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How to Become Wealthy After Paying Off Your Debt

Congratulations, you’re debt-free. Now here’s how to become wealthy.

Justin Cupler

Contributing Writer at Tally

October 14, 2021

Freeing yourself of high-interest debt, including credit cards and even lower-interest student loan debt is a major financial goal for a lot of people. However, your path to financial success doesn’t have to stop there. 

With hard work, dedication and the right amount of financial planning, you can turn your debt-free lifestyle into a life of wealth. 

Below, we’ll show you how to become wealthy through budgeting, limiting expenses, increasing income and aggressive saving. Once you reach this status, you have the financial independence to decide what you want to do and when, including retirement. 

But first, let’s explore what it means to be wealthy.

What Americans consider wealthy

For the most part, Americans measure wealth in net worth, which is assets — liquid and physical — minus liabilities and debts. The average American views anyone with a $1.9 million net worth as wealthy, according to Schwab’s 2021 Modern Wealth Survey. That’s down $700,000 from the 2020 figure of $2.6 million. 

Some examples of assets include:

Liabilities and debts can include:

  • Credit card debt

  • Personal and 

  • Business loans 

  • Auto loans 

  • Mortgages 

  • Home equity loans 

  • Home equity line of credit balances 

  • Accounts payable

Trying to determine net worth? If you have, for example:

  • A $500,000 home 

  • A car worth $30,000

  • Bank accounts totaling $10,000 

  • Retirement accounts totaling $600,000

You have $1.14 million in assets. 

If you owe:

  • $30,000 in credit card debt 

  • $200,000 mortgage balance

  • $10,000 car loan balance

  • $25,000 home equity loan 

You have $265,000 in liabilities and debts. This equals a net worth of $875,000 ($1,140,000 - $265,000). 

How to become wealthy

How to become wealthy: Man holding coffee cup

Once debt is paid off, it’s time to focus on becoming wealthy as you plan for retirement. If you strive for the agreed-upon $1.9 million net worth benchmark, you should have plenty to live a robust retirement comfortably. 

Here are some tips to reach or exceed that $1.9 million net worth level. 

Setting and maintaining a budget

Even as a wealthy person, you still need a budget that’s regularly updated. Checking in on your budget ensures you’re on a sustainable path, given your circumstances. Without a budget in place, you can easily find yourself burning through cash faster than you can earn it, potentially ruining your chances of becoming wealthy. 

Trimming expenses

Becoming wealthy begins with cutting expenses where you can. Lower expenses free up extra cash flow for investing and building wealth. Make it a practice to dig deep into your budget and find the expenses you can reduce or eliminate to free up some more cash. 

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Some options include: 

  • Dropping to a less expensive cell phone plan

  • Canceling any unused streaming subscriptions

  • Eliminating trips to expensive coffee shops

  • Switching subscriptions you use to cheaper annual plans

  • Downsizing to a smaller, less expensive house or apartment

Increasing income

After trimming expenses, increasing your income will help in obtaining wealth. While taking on a second job may not be in the cards due to your first job’s schedule, entering the gig economy is a flexible way to find other income streams. 

There’s a wide range of sources of income, including becoming a food delivery person, Uber or Lyft driver, task completer, freelancer, blogger or any other number of on-demand workers. This gives you the ability to increase your streams of income on your terms. 

Looking for a lucrative side hustle? Here are five gigs that can earn $5k+ a month

Building an emergency fund

Nothing can throw your wealth-building off track quicker than an unexpected expense or job loss. This is where an emergency fund can be a lifesaver. 

With all your debts paid off, focus as much of your extra money as possible toward building an emergency fund that can cover three to six months of expenses. If your car breaks down, you can dip into this fund to fix it instead of using a credit card. Alternatively, your emergency fund can pay the bills while you find a new job if you lose your job. 

Making your money work for you

How to become wealthy: Woman looks at stock charts on iPhone

Once you’ve paid off all your debts, your income is now free to go toward what matters most to you. In this case, it’s becoming wealthy and having the financial freedom to live the retirement lifestyle you prefer. 

This all starts with your ability to save money aggressively. Personal finance experts vary on precisely how much of your income to save, but they tend to land in the 15% to 20% range, at minimum. Not all investments are created equal, though. Let’s look at some of the retirement account options and review their pros and cons. 

Employer-sponsored 401(k)

If you have a full-time job with an available 401(k), this is a great first step for savings. Not only is it easy to automatically funnel pretax dollars into an employer-sponsored 401(k) account, lowering your current tax burden, but the account grows tax-free too. You only pay income tax on any disbursements you take.

Plus, if your employer offers a 401(k) contribution match, this is free money. It’s like earning an instant 100% return on investment after you’ve passed the vesting period.

Between 2015 and 2020, 401(k) accounts delivered an average yearly return of 11%, so reaching the maximum allowable contribution every year is a great way to build wealth. For 2021, the maximum allowable contribution is $19,500, or $26,000 for people over 50 years old. 

