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Building Wealth: Great Financial Habits to Become Wealthy

Learn about building wealth and being financially independent with M1 Finance

What is wealth?

Building wealth over your lifetime is important whether it is to meet an emergency, pay off your debt, purchase something you love, or make a bigger impact in your society. This involves acquiring a few key financial habits, and becoming wealthy can bring you many benefits, the main one being the financial freedom to do what you want at the time you want.

It turns out that the definition of wealth is as personal to you as your lifestyle. To some, being wealthy is to enjoy life’s little luxuries. To another, it means gaining extra time to do the things that matter the most. You may think that having a net worth of $1 million makes you wealthy, but a recent wealth study finds that it takes net worth of $2.2 million to be considered wealthy.

While wealth does not always involve money, many would agree that how to become wealthy means taking steps to achieve financial security in money, high-value possession, and in investments including stocks, bonds, CDs, mutual funds and annuities.

Steps to build wealth

Wealth building is the process of amassing money and assets to attain financial security and freedom. In order to start, you need a financial plan with your financial goals as well as your current and projected financial conditions. This requires an evaluation of your investments, assets and liabilities, to determine how you can achieve your financial goals.

Building wealth through financial planning boils down to a basic formula. You must make enough income to exceed your liabilities. A saving plans must be created that is proactive and includes investments that efficiently grow your savings.

To become a millionaire – the United States has 11.8 million or 3.6% of the population – you may only need to make one simple change of prioritizing thrift over expenditure. Let us examine the steps in wealth building by means of good financial habits and clear financial goals.

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Increase income stream

When looking at self-made millionaires, you realize that their top strategy how to become wealthy is to focus on increasing income. The two main ways to earn income is through active or passive income.

Active income includes wages, salaries, tips and commissions that you make from businesses or activities due to your active and physical participation. An example is a full-time job where you receive a monthly pay-check. Adding a part-time job or side hustle can add to your active income.

Passive income originates from the income you receive regularly that involves minimal or no physical effort on your part. This includes capital gains and dividends on stocks, interest income and retirement distribution. The IRS has specific definitions for material participation and passive income. For example, rental real estate income when you are a real estate professional is not passive income. You may want to consult professional help on passive versus non-passive activities to determine your taxable income and deductions.

Another way to become wealthy is to eliminate debt, which is something that is due or owed by you, usually in the form of money. If you want to be financially independent, start reducing your debt in your 20’s. Slash your debt, like your student loans, as soon as you can. Financial experts recommend paying down the debt that incurs the highest interest rate first and then go down the tiers.

Make a budget and live below your means. In your budget, classify your expenses and record your spending. You can track your spending for a month, saving all your receipts whether they are paid by credit card or in cash. Group the similar categories together and distinguish which ones are your needs and wants. To become wealthy sooner, eliminate or minimize the wants category so that you have additional funds to invest after you have paid your taxes and bills.

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Increase savings

While what you make is your income, what you actually save is your wealth. To execute an efficient savings plan, start early, take small steps and be consistent.

Start saving as early in your life as possible and reap the benefits of compound interest for wealth building. By saving as early as possible, you can receive interest not only on your principal but also on the previous interest you have earned. If you deposit $1,000 initially and contribute just $20 each month, and assume you earn an annual interest rate of two percent compounded semiannually, your final savings after 30 years amount to $11,617. You are more wealthy compared to the total amount of money you have deposited, due to interest compounding. A wealth calculator can help you in your personalized calculation.

Within your savings plan, set aside some money for emergency savings. If you are prevented from earning income for a while, the money saved will see you through. Experts say that you should plan to save up three to six months of essential expenses.

Have good insurance plans as the unexpected can happen. These can include auto insurance, health and long-term care insurance, short- and long-term disability insurance, homeowner’s/renter’s insurance, identity theft protection, and life insurance.

One strategy for building wealth that financial planners suggest is to automate your savings. This requires an automatic money transfer into bank accounts or making regular contributions to retirement accounts such as your 401(k) plan. This can be done by linking your salary deduction with your retirement account. Revisit your savings each year and add to your savings when you receive a bonus. Increase financial power over time with small and steady steps.

