How To Begin to Build Wealth
Often people will stress the importance of saving a certain percentage of your income each month. Some experts suggest 10 percent, while others say 25 percent, but they seldom say what you should do with the savings once you put it aside.
This is where the difference between building real wealth and just saving money comes in. If you just save 10 percent of your income each year, the money will add up over time, and you will end up with a good nest egg, but if you invest the money that you save in a fairly risk free option, you can build a sizable nest egg, that will begin earning more in interest than you contribute to it each month. This is where you begin to accumulate true wealth.
Start Investing Money
Investing money is often a learned behavior. Some people come from families where they were taught savings strategies, but it never went farther than putting the money into a high-interest savings account at the bank.
Some people come from families where savings was not taught, and the family always lived at the edge of their income. And some people come from families where investing is part of financial planning, and it’s taught and discussed when the parents teach the children about financial responsibility. The important thing to realize is that you can decide what environment and strategy you want to take once you are an adult and you have your own family.
Learn About investing
If you did not grow up learning about investing and your parents did not invest, it can be intimidating to start. There are so many different options to choose from. It is difficult to know if single stocks, index funds or mutual funds are better. Plus it can be difficult to predict growth and understand when you should buy and sell the stocks.
The safest way to invest is to choose a few good mutual or index funds with a proven track record and then stick with them even as the market goes up and down. This allows you to recover from the low points in the market, and it protects you from market fluctuations. When you look at a mutual fund you want to choose one that has been open for several years and has a history of earning a profit more than losing money.
Get Help from a Financial Planner
A financial planner can help you to understand the different products available and the risks associated with each one. The higher the return generally means that there is more risk involved. When you are in your twenties, you can choose products with a higher rate of return because you have the opportunity to wait for the market to recover.
As you grow closer to retirement, you may way to work with a wealth manager to help you switch to more conservative investments to protect your money. Your financial planner should be able to explain all of this to you.
Set Investing Goals
If you are focused on building wealth, it helps to have a clear goal in mind like financial independence or early retirement Determine how much you want to put into investments each month. You can set up accounts that allow you to make contributions each month, which is the easiest way to make sure you continue to invest. A monthly goal can help you to reach targets that you have for retirement or other goals.
Additionally, it is important that you make progress each month. If you are dipping into your savings each month or you skip a month at Christmas, you may be hurting yourself more than you realize.
Keep Your Finances in Order
Before you begin investing you should be debt-free since the amount you pay in interest is usually more than what you will earn on your investments. You should also save an emergency fund that you do not put into investments. You may also save up for things like home repair and vacations. A percentage of 10 percent straight into investments is a good goal, especially if it is on top of your retirement savings. This strategy will help you really begin to build wealth and retire comfortably.
Updated by Rachel Morgan Cautero.