The downside to a 401(k) is the cash is reduced by penalties and fees if you wish to make an early withdrawal — before 59.5 years old. You’ll not only pay income tax on any withdrawal but also pay a 10% penalty. 

One exception to the penalty is if you leave your employer after turning 55 years old. At this point, you can start taking penalty-free disbursements.

Let’s say you earn $60,000 annually and set your 401(k) contributions to meet the current annual maximum allowed. If you also receive a 100% employer match on up to 6% of your salary and an average annual 11% return on investment, your 401(k) account balance would be $1.494 million in just 20 years. 

That goes a long way in getting you to the wealthy mark of $1.9 million net worth. 

Roth IRA

A Roth individual retirement account (IRA) is an individually owned retirement savings account. However, some employers do offer one. The other main difference between a 401(k) and a Roth IRA is you fund the latter with post-tax dollars

While funding a Roth IRA with post-tax dollars eliminates immediate tax savings, it has its benefits:

Roth IRAs have strict limitations, though:

  • You can only contribute up to $6,000 per year — $7,000 if you’re over 50 years old., 

  • Your contribution limit begins to drop once your income reaches a certain point. If your annual income exceeds $140,000 for a single tax filer ($208,000 for a married tax filer), you can no longer contribute to a Roth IRA.

Roth IRAs, on average, deliver a 7% to 10% annual return on investment, making them not quite as powerful as a 401(k). However, IRAs offer different tax advantages than a 401(k), making them a nice complement to a 401(k). Roth IRAs are also a good way to continue investing in a tax-advantaged account after you’ve reached the 401(k) contribution maximum. 

If you set your Roth IRA contributions at today’s maximum for 20 years and earned a 7% average annual return, your Roth IRA balance would be $263,000 in 20 years. Add this to the projected 401(k) balance from the earlier scenario, and your bottom-line net worth would be near the wealthy mark, at $1.757 million.

Stock market 

Any remaining cash flow could go into the stock market after you maximize contributions to your tax-advantaged retirement accounts — your 401(k) and Roth IRA. 

Before investing in the market, consult with a financial advisor to determine what types of stocks, bonds, mutual funds, index funds, real estate investment trusts (REITs) or exchange-traded funds (ETFs) may be best for you. 

Keep in mind profit in the stock market is never guaranteed, and there’s the opportunity to lose some or all of your investment, even if you have a professional’s assistance. 

Still, with 20 years of your maximized 401(k) and Roth IRA getting you within $150,000 of being wealthy, you wouldn’t need to invest much in the stock market to reach your goal. Assuming an average stock market return of 10% annually, you could invest as little as $189 per month into the stock market and reach the $1.9 million net worth mark. 

Alternatively, you can keep your foot on the accelerator and invest as much as possible in the stock market and potentially surpass your goal. Your financial advisor can offer more guidance on this. 

Downsize to boost your wealth

Once you reach your goal, there are additional ways to increase your wealth as you approach retirement.

Smaller home

As you near retirement and the kids leave the nest, you likely don’t need a four-bedroom, 2,500-square-foot home. Chances are, it’s more than you need and may be more than you can manage. 

Consider selling your larger family home in favor of a smaller, more manageable retirement abode. If your family home is worth $600,000, you can use a fraction of the proceeds to buy your dream retirement home, cabin or condominium and invest or tuck the remainder in a savings account.

Plus, a smaller home may be easier to manage as you age. 

More economical vehicle

You also likely have a vehicle that you used to haul the whole family around. Once you’re near retirement age and carpooling is no longer an issue, you sell your larger vehicle, downsize into something less expensive and deposit any proceeds into your savings accounts or invest it. 

Live below your means

Though you’re now wealthy, this isn’t the time to live an overly lavish lifestyle. By all means, have fun, but ensure it’s sustainable fun. 

Focus on maintaining wealth by living below your means. Yes, to do this you’ll still need to run a tight budget, monitoring all your income and expenses and then ensure your expenses are always less than your income. 

Running a budgetary surplus like this keeps your investment and retirement accounts funded for a long retirement. Plus, your retirement accounts may outlast you in some cases, and you can pass them down to younger family members to help them build their wealth. 

Becoming wealthy takes discipline

Man in wheelchair and woman frolick on beach

With your debt paid off, you’re well on your way to building the net worth you need to be wealthy. While the hard part — eliminating debt — is behind you, there’s still lots of work to be done, including reducing your expenses, maximizing your income, saving and resisting the temptation to splurge.

However, by diligently monitoring your finances you’ll be on the right path toward becoming wealthy. 

Credit card debt keeping you from building wealth? Take a look at Tally†. Tally is a smart credit card debt repayment app that offers a lower-interest line of credit to help pay down debt faster. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.