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How To Build Wealth and Live a Life You Love

Early wealth building can lead to a more satisfying life. Here’s where to start.

Justin Cupler

Contributing Writer at Tally

October 13, 2021

There are many financial goals to strive for, but few can have the lasting impact of building wealth. With wealth comes financial freedom and the ability to live the life you want instead of the life you need to live. 

On the path to financial independence, you must build wealth. Without wealth, you’re constantly working for money to keep the bills paid, instead of having your money work for you. With these personal finance tips, you’ll be on your way to building wealth early, which can lead to a clearer path toward retirement and living on your terms in the future. 

Here’s how to build wealth now so you can live a life you love. 

Build a strong budget

No wealth-building exercise can succeed without a firm budget in place. 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 and develop a budget that works for you. Keep in mind that you’re still human and need some time for fun — make sure your final budget has some funds earmarked for you to do the things you love most. 

Also, remember that budgets are fluid, so prepare to change and update 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. 

Analyze and adjust expenses

When building wealth early in life, an essential part is ensuring every expense is worthwhile. Review what you spend money on every month and determine if what you’re paying is truly worth it — eliminate or reduce anything that’s not. 

For example, if you’ve been paying $15 per month for a streaming service, and you can’t remember the last time you watched it, you may want to cancel it. Or maybe you have a cell phone plan with unlimited data but never use more than the 10GB; by downgrading plans, you can save cash and never notice a difference in the service. 

Even the slightest bit of savings can add up over time, so dig deep to find all the small places to save money on living expenses. 

Diversify your income

How to build wealth: woman sitting on the floor and typing on her laptop

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. 

Build an emergency fund

When building wealth, it’s key to be prepared for an emergency, as one unexpected turn can throw you way off track. Creating an emergency fund that covers three to six months of expenses allows you to avoid reaching for a credit card every time 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 extensive and expensive repairs. 

When you build this fund, think about saving it in a high-yield savings account so it can grow from the interest the bank account pays. The growth may be small, but it can add up over the years thanks to compounding interest

When it comes to saving — emergency fund or otherwise — many experts recommend setting aside at least 20% of your income. If you can afford to save more, that’s great. You can also scale back the savings rate a bit if you can’t afford 20%. 

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 typically don’t qualify. However, credit card debt, personal loans and private student loans are likely to be in that category. 

Come up with a debt repayment strategy that works for you and execute it. Two tried-and-tested repayment strategies may work well for this: the debt avalanche and debt snowball methods. 

The debt avalanche method of debt 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.

Save for a home

How to build wealth: family going into their newly bought 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 not only preserves your wealth but also increases it as 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. 

As we mentioned above, think about making your savings goal at least 20% of your income — but you can scale your savings rate up and down to fit your budget. 

When looking to purchase a home, many personal finance experts 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 $1,044.50 per month in principal and interest and $136,018.30 in interest over the 30 years. If you dropped to a 15-year mortgage at 2.5% interest, you would pay $1,600 per month and just $48,052.94 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 for you. However, to help reduce the interest you pay and the time it takes to pay off the mortgage, you can try to make extra payments when possible. 

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 make the most of your tax-advantaged retirement accounts. 

401(k)

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 — 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. For example, 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, it would be a good idea to increase your contributions with each raise until you reach the maximum yearly contribution. As of 2021, the IRS caps 401(k) contributions — not including employer matches — at $19,500. If you’re 50 years old or older, you can contribute up to $26,000 per year. 

Remember, the IRS changes the contribution limits periodically, so adjust your contributions to meet this maximum when these changes occur. 

If you save $19,500 in your 401(k), receive a 6% employer match and earn a 10% return on your investment, your 401(k) balance could be $1.473 million in just 20 years. 

Roth 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 — $7,000 if you’re 50 or older. And there are strict income levels at which your contribution limitations shrink and eventually reach zero. 

While that $6,000 limitation is small, this gives you a little extra leeway to invest your retirement savings into a tax-advantaged account. 

Like you did with the 401(k), contribute as much as your budget allows to your Roth IRA. With each pay increase, you can add to your contributions, and continue increasing your contributions until you reach the yearly maximum.

If you reach the $6,000 maximum contribution and receive a 10% return on your investment, your Roth IRA balance could be $378,000 in 20 years.

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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 and financial goals. 

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. 

The financial advisor will review a wide range of investment advice, but here are some of the key areas they may cover. 

Investing in the stock market

One big area a financial advisor will likely discuss with you is the stock market. People have been building wealth here for generations, and it’s not stopping any time soon. 

The stock market is great for diversification, as you can invest in individual stocks, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), commodities and precious metals.

You can spread out your cash in a stock market investment account to mitigate against a complete loss of investment. Of course, there is always the risk of a complete stock market crash, so keep this in mind when considering the stock market as an option. 

Real estate investing

The stock market allows you to dabble in real estate investment through REITs, which basically allow you to partially fund real estate transactions. Your financial advisor may also recommend getting into physical real estate by purchasing commercial or residential space and turning it into rental income. 

While this generally takes significant investment, there are some benefits. First, a tangible object secures the value you invested, so your net worth should stay relatively consistent or grow as the asset appreciates. Second, you can generate monthly revenue that you can reinvest and with which you can continue building wealth. 

The downsides are also clear: There is the chance of losing the asset to a natural disaster, fire or other destructive force. Or if a tenant fails to pay rent, you’re out that cash, and you’ll have to evict them, which can cost you more money.  

Follow the path and adjust when needed

Two people analyzing charts and graphs

When you initially look at your finances, building wealth may seem 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 path 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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