Creating Wealth: A Guide on Building a Financial Fortune
The media often glorifies rags-to-riches stories where someone invents a new product or founds a wildly successful company in their garage. Yet the odds of that happening remain comparatively low for most people. You can see the evidence in the average net worth of approximately $266,000 among those around retirement age.
While you can’t depend on lightning to strike in the form of wild fame or a burst of business genius, creating wealth and building a meaningful financial fortune is an achievable goal. Keep reading for some key insights, tips, and strategies about making that happen.
Deal with the Basics
You cannot focus on building wealth if you can’t keep your financial house in order. You must get your financial life on stable footing, which means dealing with the personal finance basics.
Assess Your Finances
First things first, you must assess your finances. You can’t make good decisions if you don’t understand the full scope of your bills and debts.
Gather up all of your bills or, at least, write out a complete list of your bills and the amounts due. Include everything from car payments and rent to that streaming video subscription. For variable expenses like utilities, food, and eating out, make best guesses based on debit and credit card records.
Next, gather up your pay stubs. If you make a fixed salary, that’s easy. If you don’t, use the last three to six months’ worth of pay stubs to figure out an average. Just add them all up and divide by the number of pay stubs.
Make a Budget
Now that you know the full scope of your expenses and your average earnings, you can make a budget. There is no single right way to budget, but there are several popular budgeting strategies:
- Zero-balance budget
- Envelope budget
- Pay yourself first budget
Each of these strategies takes a different approach, but they all share a common goal. They let you assign your earnings in a practical way. If you want a bit more help or just more automation, you can also find personal finance and budgeting apps that can help you.
It can feel pointless or like you’re depriving yourself, but you must start saving. Even if it’s just a little bit each month, you must put some money into personal savings for future needs.
In fact, you should have at least two savings accounts. You need one savings account that remains sacrosanct. You never touch that money for any reason.
The other is your emergency fund. That’s the money you set aside specifically for disasters like unexpected medical bills or losing your job.
Ideally, you’ll sock away enough for three to six months of expenses. Practically speaking, you must tailor the amount you put into your emergency savings for your current earnings.
You also need some kind of retirement account in place. If your workplace offers a 401k program, enroll in it. If not, look into individual retirement accounts, such as Roth IRAs, that you can get through your bank.
Ideally, you’ll max out your contributions each year. Even putting away $1000 a year over 30 years will leave you with something meaningful when you account for average IRA growth rates.
Pay Down Consumer Debt
Despite what some might claim, debt is not always a bad thing. Debt can let you access things that might otherwise remain out of reach, like a new car or a home, or even let you finance a business launch.
Yet, much of the consumer debt that people carry exists in the form of things like credit card debt. Credit card debt is some of the most expensive debt that you can carry. High credit card interest rates soak up money that you could do other things with, like add to IRA.
Paying down consumer debt frees up that money for more productive uses.
Getting your basic personal finances in order can take a little time and even feel frustrating, but it’s a crucial step. It tells you exactly where you are financially speaking, which often proves a harsh blow at first. More importantly, it helps yo build good money habits and puts you in a position to start building wealth.
Now, let’s dig into approaches that help you build wealth.
One of the very first things that people think when they put their personal finances in order is: “I need to make more money.” There are a several ways you can do that.
Negotiate a Raise
In some jobs, you can negotiate for a raise. It’s one of the best and fastest ways to increase your income because nothing changes about your job or life except the amount of money you make. Unfortunately, many jobs only give raises on a fixed schedule, which makes negotiating basically impossible.
Your next option is a side hustle. There are countless side hustle options, such as:
- Freelance writer
- Dog walker
- Food delivery
- E-commerce websites
A lot of people like online side hustles because most of them don’t require fixed schedules. You can work around your day job.
Assuming your day job covers your expenses, you can roll your side hustle earnings straight into your retirement account to max it out or use other wealth-building strategies we’ll discuss below.
The nuclear option for many people is a full career change. While career changes are common, they’re also an option that many people don’t like. Career changes are disruptive for you and your family.
If you see a career change as the most viable option, you’ll want a change that takes you into a higher-paying field. Options like information technology and web development often provide a gateway to higher income. They’re also areas where you can get in without a degree.
If you’re comfortable going back to school for a degree and can afford the time off, fields like business, engineering, and computer science can open doors for you. Law and medicine pay really well, but the school costs and the time investment aren’t practical for most people looking to make a career change.
