When I graduated from college I only knew the basics about building wealth and saving for retirement. Plus, I had aspirations to pay off my student loans, get married, start a family and become an entrepreneur.
My goals pushed me to find mentors and ask questions until I learned more specific ways to build wealth. I picked up financial habits that successful people do throughout the year to build wealth.
If you want to get on the fast track to building wealth as well, here are six key ways to build wealth. You can start using these tactics today.
1. Pay Off Debt
If you have debt that is growing thanks to interest, your debt payments are taking money away from what you could be investing and saving. What’s worse is that interest is only beneficial to the credit card company. You get nothing for that extra money you are paying on purchases from your past.
Debt could also be holding you back from reaching your financial goals. Therefore, make it a priority to pay off your debt quickly and avoid new debt in the future.
To get out of debt, create a debt payment plan that includes consistent payments towards your student loans, credit cards and personal loans. To get started, add up all the money you owe. Then, prioritize your debt based on the interest rates.
If you are overspending on credit cards and not paying off your balance in full, stop using your credit cards and only focus on paying down the balances. Then, commit to paying off your debt with the highest interest rate first (debt avalanche) or the smallest balance (debt snowball).
Once that balance is zero take the money you used to put towards that debt and apply it to your next loan or second-highest interest rate. It may take time, but eventually, you will be debt-free.
Effects of Paying Down Debt Faster
For example, if you had a credit card with a $5,000 balance and a 15% interest rate, it would take you almost 7 years to pay off your debt. Your monthly minimum payment would be $100 dollars, but you would pay almost $8,000 before your balance due is zero.
However, with that same balance, if you put another $100 towards your debt, making your payment $200 per month, you could pay off your debt in just under three years. This saves you over $1,800 in interest.
Put any extra money you get from pay raises, bonuses or gifts towards your debt. Furthermore, check to see if you qualify for student loan forgiveness programs and see if your employer has any programs where they pay off your student loans. Every little bit towards debt, whether it’s your money or someone else’s, helps you get debt-free.
2. Get the Free Money
Does your employer offer you money for investing in your retirement account?
Some companies will match a percentage of your retirement contributions or pay you a set amount as long as you contribute to your retirement account, too. We call this money match free money because it’s added to your overall retirement savings, but it’s money you didn’t have to contribute.
For example, if you make $50,000 a year and your company matches 5% you could earn up to $2,500 in free money as long as you also contribute $2,500 to your retirement account.
If your job matches a percentage of your retirement account contributions, make sure you are putting in at least enough money to receive all the free money. If your job matches up to 5% and you are only contributing 3% of your salary that means you are leaving free money on the table.
If you are currently not getting all your company’s match, adjust your expenses so you can afford to increase your retirement savings. Each year try to save more for retirement and raise your contributions by a percentage point or more if you can.
Remember, each year the tax rules are subject to change. If the IRS increases the retirement contribution limits, review your finances to see if you can increase your contributions and save as much as possible for retirement.
3. Review Your Retirement Account
Most employees set up their retirement account when they start a new job, but very few check their retirement account statements or performance throughout the year. If your retirement account is on autopilot, it’s time to check on it.
First, make sure you are contributing enough to get all of your employer’s free money. Then, rebalance your retirement account at least once a year but not more often than quarterly. Review your retirement account and your fund allocation mix to ensure you are maximizing your possible earnings.
The only time you don’t need to rebalance is if your account is automatically rebalanced by your fund manager or a financial advisor on a regular basis. Even if you fall under this category, it’s still important to review your retirement fund’s performance.
When preparing to rebalance your portfolio, first review your funds to see which ones generated gains and which experienced losses. Then you should reconfirm your funds and their allocation mix. Make sure your investments are still appropriate based on your goals.
For example, if you started out with an aggressive portfolio and now want to switch to something more moderate, you need to make changes accordingly. Your investments, including your retirement fund, should be aligned with your goals and values.
Work with your retirement account specialist or your own financial advisor to adjust your portfolio. Just make sure that you continue to invest in funds that aren’t too risky for you and never put all your eggs or money into one type of investment.
For example, even if your company is doing well never put all your retirement funds into company stock. Balance and diversification are key.
