How to Build Wealth and Live a Life You Love
Wealth building can lead to a more satisfying life. Here’s where to start.
Contributing Writer at Tally
October 23, 2022
Americans have many financial goals to strive for, but few can have a lasting impact on building wealth. With wealth comes financial freedom and the ability to live the life you want instead of the life you need to live.
But what do you need to do to reach this goal? Below, we’ll explain how to build wealth so you can start your journey toward financial independence and living a life you love.
How to build wealth: 7 steps toward financial freedom
Building wealth doesn’t happen overnight, but the following personal finance steps can help you work toward your goal.
1. Create a strong budget
No wealth-building exercise can succeed without a firm budget in place. Even if you have a small income, setting a budget can help you build wealth.
Choose a budgeting style that fits your needs, whether it’s a simple envelope budget, a 50/30/20 budget or something else.
Analyze your spending and income to develop a budget that works for you. If you can, look for ways to save money on living expenses. You can then use the extra funds to save for the future or to pay down debt.
Remember that budgets are fluid, so prepare to update your budget as your lifestyle and needs morph. It’s easier to adjust a budget to fit your changing needs than to force your lifestyle to fit the budget.
2. Diversify your income
After adjusting expenses, you can further swing your cash flow in the right direction by income diversification. While it’s great to have a steady full-time job, you can enhance your earnings by getting into the gig economy.
Find a side hustle that works for you, whether it’s being an Uber or Lyft driver, delivering food, dropping off groceries, doing on-demand task completion, becoming a freelancer or taking on any other on-demand gig that can work on your terms. This gives you more income per month, and it doesn’t involve the commitment of a part-time job.
3. Build an emergency fund
When focusing on how to build wealth, it’s key to be prepared for an emergency. One unexpected turn can throw you off track. Creating an emergency fund that covers three to six months of expenses allows you to avoid reaching for a credit card if an emergency strikes.
If you lose your job, the emergency fund can keep the lights on and food on the table while you search for a new job. It can also help if your car breaks down and needs expensive repairs.
Where can I put my money to earn the most interest?
You can put your money in a high-yield savings account as it will earn more interest than a traditional savings account. Your emergency fund will grow from the interest the bank account pays. The growth may seem small, but it can add up over the years thanks to compounding interest.
4. Pay off high-interest debts
The term high-interest debt is subjective, but many experts agree that any debt with a 6% interest rate or higher falls into that category. This means that debt like auto loans, mortgages and federal student loans probably wouldn’t be considered high interest. However, credit card debt, personal loans and private student loans are likely to be in that category.
To pay off debt, choose a debt repayment strategy that works for you. Two tried-and-tested options are the debt avalanche and debt snowball methods.
The debt avalanche method of repayment has you pay as much as you can toward the debt with the highest interest rate while making the minimum payments on your other debts. Once you pay off the first debt, you move to the next-highest interest rate and so on. You repeat this process until you pay off all your debts.
The other reliable debt-repayment method is the debt snowball. Using this method, you focus all your extra cash on the lowest-balance debt while making the minimum payments on all other debts. Once you pay off the first debt, you move to the debt with the next-lowest balance and so on. You repeat this process until you pay off all your debts.
5. Save for a home
Buying a home is a good way to preserve and grow your wealth. When you buy your home, you’re putting your liquid wealth — your cash — into an appreciating asset, which can preserve your wealth and possibly increase it if the asset rises in value.
While some lenders and mortgage plans allow as little as 3% down, many experts recommend putting at least 20% down. This keeps you from paying for private mortgage insurance, an extra insurance policy that protects the lender if you default on the loan. This larger down payment also gives you immediate equity, meaning the home is worth more than the mortgage balance.
When looking to purchase a home, some personal finance gurus recommend finding one you can afford on a 15-year mortgage. The interest rates for a 15-year mortgage are significantly lower; the low interest rate combined with the shorter loan terms means you’ll pay much less in interest over the term of the loan.
For example, if you get a 30-year, $240,000 mortgage at 3.25% interest, you’d pay $1,438.92 per month and $278,011.65 in interest over the 30 years. If you dropped to a 15-year mortgage at 5% interest, you would pay $1,859.81 per month and just $50,130.42 in interest over the 15 years.
