Building wealth seems like an unattainable dream for some people. It is doable if you’re willing to work and learn.
- Have goals you want to achieve and set a deadline.
- Spend less than you earn (and increase the gap).
- Automate your finances as much as you can.
- Eliminate your credit card debt.
- Have all the necessary insurance.
Here’s how you go about building wealth step by step:
Have goals you want to achieve and set a deadline.
A very productive way to write a goal is to use the SMART method.
- Specific: Choose a specific goal. Don’t say ‘save more’, but instead choose ‘put aside 5% of my paycheck into a savings account.’
- Measurable: How do you know when you reached your goal? If you are saving an emergency fund up, consider setting aside 3-6 months of living expenses.
- Attainable: Work on 1 or 2 goals at a time so you don’t feel overwhelmed.
- Realistic: Make sure your goal is something you can do and truly believe in.
- Time Based: By setting a deadline, you can work backwards and break down the steps into mini goals.
Spend less than you earn (and increase the gap).
This is the fundamental wealth law. By keeping your expenses lower than you income you’ll have more money left for saving, investing, and sharing. There are two factors in this law that you can change: your expenses and your income.
Decrease your expenses. A great place to start is to look at your last bank statement and see how you can trim your expenses 10%. Start small and see what you can do without. My husband and I are not big TV fans, so basic cable fulfills our needs without a big bill.
Increase your income. You can only cut expenses so much, so increasing your income is the other half of the plan to increase your gap. See if you can increase your profile at work and ask for a raise. See if you can turn a hobby into side income. There are different ways to build up income.
Automate your finances as much as you can.
Have a portion of your paycheck transferred to a high interest savings account. Start small and automate your money to put into savings. You’ll become use to the slightly small paycheck as you start savings. The first thing you need to save for is an emergency fund. This step can help you build financial cushion, especially in turbulent economic times like these. Find an FDIC bank or CUNA credit union that offer high interest rates for savings and watch it grow faster.
Set up free online bill pay with your bank. Most banks and credit unions offer money and time saving feature. Spend an hour setting this up with your bills, account numbers, due dates, and amounts, and you’ll only need a few minutes a month to keep it up. Some
Take advantage of your company’s 401k program. Try to at least set aside enough money to receive the company match as it’s basically free money in your pocket. Look for low cost index funds to put your money in.
Have a small portion of your paycheck transferred into an IRA account. Once your build up your emergency fund, eliminated your credit card debt, and have increased your income; funnel some money into an IRA. You want to still look for low cost index funds to put your money in.
Eliminate your credit card debt.
With credit card interest rates higher than the average return in stocks, a wise choice is to eliminate credit card debt. Depending on your circumstance you may want to transfer over to a 0% interest card to speed the process up. Here are some tips on using your credit card wisely.
- Pay your bills on time. A good credit history can help when looking for a home as a higher credit score leads to lower interest rates. I had a bad habit of losing paperwork, so I automated all my bills. It saves on late fees and stamps. Many banks have online bill pay as a feature.
- If you can, pay the full amount owed. Credit card companies might call you a “deadbeat“, but at least you’re not tied to them each month. If you can’t, then pay as much as you can. Try a debt snow ball (a technique Dave Ramsey advocates) or even snowflaking. Find money in your budget to eliminate your debt.
- NEVER, EVER lend your credit card to anyone! Even if it is a trusted family member or family. This account is tied to YOU and you will be held responsible.
Using a debt snowball or debt snowflakes to help speed up the process.
Have all the necessary insurance.
At the very least you should have health insurance for yourself. There are some things you can do to lower your health insurance premium and health expenses.
- Don’t be a smoker: This habit can cut your life short and it has been linked to other health problems. This in turn leads to higher costs.
- Exercise regularly: Try being active 3x a week for at least 20 minutes. You can lose some
- Watch what you eat: Obesity can increase your chances of diabetes, heart disease, and joint problems.
- Get a hobby: Hobbies can reduce the stress that you feel. That in turn can help your mental health and enrich your life.
- Go for generic drugs when possible: Some drugs are available in generic form at less than half the cost.
- Do routine exams: It’s better to catch something early than to wait until it develops into something worse.
- Try health clinics: If you’re pinching pennies, this could be a good option. With my health insurance, I pay $30 a month for birth control pills. By going to the university health clinic, I pay $40 for 3 months’ supply. I save $240/year just by doing that.
If you own a car or rent an apartment, get insurance to protect yourself and valuables. Renter’s insurance for us is less than $200 a year.
Being in your 20s can be great if you take control of your finances. By getting into good habits now, you’ll lay the foundation to building wealth.
Those who are building their worth, what advice do you have?
Photo Credit: krisdecurtis