What does it mean to get wealthy?
If you want to know how to get wealthy, it is important for you to first understand what it means. Many people define personal wealth in one of three ways, including wealth as income, wealth as net worth, and wealth as a lifestyle.People define what it means to get wealthy according to their own financial goals. If you want to learn how to build wealth, you can start by thinking about what it means to you to get wealthy and set your own financial goals accordingly.
Statistics on getting wealthy
There are an estimated 9.4 million people in the U.S. whose net worth range from $1 million to $5 million. An additional 1.3 million people have an estimated net worth that range from $5 million to $25 million and 156,000 households that enjoy net worth of $25 million or more.
When these groups are added together, it means that there are roughly 11 million people in the U.S. who are millionaires, which is roughly 3.5 percent of the population. When you think about it, these statistics demonstrate that few people actually learn how to get wealthy and to follow through with plans for how to build wealth. However, many adults have the ability to learn how to build wealth if they follow some straightforward steps.
What are the steps to take in order to build wealth?
At first glance, the steps might appear to be simple. However, the problem lies in the implementation of these steps for how to build wealth over time. If you are instead looking for how to get rich fast, you might want to take a step back and rethink your goals. The path to get wealthy takes dedication, hard work, and a willingness to write and implement a financial plan. It takes time for most people.
1. Create a financial plan
The first step to get wealthy is to create a financial plan. If you do not have a plan, it will be difficult for you to build wealth. Most people tend to spend everything that they make, leaving little to save or to invest. A plan can help to provide a blueprint that you can use to reach financial independence.
To write a financial plan, you need to begin by reviewing your assets and your liabilities. You should determine the fair market value of all of your assets and add up all of your liabilities. Then, subtract your liabilities from your assets so that you can understand what your net worth currently is.
Track your expenses for a month, saving every receipt. This includes tracking small purchases that you make with cash or with your debit card. This can help you to identify areas in which you are overspending so that you can make adjustments. Once you understand your fixed expenses and your spending habits, create a budget to control your expenses.
The focus of this step should be on learning to live below your means so that you can reach your short-term goals and start to save. You can identify which expenses are fixed expenses and which are variable so that you can make appropriate changes.
2. Create a savings plan
Your next step for how to become wealthy and to achieve financial independence is to create a savings plan. Your savings plan should include plans for saving up ample funds for emergencies.
No one can predict when or if the unexpected can occur. If you do not have sufficient savings and are faced with an emergency situation such as an illness, accident, unemployment, or death in your family, you may not have the financial means to weather the storm.
You should plan to save up to six months’ worth of your living expenses for an emergency savings fund. If you have this available to you, you will be prepared to meet your living expenses for months while you work to return to your financial normal.
3. Create an insurance plan
Preparing for the unexpected includes more than simply saving up an emergency fund. You should also hedge against the unexpected with a good insurance plan. Your plan should include the types of insurance that you need. Some of the potential types of insurance that might be appropriate for you might include the following:
- Auto insurance
- Health insurance
- Short- and long-term disability insurance
- Homeowner’s or renter’s insurance
- Life insurance
There are other types of policies that are available, but they might be unnecessary unless you have special circumstances. For example, if you own a family farm, you might want to consider adding liability insurance and crop insurance. For most people, however, the five basic types of insurance that we have listed will suffice. You might want to talk to an insurance agent about the different policies that might provide you with the greatest benefit.
4. Create an income tax plan
Most people have heard the saying that nothing in life is guaranteed other than death and taxes. However, while you cannot cheat death, you can create an income tax plan to reduce the taxes that you might have to pay.
People engage in tax planning to minimize the taxes that they will have to pay. They can do this by employing strategies to reduce their taxable incomes. Strategies that can help you to reduce your adjusted gross income include contributing pre-tax dollars to a 401(k) plan or an IRA. You can also implement strategies to increase your tax deductions and to identify tax credits that you can claim.
5. Create an estate plan
The next step for how to build wealth is to create an estate plan. It is important for you to create an estate plan even if you are young. As soon as people turn age 18, they become legal adults. If they subsequently suffer debilitating illnesses or accidents and are incapacitated, it can be difficult for their loved ones to get important information or to make financial and health care decisions for them without proper estate planning documents in place.
Your estate plan might include a number of different documents, including the following:
- Durable financial power of attorney
- Durable medical power of attorney
- Advanced directives
- Living will
- Last will and testament
- Revocable living trust
- Life insurance and other types of trusts
Like other types of plans, your estate plan is not meant to be static. You should review it and make changes on a regular basis as you experience changes in your life. You might begin with a simple will, durable powers of attorney, a living will, and advanced directives.