If the minimum payments on a 15-year mortgage are too high for you, a 30-year mortgage may be better. However, to help reduce the interest you pay and the time it takes to pay off the mortgage, you can try to make extra principal payments when possible.
6. Make the most of your retirement accounts
With a plan to tackle high-interest debts and an emergency fund built, you might start thinking about how to build wealth through tax-advantaged retirement accounts.
If you have a full-time job, your employer may sponsor a 401(k) retirement account. These allow you to save and invest pre-tax dollars for retirement. Since you make deposits with pre-tax dollars, participating in your employer-sponsored 401(k) reduces your current tax burden. Plus, your 401(k) account grows tax-deferred, so you’re only taxed on a 401(k) when you make withdrawals.
Also, some employers will match your 401(k) contributions up to a certain amount. For example, your employer may match 100% of your contributions up to 6% of your salary. So, if you earn $100,000 per year, your employer will match up to $6,000 in contributions per year.
These matches are like free cash, so most personal finance experts recommend maximizing this first. If your budget doesn’t allow you to maximize it immediately, you might start at the highest contribution rate you can afford, then increase your contribution rate to match any pay raises you receive. Try to repeat these small increases until you reach the full match.
After reaching the maximum match, you can aim to increase your contributions with each raise until you reach the maximum yearly contribution. As of 2022, the IRS caps 401(k) contributions — not including employer matches — at $20,500. If you’re 50 years old or older, you can contribute up to $27,000 per year.
Remember, the IRS changes the contribution limits periodically, so you’ll need to adjust your contributions to meet this maximum when these changes occur.
Roth individual retirement account (IRA)
A Roth IRA, like a 401(k), is a retirement savings account, but it works differently. First of all, the individual, not an employer, typically owns a Roth IRA.
You fund an IRA with post-tax dollars, missing out on the immediate tax break, but you don’t pay taxes on qualified withdrawals. Like a 401(k), a Roth IRA grows tax-free, but your Roth IRA disbursements in retirement are also tax-free, whereas the IRS taxes 401(k) disbursements as income.
A Roth IRA also has limitations: The IRS permits you to contribute only $6,000 per year as of 2022 — $7,000 if you’re 50 or older. And there are strict income levels at which your contribution limitations shrink and eventually reach zero.
7. Consider other investments for retirement
After maximizing your tax-advantaged retirement accounts, you may still have some leftover cash flow to invest. This would be a good time to sit down with a financial planner or financial advisor and discuss your retirement plan, financial goals and how to build wealth in other ways.
The advisor can help you sift through all the noise in the financial world and find the investment strategy that will deliver you a secure financial future.
A financial advisor can offer a wide range of investment advice tailored to your financial situation. For example, they can advise you on investing in the stock market or in real estate as a means of building wealth.
Investing in the stock market
One big area a financial advisor will likely discuss with you is how to build wealth through the stock market. People have been building wealth here for generations through stock value growth, dividends and other payouts.
The stock market is great for the diversification of your investment portfolio, as you can invest in individual stocks, mutual funds, exchange-traded funds (ETFs), commodities and precious metals. But remember, investing comes with risks as well.
Investing in real estate
Your financial advisor can help you decide if real estate investments are right for you. This may include buying physical real estate and turning it into rental income or investing in real estate through the stock market in the form of real estate investment trusts (REITs).
What is the fastest way to build wealth?
The stock market is often the fastest way to build wealth, thanks to its 10% average rate of return, but it also comes with a significant risk of a complete stock market crash and losing all your money. So keep this and your risk tolerance in mind when considering the stock market as an option and always consult an investment professional before investing in the stock market.
Follow the path and adjust when needed
When determining how to build wealth, your finances may seem to make it virtually impossible. However, with the right planning, execution and dedication, you can have a net worth you’d be proud of and live life on your terms.
Continue following the financial plan established between you and your financial advisor. Remember that things will pop up that throw you off the track slightly, but know that you can always make adjustments and continue working toward becoming wealthy, living the life you want and potentially building generational wealth for your future family.
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