Review your bank and credit card statement regularly and search for the most competitive interest rates for your bank savings. Small fees and maintenance charges add up over time and can eat into your savings.

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Invest with a long-term mindset

A crucial part of becoming financially independent is investing. Prudence in spending and savings are the foundation, but to become wealthy, you have to take on the level of risk that is right for you. Building wealth through investing may appear daunting but having the right tools can help build confidence.

Investing involves putting together a portfolio of assets that can include stocks, bonds, mutual funds, exchange-traded funds, money-market funds and cash. You should first set your financial goals with a long-term view. Consider your current and target income, investment horizon, tax implications and liquidity needs.

Ask yourself about your risk preference in building wealth. How well can you tolerate market volatility? More importantly, how much are you willing to lose? A younger person has a naturally higher risk tolerance than a person who is near retirement, making the portfolio change over time.

An aggressive portfolio has more volatility but may enjoy higher potential returns This portfolio typically contains more stocks than bonds or cash. A study finds that the wealthiest one percent of U.S. families owns 40% of all the stocks. A conservative portfolio will contain more bonds, money market funds and other capital-preservation instruments. A moderate portfolio to build wealth is a balanced one with more diversified assets and contains a mixture of high- and low-risk instruments.

A diversified portfolio that contains multiple asset classes may help you spread out your risk and act as a “hedge” against unexpected events or risks. Given that risks and losses can be concentrated on a certain stock, sector, or country, an optimal asset allocation is a key strategy for building wealth. This is the apportionment of your investment portfolio that balances your risks and rewards. With asset allocation, your focus is the long run and not the short-term volatile market.

With modern investing, you can build wealth using the help of robo-advisors. These are automated investment platforms that help you to invest, allocate and rebalance your portfolio in accordance to your financial needs and risk profile.

Make investments in your retirement accounts. Pay yourself first by contributing to a 401(k), an IRA, or a Roth IRA to take advantage of tax-deferred or tax-free investing for long-term wealth building. Fund these accounts before college plans. Max out these retirement contributions early on in your career. When you grow older, take advantage of the catch-up contributions.

An important step to grow financial assets is to implement tax planning in investing. These are investment strategies to reduce your taxable income. For example, you can contribute your pre-tax dollar to a retirement account. You can also utilize the wash sale rule when you sell a security at a loss. To make the most out of your tax strategy, it is advised to seek the help of a tax professional.

Having a good credit FICO score helps you to lower your interest costs on mortgage loans and auto loans as well as other large purchases, therefore supporting you to build wealth.

Stay informed with news, events and investments by reading investment blogs, financial websites, and investing books so that you invest and adjust your portfolio at opportune times. Minimize your security transaction costs, commissions and management fees in your accounts so that every penny works to build wealth.

How to open an investment account

An investment account is a basic tool for increasing your net worth. Choosing the right broker can make a big difference in how to invest money. Here are some steps to take when opening an account:

  1. Decide which type of brokerage, e.g. online, discount, or full-service, that best suits your financial plan.
  2. Compare the incentives, pros, cons and costs offered by each type of broker.
  3. Choose your brokerage firm.
  4. Complete a simple online application or call to open an account.
  5. Research how to invest money into the various types of asset classes and securities.
  6. Fund your account or transfer your assets to a new broker.

Building wealth with ease at M1

With free automated investing, M1 Finance empowers you to manage your money and build wealth with ease.

M1 Finance allows anyone to invest without commissions or management fees so your money can work harder for you. We blend key investing principles with powerful digital technology to simplify the investing process, so you can build wealth effortlessly.

Invest without compromise. We combine the features of a robo-advisor and a traditional brokerage where the customers can choose the investments and asset allocation. M1 offers you over 80 expert portfolios that are tailored to your financial goals, risk preferences, and time horizon, allowing you to customize your portfolio for your own needs.

M1 is built with powerful digital technology to allow you to build wealth seamlessly and cost-effectively. M1 dynamically rebalances your portfolio according to your needs and allocates your funds automatically so that you will never have to worry about idle cash. With no fees and commissions, M1 helps to build wealth. M1 Finance empowers you to manage your money and build wealth with ease. Get started today by opening an or call us at 888.714.6674.