that you gain from an investment or other source without the need to actively manage it. An example of passive income is when you invest in a piece of real estate and hire a property manager to collect rents and maintain the property.
You could earn passive income while keeping your standard work schedule. Along with real estate investments, passive income can also be obtained through stock investments or book royalties. Most forms of passive income require a significant upfront investment.
Increasing Income
The first step in building wealth is to increase the amount of income you bring in. During this stage, your goal should be to obtain a sizable gap between your income and expenses. A large gap means that you'll have more money to save or invest. Before taking steps to increase your income, determine how much expenses you have. Once you've accounted for expenses, there are several things you can do to increase income.
One option is to improve your earned income. In this scenario, you might start a freelance job that will add to the total income you bring in from your standard job. You could also focus on reducing your expenses. Some of the leftover money you have could be placed into assets that will bring in passive income. Increasing your income allows
Saving Your Money
You'll be able to build your wealth more effectively by saving more money every month. To achieve this goal, you should first track all of your monthly expenses, which can be done via a spreadsheet, piece of paper, or mobile app. Once you've determined what your expenses are, you can begin to control them.
During this process, make sure that you separate expenses into variable and fixed categories. The fixed expenses are ones that you're unable to avoid spending on a monthly basis. The most common fixed expenses include utilities, rent, and transportation. Variable expenses will differ each month and can be easily modified with the right approach. Examples of variable expenses include entertainment, restaurants, and other expenditures that aren't considered necessities.
While you're budgeting your money, you should regularly assess your expenses to determine if there's anything that you don't need or don't use. Once you've minimized your expenses, you'll notice that the amount of money that's leftover each month increases. If you need any assistance during the budgeting process, we are here to help.
When you're trying to save as much money as possible, you should focus on building an emergency fund that covers around three to six months of total expenses. In the event that you live in a household with two incomes that's proven to be highly stable, three months of savings may be sufficient. Otherwise, five to six months would be ideal. If your current employer offers 401(k) matching contributions, you may be able to build your wealth at a faster rate.
Making Strategic Investments
The final step in building wealth involves making strategic investments. While you may be able to accumulate significant savings by cutting your expenses and bringing in more income, there's a limit to how much you can save without making investments.
By effectively investing money in stocks, bonds, or alternative investments, you can eventually become considerably more wealthy than you currently are. Keep in mind, however, that you'll need to be careful when making any investments. Mistakes with risky investments can result in you losing substantial sums of money. To limit these mistakes, work with Attentive Investments to better manage your portfolio. By hiring a financial advisor, you'll be able to create a more compelling strategy, not take on too much risk, and it'll give you peace of mind that your investment decisions are the right ones to make.
Before making any kind of investment, it's highly recommended that you determine what your current risk tolerance is. If you're highly risk-tolerant, you may be willing to place more of your money into stocks and volatile investments like cryptocurrency. As a risk-averse investor, placing your money in bonds and cash is likely more appealing.
One way that you can reduce your risk is by diversifying your portfolio, which means that the money you invest will be spread across numerous types of investments. Once you've identified what kinds of investments you'll make, you should also set an asset allocation for your investment portfolio. For instance, your portfolio could consist of 30% real estate, 30% bonds, 30% U.S. stocks, and 10% international stocks. Additional investment options include exchange-traded funds, mutual funds, and precious metals. Holding investments on a long-term basis should help you build and maintain your wealth.
By consistently earning income, saving money, and making sound investments, you can build wealth and start working towards your financial goals. If you're new to building wealth, begin by taking relatively small steps. These steps should eventually compound and lead to more substantial results. Over time, you may be able to build generational wealth.
Attentive Investments understands that building wealth is a lifelong pursuit, and regardless of your life stage, our team is dedicated to helping you achieve your financial goals by providing guidance, personalized strategies, and the tools you need to build ample savings, secure cash reserves, and maintain your desired lifestyle during retirement. Contact us today and take the first step towards building your wealth with confidence.