As you grow older, get married, have children, get divorced, or experience other life changes, your estate plan may necessarily become more complex. While there are forms online for estate planning, it is a better idea to get help from an estate planning lawyer so that you can make certain that your documents conform to the laws of your state.
6. Create an investment plan with a long-term focus
Your next step for how to build wealth is to create an investment plan. Your investment plan should have a long-term focus. If you are young, you can be more aggressive with your plan and your investments. As you age, you will want to make changes so that your investments are more conservative over time. Here are the components of creating an investment plan with a long-term focus.
Build your portfolio
To get wealthy, you will need to create a good retirement account portfolio. To build your portfolio, you should make regular contributions to a retirement plan. Your plan can include a 401(k) through your job, a traditional IRA, or a Roth IRA. If your employer offers matching contributions up to a certain percentage, you should at least try to contribute the amount that your employer will match.
You can also contribute to either a traditional IRA or a Roth IRA. Contributions that you make to a traditional IRA may be tax deductible in the year in which you make them if you meet certain income guidelines. You can contribute to a Roth IRA if your income does not exceed the maximum amount. Contributions are made after tax, which means that you will not pay taxes when you start taking withdrawals from your Roth.
How to set up accounts
Learning how to build wealth will include setting up investment and retirement accounts. While you might have an employer-sponsored plan at your job, you should also open your own accounts. To set up an account, you can follow these steps:
- Decide which type of account that you need;
- Compare the incentives that are offered as well as the costs by different brokerages;
- Look at the services that are offered;
- Choose your brokerage firm;
- Complete the application;
- Fund your account; and
- Research different investments.
Determine risk according to age
One important factor in how to build wealth is to understand your risk tolerance. Your risk tolerance will vary depending on your age. If you are young, you can be more aggressive with your investment choices. As you grow older, you should adjust your portfolio so that it becomes less aggressive over time.
If you are drawing near to retirement, you should be more conservative with your investments. Determining your risk tolerance can help you to understand the types of securities you should choose and the balance in your portfolio.
Diversification of your investments is key to how to build wealth. When you have a diversified portfolio, it can help to hedge against risk. Diversification involves a strategy of selecting a number of different types of asset classes to help to reduce the overall risk of your portfolio. Diversification does not guarantee profit or protect against loss in declining markets.
A portfolio that is diversified might include a blend of cash, bonds, stocks, ETFs, and other asset classes. Diversification involves smart asset allocation and is a building block of a strong portfolio to help you to become wealthy.
Automate savings and avoid high fees
A good method for how to build wealth is to automate your savings while also avoiding high fees. When you are comparing different investment firms, make sure to review their fees. Some charge high fees to manage your account as well as high transaction costs.
Some firms allow you to invest for free and to set up automatic savings. With these firms, you can schedule regular transfers from your bank account to your investment or retirement account so that you can save without giving it much thought.
View the market as a long-term investment
In order to get wealthy, you need to ignore claims that different types of schemes or gimmicks can help you to learn how to get rich fast. If you want to learn how to build wealth, you need to look at the market as a long-term investment.
Building wealth by the decades
Many investors make the mistake of reacting emotionally to market fluctuations and engage in trading that is too frequent. You should remove the emotions from your investments and ride through fluctuations. You should also optimize your portfolio and change your risk portfolio as you get older.
Your approach to how to become wealthy and to achieve financial independence should change as you grow older. Your personal finance goals should be different for each decade of adulthood. Here is an overview of what you could do during each decade.
Investing your 20s
When you are just starting out on your path to achieving financial independence, you can begin by building good financial habits. Personal finance in your 20s should focus on several things.
You should start saving and try to save a minimum of 10 to 15 percent of your income. When you start saving in your 20s and make it a habit, building wealth over time can be easier. This is because you will have more time for your money to grow because you can take advantage of compounding interest.
Eliminate debt and invest
If you have debt, you should work to eliminate it. You can do this by budgeting and learning to live below your means. You should also invest regularly. Your growth strategy on your path to becoming independently wealthy when you are in your 20s can be more aggressive. When you begin investing early, you have more time and can afford to take more risks.
Budget and live below your means
It is easy for people to spend every dollar that they make when they do not have a budget. You should create a budget and work to live below your means. Start by tracking all of your expenses for one month, including those that you make with cash or change. Save all of your receipts. At the end of the month, categorize your different expenses for the month so that you understand where your money is going. Identify the areas in which you can cut your expenses so that you can live below your means and save more.
Investing in your 30s
When you are in your 30s, your personal finance strategy will likely need to focus on new goals. By this time, you may have started a family and have additional expenses and financial considerations. You can still work on how to become wealthy by following a number of steps.
