7 steps to building wealth
Becoming wealthy does not just happen by chance. It requires you to make daily conscious decisions that align with your future financial goals. Choose to stop living paycheck to paycheck and know that you deserve the peace that comes with financial security.
These 7 steps can help you start your journey.
Step 1: Set Clear Financial Goals
Decide what is important to you and your family. Do you want to save for your kid’s college? Pay off debt? Ensure you have enough money saved for retirement or even retire early?
Write these goals down. Make sure they are specific, measured, relevant, and time bound. Doing so will increase your chances of achieving them. For example, “We will save $200 in our daughter’s 529 account every month until she turns 18”. Choose short-term goals (paying off your $500 credit card debt) and long-term goals (saving for retirement). Revisit these goals periodically to ensure you are staying on track.
Step 2: Understand Your Current Spending Habits
Your habits define what you become. Each time you swipe your card, you are making a choice. If you tend to spend mindlessly, financial security is likely not in your future. However, you can only have a clear picture of your habits once you track them.
Before making any drastic changes, monitor what you are currently doing. There are many different apps you could use, or simply write it all down in a notebook. Once you’ve gathered your data, tease through your expenses and decide what is hindering you from reaching your goals. Cut out all the unnecessary spending.
Step 3: Create a Plan to Pay Off Debt
One of the biggest hurdles to becoming wealthy is debt. It weighs you down and eats away at your wealth-building potential. Getting rid of your debt frees up income that you can use in other, more important areas of your life.
Write down all your debt and the associated interest rates. Decide on a debt payment strategy such as the snowball method (paying off smaller debts first) or the debt avalanche method (tackling high-interest debts first). Stick to it, keeping in mind your ultimate goal.
Step 4: Create a Budget
You work hard for your money, so you should know where every cent is spent. A budget creates a roadmap for your journey to financial freedom. Though it may seem tedious to create one, doing so will help you become more intentional with your spending.
To build a budget, start by using an app or spreadsheet. List your total income after taxes and every important expense category: groceries, rent, utilities, savings, etc. To get an idea of how much you should allot to each category, open your bank account, and look at your history over the last few months. Take the average of how much you spent on groceries, utilities, gas, etc., and add that to your budget. Remember that you can change these numbers to fit your goal. The first budget you create will take some time. Once established, you can just plug in your numbers for the subsequent months. Stay consistent with your plan. You want to build wealth, don’t you?!
Step 5: Build an Emergency Fund
Even with the most well-planned budget, emergencies will happen. Are you prepared for that? Most Americans are not. Having an emergency fund will ensure that you can weather any storm.
Aim to save 3-6 months of your monthly expenses. Keep it in a high-yield savings account and don’t touch it until you truly need it (e.g., job loss, car problems, washing machine broke). Do not use this money for frivolous spending or if you happen to overspend one month. It is best to have this account at a different bank than your checking or normal savings accounts. That way, it requires extra effort to withdraw money from it.
Step 6: Invest
This step is vital to your success on this journey to financial freedom. Investing in the stock market is the simplest way to build wealth. It creates an opportunity for your money to make you money through compounding. You must be prepared to assume some risk, but the potential benefits are too good to ignore.
You are investing when you contribute to your company’s 401k plan, a Roth IRA, or a brokerage account. If your company offers a match, you would be crazy not to take advantage of it. That is free money! Or it is embedded in your compensation package, so you’re doing yourself a disservice if you are not contributing. If you are in debt, at least get the match and focus on paying down your debt. Investing something is better than nothing at all. If you are debt free, consider maxing out your 401k and contributing to a Roth IRA and brokerage account.
Step 7: Review and Adjust Regularly
Once you have established a plan that works for you, reassess your progress periodically. Set a regular check-in schedule (monthly, quarterly, annually) to ensure you remain on track to reach your goals. Using a wealth-tracking app will show your net worth and how it grows over time. Choose one and watch your progress. Nothing is more motivating than watching your debt decrease and your net worth increase!
Following these 7 steps will lay a foundation for your wealth-building goals. They can make your chaotic financial situation feel less overwhelming and manageable. Commit to them and stay focused. Seek help if you need it. Start now, keep your head down, and work hard. Soon, you will look up and see the fruits of your labor.
