Small Financial Changes to Help Build Your Wealth Faster
To grow your wealth to its full potential, start implementing these best practices today.
Developing and practicing good financial habits early in life, such as investing in a 401(k) or prioritizing your financial goals, will lead to building your wealth more efficiently and a large nest egg later in life. Strong and consistent financial planning is key in solidifying your wealth down the line.
Focused financial planning prepares you for life events you can’t necessarily foresee. Preparation requires investing in the future; however, over 75% of American workers still live paycheck to paycheck, and many are saddled with unmanageable debts, creating a financial house of cards.
To build your wealth in the most efficient way possible, here are a few things to consider.
Pay Off Debts Now, Thank Yourself Later
Debt has become the bane of many Americans' financial lives. It reduces your ability to save and invest for the future. Too much debt of any kind can sink your budget, but credit cards are by far the most destructive.
According to FINRA’s National Financial Capability Study, one-third of Americans pay just the minimum balance on their credit cards, and the average household that carries a balance pays $1,292 in annual interest.
High interest payments send your earnings to the banks rather than into your savings and investment accounts, where you can earn returns on your capital. Ridding yourself of credit card debt allows you to seize financial opportunities. You can pay off credit cards faster by implementing the debt snowball strategy.
Debt is not always one-sided, however. In some scenarios, taking on debt in order to achieve a worthy goal, such as purchasing a house or starting a business, can be worth the long-term costs. Debt for lifestyle expenses should be avoided at all costs, however if a spending decision you make is connected to your values, there can be reason to follow through with it.
Creating a Budget Is Key to Long-Term Success
Without a budget, you could end up spending all you make and utilize too much credit. Within months, lack of budgeting can easily leave you with no cash and a lot of credit card debt. These are two ills of financial planning that careful budgeting relieves.
The first person you should pay each month is yourself. When you follow this adage, you guarantee money is contributed to your emergency fund. Once your fund reaches a healthy level (three to six months of basic expenses), it's time to put additional savings into an investment account and earn returns that conquer inflation.
The more you pay yourself, the better. To maximize savings, look for ways to save on rent, insurance, vehicle costs and other recurring expenses that can easily leave you tapped out at the end of the month.
Cut Down on Non-Essential and Fixed Expenses
When it comes to growing your wealth, it is essential to create a large gap between your expenses and your income. Therefore, it is wise to cut down on your expenses. A way to do this is to minimize what you are spending on non-essentials, as well as reconsider your fixed spending.
Non-essential expenses are experiences and things that you don’t need to survive, such as dining out, entertainment costs, gifts, clothing and alcohol. By properly accounting for these expenses and trimming them from your budget, you’ll be able to move the needle toward building wealth.
It is also wise to consider housing options. Housing costs are a fixed expense and a major portion of most people’s budgets. This is particularly beneficial for renters. Through roommates, relocating and/or refinancing your rent, there are many ways renters can cut living expenses.
When it comes to house hunting, renting may seem like a wealth-conscious decision in the earlier stages of property ownership, because it avoids mortgage payments. However, in some financial scenarios, owning a house is far more beneficial in the long run, because homes tend to increase in value, build equity and provide a nest egg for the future.
The same goes for vehicles. Consider all the interest costs that come along with car loans. Driving a car that you own outright will massively help your bank account in the long run.
Invest for Your Future
With a sustainable budget and debt under control, you're ready to invest for your future. Among the many asset classes, it's important to identify which ones are appropriate for your goals, time horizon and risk tolerance. Most investors focus on mutual funds, exchange-traded funds, stocks, bonds, real estate, foreign stocks and cash equivalents.
Asset allocation refers to how you divide your funds among different asset classes. Additionally, financial advisers can help determine asset allocation according to your unique investor profile. They create an investment policy statement (IPS) detailing investment goals and appropriate strategies for achieving them.
Tax Deductions that Build Wealth
By contributing to your 401(k), traditional IRA or similar type of tax-deferred savings plan, you can significantly help reduce your current tax liability. Through contributing to these plans you are putting money away for yourself that will be excluded from your taxable income. This is a huge benefit that can increase your tax refund. These qualified retirement plans also allow the savings in your account to grow tax free. The income from your investments that isn’t being taxed, combined with the power of compounding, creates an ideal wealth building situation. (Keep in mind that you will have to pay taxes on any money you withdraw down the road, though.)
Additionally, as far as taxable brokerage accounts go, taxes on long-term gains, which are most investments held over one year, and qualified dividends have only three tax brackets, depending on your total income: 0%, 15% and 20%. Planning your investment income to fall into one these categories as much as possible can result in a major tax savings, as well as long-term wealth building benefits.
Growing YOUR Wealth Starts with YOU
You should be taking the necessary steps in building your wealth as efficiently as possible, and the only way to achieve maximum returns is to start exercising strong financial practices now.
- Avoid debt by staying on top of your finances, especially credit card bills.
- Create a budget and stick to it vehemently.
- Cut down spending on living costs, especially by avoiding excess buying. Invest now and see the returns later.
You are in full control of your financial future, and it can be realistic to build your wealth as fast as possible. Take the first steps in growing your wealth, and it will implement great financial habits for life.
About the Author
Senior Wealth Manager, Planning to Wealth
David Flores Wilson, helps Gen X and Gen Y professionals and business owners in New York City achieve financial freedom. Named one of Investopedia's 100 Top Financial Advisors of 2019, he is a Senior Wealth Manager for Watts Capital and Writer/Editor for Planning to Wealth. His financial guidance has appeared on Yahoo Finance, MSN News, CNBC and InvestmentNews.