Launch a Business
Launching a full-time business is often the next step from a side hustle. For example, let’s say you have specific skills that let you act as a consultant. You may find that you’ll make more doing that as a full-time job.
If you’re already an expert in areas like marketing or physical fitness, you can often turn that into a real business with your own office or building and employees. Hiring staff lets you scale up your operations and make more than you can make on your own.
Making more money is one of the most direct ways you can create additional wealth for yourself, but even that typically isn’t enough to really build a fortune. For that, you must move beyond simply trading your time for money.
The truly wealthy don’t get their wealth from day jobs, for the most part. Their wealth comes from having multiple revenue streams of largely passive income and other key investments. So, let’s look at some investment strategies.
For many people first looking beyond their savings accounts and retirement accounts for investment options, the stock market is a popular choice. It’s readily accessible and allows for a fair amount of control over your total risk.
You can work through a broker. You can also open an online account and do the trading yourself. Of course, that often edges back into trading your time for your money.
If you spend six hours a day working on your stock market investments, it’s like having a job. That’s why so many people use brokers.
Another way you can limit your total time investment is with algorithmic trading. Algo trading happens automatically based on the parameters that you set up. For example, you can set it to buy or sell a block of stock that dips below a certain threshold or above a certain threshold.
Another option that is popular is real estate. There are several potential ways you can invest in real estate, including:
- Rental properties
People like different strategies for different reasons, so let’s look at them individually.
Many investors like the rental property approach because it’s an income-generating investment. If you don’t mind some hands-on work, you can even start small and manage it yourself. If you want a more passive investment, you can employ a property management service for daily management needs.
The buy-and-hold strategy banks on the fact that property typically increases in value as time passes. For example, if you buy a property now for $350,000 and wait ten years, odds are good you can sell it for substantially more.
Of course, that also means you have a property sitting there, doing nothing, costing you in taxes and upkeep. Many investors combine the buy-and-hold approach with the rental property approach. That way the property at least covers the expenses and even generates a profit while you wait for the price to rise enough to sell it.
The fix-and-flip approach isn’t for every investor. It takes a savvy investor to know what a distressed property needs and how much it will cost to fix. If you can figure those things out successfully, though, you can turn a tidy profit.
REITs are a mix of stock market investing and real estate investing. Instead of buying and managing properties yourself, you buy stock in a real estate investment trust. The trust buys and manages properties for investors and, ideally, generates a profit.
Assuming you have some success with your wealth-building strategies, you may eventually graduate to investing in businesses or owning them outright. This is a trickier area of investing. You should enlist the help of professionals, such as investment advisors, lawyers, and accountants before you invest in or buy a business.
Passive Income Approaches
For passive income, you can opt for the silent partner approach. In that approach, you find a business that has a good business model but lacks funding. You essentially buy a stake in the business by providing the necessary funding. In exchange, you get a piece of the profits in return.
The exact terms of a silent partner arrangement will vary from one deal to the next. It’s often based on how much money the business needs and what you can reasonably expect to see in profits.
You can also take a passive approach when owning businesses. For example, let’s say that there is a successful franchise in your region. You could potentially buy a franchise, set it up, and hire people to run the business for you.
Sure, you must invest some time in terms of overseeing and monitoring the business, but you don’t necessarily need to make an on-site appearance every single day.
Active Income Approaches
Your other main option is an active income approach. In those cases, you start a whole new business in which you take an active role. For example, you might start a franchise business and act as the owner/manager.
You spend the bulk of your working day working in and working on the business.
In many cases, though, this approach eventually evolves into a passive strategy. You may work steadily in the business for the first year or two only to hand daily management over to someone else once things are up and running.
As you grow and become more experienced with creating wealth, you may find yourself focusing on just one or two investment options or deploying several. With diverse income streams, you often partially shield yourself from economic changes.
Creating Wealth and You
Creating wealth isn’t something that happens overnight for most people. Instead, building a fortune stems from building a strong foundation. Your personal finances are that foundation.
Get your finances in order so you can see what needs to happen next, whether it’s a raise, side hustle, or career change. Once you’ve got that squared away, you can worry about investments that generate multiple, passive income streams.
Looking for more wealth-building tips? Check out the posts in our Finance section.