4. Max Out Your Paycheck
To ensure you have the most income to save and invest, make sure you are getting your maximum possible paycheck. If you got a tax refund last year, you are not maximizing your income during the year.
A tax refund means you paid Uncle Sam too much in taxes every time you got paid. It also means you may not be claiming enough allowances. As a result, the government used your money all year without paying you any interest, and you didn’t have access to that cash for yourself.
If you owed last year, and don’t want a bill again, ask your employer to take additional money out of your paycheck. You can take the amount you owed and divide it by your number of paychecks per year. Then pay that additional amount towards taxes each time you get paid.
Your goal should be to break even so you owe no taxes or to owe as little as possible. To adjust your tax payments, update your W-4 and adjust your withholding allowance.
The more allowances you claim, the less tax your employer withholds from your paycheck. You should fill out a new W-4 every time you start a new job or experience a major life change such as marriage, divorce, having a child or adoption.
To figure out how many allowances you should claim, use the IRS Personal Allowances Worksheet. If you have a complicated tax situation because you own several rental properties, own one or more businesses or have multiple streams of income, consider working with a certified public account (CPA) or a tax professional who can help you with tax planning throughout the year.
5. Make a budget
The best way to track your expenses and income is to make a budget. Regardless of how much money you make, budgets help you meet financial goals and prevent overspending. Even if you have a million dollars, it’s important to budget.
When budgeting, you must designate every dollar for a specific purpose. Add up all your household income and assign each dollar to an expense. Remember to set aside a portion of your income for savings, too.
To be sure about how much money you need each month, try tracking your expenses for 30 days straight. Then use that information to set limits on how much you can spend in each category such as housing, loans, fun stuff, food and utilities. If giving is important to you, also include charitable donations in your budget.
Check your spending at least twice a month. This allows you to see if you are overspending in some areas before the month is over. If you find you have overspent on one expense you need to adjust what you spend in other categories so you don’t end up overspending for the month.
In the end, your total expenses should be less than your monthly income. If not, this means you are living beyond your means and need to cut back.
A popular budget system is the 50/30/20 rule where you spend 50 percent of your income on essential expenses, save 20 percent and spend 30 percent on fun stuff. This budget allows you to save and live a little. However, in the past we’ve discussed several other budgeting systems you could use when you’re focused on building wealth,too.
6. Read a Book, Take a Course
I love to read and this year I have challenged myself to read 50 books before the end of the year. I am focusing on finance books as well as leadership books that can help me become a stronger manager and team builder.
If you have an area of expertise you want to expand upon, consider reading more. During your daily commute, you can fit in audiobooks and boost your knowledge and skills faster. It could also be fun to take a book or two on vacation. Throughout the year is a great time to read wealth building classics like Think and Grow Rich or Rich Dad Poor Dad.
It’s always a good time to learn. If you want to increase your knowledge about building wealth and investing you can read books on various topics like real estate investing, budgeting, paying off debt, investing in the stock market, fixing your finances and more.
Not a fan of books? Courses are also a great way to learn new concepts. Then you can apply that knowledge to your own financial plans and goals.
Start Using These Ways to Build Wealth Today
Building wealth shouldn’t be something you only focus on at the end of the year when you are making New Year’s resolutions. Instead, focus on building wealth daily and use some of these tips to get started.
Start with reading a good book to boost your knowledge. Then, pay off your debt so you can put that income towards saving and investing once you are debt-free. Combined, these efforts will improve your finances and give you the cash you need to build wealth and secure your future.
Each step you take to save, invest and improve your money habits gets you one step closer to your overall financial goals.
Leave a comment with any tips or tactics you are using today to build wealth. Don’t forget to join the Wealth Noir Community, a group of like-minded black millennials focused on financial freedom and building wealth.
Acquania Escarne is the creator of The Purpose of Money, a community of women building generational wealth for their families one dollar at a time. As an entrepreneur, real estate investor, and licensed insurance agent, Acquania has always been passionate about financial literacy. On her website, Acquania blogs about ways to help you improve your money habits, create wealth, and invest in real estate. Follow Acquania on social media for daily tips.
It really helped when you said that I should avoid overspending using my credit card. I noticed that I heavily rely on it once I read this part of the article and I think that it is a habit that I should stop immediately. Maybe I should consider my financial choices and focus more on wealth management while I’m still young.