Building wealth doesn’t happen overnight. For most people, it takes hard work and commitment over the course of decades. But it’s not impossible to make a significant improvement in your financial situation. When you apply the following tried-and-true methods for wealth-building, you can see big returns in your lifetime.
In This Article
Set yourself up to earn more
Despite the growing cost of tuition, a college degree is still one of the main keys to earning more money. That’s not because postsecondary education increases your financial literacy, unfortunately.
Instead, it gives you the opportunity to earn more money. According to the Georgetown University Center on Education and the Workforce (CEW), people with college degrees make up 55% of the workforce, but they take home 69% of the earnings.
If obtaining a college degree is not possible, strive to enhance your earning potential in other ways. Here are some options to consider:
- Take training courses in your field
- Get certified in your profession or trade
- Work with your manager to ensure your performance is on track for a pay increase or promotion
- Review job openings and look for roles that offer higher pay
- Negotiate every job offer to increase your pay and benefits
- Work for an employer that offers valuable incentives, such as a 401(k) match
Avoid credit card debt at all costs
Credit card debt is one of the biggest wealth-killers around. Why? Because interest rates on credit cards are comparatively high. The cost of carrying this kind of debt far outweighs the gains you get from investing.
For example, you might be able to earn a 10% average return on your stock market investments, but the average credit card APR (that’s interest charges plus fees) is now over 22%.
For that reason, many advisors suggest paying off credit card debt aggressively and then setting some money aside for emergencies before you begin investing.
Identify your financial goals
Get clear about why you want to build wealth. Do you want to buy a home? Live a more worry-free life? Start your own business? Defining your “why” will keep your goal in sight and help you stay motivated.
You can take it one step further and follow the advice of Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, who suggests adding your investment goal to a vision board.
The Financial Industry Regulatory Authority (FINRA) offers these tips (among others) for clarifying your goals and increasing the odds of success with your investments:
- Identify your most important short, medium and long-term financial goals
- Estimate how much each goal will likely cost
- Determine your investment time frame
Once you have a strong sense of what you’re working toward, you can go from wondering how to build wealth to creating a financial plan, which includes choosing the right investments for your timeline and needs.
Pay your future self
With each paycheck, you’ll need to think intentionally about your money and where you want it to go. If you spend every dollar you earn, there’s no way your wealth will grow. You risk facing a huge financial setback if (more likely, when) your expenses increase.
Instead of hoping you’ll magically create wealth without trying, build investing into your budget and then spend whatever’s left over after you invest.
To further increase your odds of success, set up an automatic deposit into an interest-earning asset, such as a 401(K) or IRA, from every paycheck. It’s okay to start small, especially if you aim to earn your full employer match on a retirement contribution. But when your income increases, increase your contribution, too.
Start investing early and often
Time is one of the best tools you have when it comes to building wealth. Why? Because of compounding interest, which is interest you earn on both your original investment amount and the interest that money earns.
The longer your money is invested in an asset with compounding interest, the more your investment can grow.
For example, if you invest $200 a month at 7% interest, your investment will be worth $34,819 in ten years, but if you keep it up for 20 years, your balance will reach $104,793.
| Monthly investment | Length of time (years) | Total investment | Interest earned | Ending balance |
| $200 | 10 | $24,000 | $10,819 | $34,819 |
| $200 | 20 | $48,000 | $56,793 | $104,793 |
Does that mean you should give up on building wealth if you’re not in your 20s anymore? Definitely not! It simply means that you’ll want to start working toward retirement and other financial goals immediately.
To come up with the best strategy, consider talking to an investment professional about how to choose assets based on your age and risk tolerance.
If you’re over 50, the IRS allows you to make catch-up contributions, to certain retirement accounts each year. Please consult a tax professional for any tax advice.
Think long-term
When you invest in assets like stocks, it can take years or even decades to earn major returns. In the meantime, you’ll watch the market fluctuate and the value of your assets will occasionally drop.
When the market is down, don’t panic. Instead, keep the “buy and hold” strategy in mind. Historically, assets, particularly stocks, have shown an increase in value over extended periods of time.
Throughout your years of investing, you’re bound to see investment trends come and go. Another way to prevent big losses is to avoid impulsive decisions based on “hot tips” and trends.
Yes, investing in a new asset class like cryptocurrency can be exciting, but trendy assets should be just one small part of a well-diversified portfolio.
Diversify
If you put all of your money into one company’s stock, you risk losing everything if that company fails or the industry they work in takes a hit. To reduce your risk of a big loss, invest in diverse products, such as stocks, bonds and real estate.
An easy way to diversify is to invest in mutual funds or exchange-traded funds (EFTs), since these products usually include hundreds of different stocks and bonds.
If you choose one that’s also an index fund, meaning the portfolio is chosen to match a market index instead of being chosen by a manager, you can pay less in fees. Plus, index funds tend to outperform funds that are “actively” chosen by investment managers.
Revisit your goals
When it comes to building wealth, you might be tempted to adopt one strategy for life. But as your circumstances change, you’ll need to reevaluate.
For example, if you decide you want to buy a home within the next five years, you may need to decrease your 401(K) contribution and put the money into a savings account for your down payment.
In other words, building and managing wealth is not a set-it-and-forget-it activity. Instead of taking a passive approach to management, be sure to revisit your budget and investment strategy any time the market moves significantly, your goals change, or your finances change.
Written by Sarah Brady | Edited by Rose Wheeler
Sarah Brady is a financial writer and speaker who’s written for Forbes Advisor, Investopedia, Experian and more. She is also a former Housing Counselor (HUD) and Certified Credit Counselor (NFCC).