Budget carefully, cut out unnecessary expenses, and stick to it
Budgeting continues to be important in your 30s. You should budget your money carefully and stick to the budget that you have created. Identify things that you can cut out such as grabbing a cup of coffee from a coffee shop or eating lunch out every day. After you have created your budget, continue tracking your expenses so that you can adhere to your plan.
Build your emergency fund
If you have not already, you need to build your emergency fund. One part of gaining financial independence is being prepared for emergency situations and financial setbacks. You should aim to save a minimum of three to six months’ worth of your living expenses. If something happens, this money can help you to get through hard times and to emerge relatively unscathed. It is a good idea to put your emergency fund savings in a high-yield savings account or a money market fund so that it will be accessible if you need it.
Max out retirement savings options
One goal that you should work toward in your 30s is to maximize your retirement savings. If you are contributing to a 401(k) at your job, you can contribute up to $19,000 per year. If you are unable to max out your savings options, you should at least try to contribute as much as possible.
If you are able to contribute the maximum to your 401(k), you might also consider opening a traditional IRA or a Roth IRA if your income meets the requirements. You can contribute up to $6,000 per year to a traditional or Roth IRA on top of your 401(k) savings.
Save for children’s education
If you have children, it is a good idea to begin saving for their education when they are young. The cost of college has skyrocketed and shows little signs of slowing down. You can open 529 savings plans for your children so that they will be able to attend college when they are older without having to take out college loans.
Investing in your 40s
By the time that you are in your 40s, you may want to focus on how to increase your net worth so that you can become wealthy. During this decade, work on paying down your mortgage. You should also make sure that you know your portfolio and check it on a quarterly or annual basis to make adjustments to it.
Other goals during your 40s might include eliminating debt, saving for a down payment on a new home, and continuing to save money for college for your kids. During all of this, you should also be continuing to maximize your retirement savings. You might look at adding side income streams and adding passive investments to grow your net worth even further.
Investing in your 50s
When you reach your 50s, it is time to accelerate your savings so that you can retire comfortably. Beginning when you reach age 50, you can start making catch-up contributions. If you have a 401(k), 403(b), or 457 plan through your job, you can make additional contributions of $6,000 per year on top of the maximum contributions of $19,000 per year. This means that you are able to contribute $25,000 per year to these types of plans. If you have a traditional IRA or a Roth IRA, you can contribute an additional $1,000 per year for a total of $7,000.
Stay with your stock investments for the long-term. Invest in your Roth IRA if you have one. You should also make sure that you have good health insurance so that you are prepared if you have any health issues.
Investing in your 60s
When you reach your 60s, you are drawing close to retirement. Your retirement strategy should be more conservative. During this decade, you need to shift your portfolio allocation to more conservative investments.
If you do not have an estate plan, you need to create one. If you do have an estate plan, it is important to review it and to make any necessary changes. Make sure to pay attention to your beneficiary designations for all of your accounts and life insurance policies so that your estate will be handled in the manner that you intend.
You should also investigate different options that you might have to pay for long-term care if you need it in the future. You can investigate long-term care insurance or life insurance that has a long-term care rider. Long-term care can be prohibitively expensive and planning ahead can help you to preserve your wealth.
Review and revise as needed
No matter what your age might be, it is important for you to create a financial plan and to stick to it. Your plan is not static but instead should be changed as your needs change. You should review and revise your plan and your goals as needed.
A review of your plan should be conducted at least annually. If you have a major life change or experience a catastrophic event, you should review your plan and revise it accordingly. This can help you to make certain that your plan reflects your needs and your changed circumstances so that it can grow with you.
How the investment platform with M1 Finance works
M1 Finance is an investment platform that offers investors a combination of innovative expertise and cutting-edge digital technology to help them with investing and improving their financial habits. Individuals are able to invest without paying any management fees or commissions so that your money goes further in assisting your goals to get wealthy.
You can determine your risk tolerance and then choose your own investments for better personalization or select from one of 100 portfolios that have been created by experts. The M1 platform is designed to make investing accessible to investors of all levels.
Benefits of investing with M1 Finance
M1 Finance offers several different account categories from which you can choose, including taxable investment accounts, retirement accounts and individual accounts. You can choose from a broad selection of securities to create a custom portfolio and set up automatic transfers from your account so that you can invest without thinking about it. M1 Finance uses automatic rebalancing to keep your money working harder for you. You can also invest for free, which can allow your money to grow by thousands more over time. You can sign up now to get started investing or call 312-600-2883 to learn more.