While attaining wealth may seem distant for some, strategic planning can help set you up for success. There is no one-size fits all blueprint to guarantee wealth, but these strategies may help.
Budget and make a plan to reduce expenses:
Creating a budget may help you better track your money. Not having a budget can make it difficult to know where you are spending your money, or difficult to have control over your spending in general. To get started, you can look at old credit card and debit card statements to get an idea of where your money is being spent, and then figure out areas that you can cut back. Budgeting with software, websites or apps can also make budgeting easy to stick with. Many may feel intimidated about where to start, overwhelmed by the amount of data to go through, or can’t afford an accountant, but using an app, website or software can help reduce stress and make things easier. There are many free apps, websites and software to choose from. Creating a budget will help you visualize where you can cut back spending and where you can save money.
Being more frugal and spending less than you earn:
Many millionaires are wealthy because they know how to manage and invest their money, and not spend it on unnecessary things. Being frugal can help you build wealth, because by being frugal you are being more resourceful with your money. Being frugal is not the same as being cheap. Being frugal is prioritizing your spending so that you can focus on building wealth, and spending your hard earned money on what is important to you in life. Think of money as a tool, and use your money resourcefully to build wealth. Being frugal isn’t about sacrificing everything you enjoy, it’s about being intentional with your money and spending it more resourcefully.
Increase your income:
There are many ways to increase your income such as by negotiating a raise or promotion at work, finding a new job with a higher salary, or working on a “a side hustle” or side-business.
The most efficient way to land a raise, is to keep a “work diary” and update it every week with your accomplishments, problems you’ve solved, and value you have added at your place of work. Then, when it is time for your annual review or time to discuss a raise, you will have many examples on why you deserve a raise. Managers can be very busy and may not remember everything that their reports do (especially if they have multiple reports), so this record keeping system is a great way to remind them of the value you add, and not forget about your contributions. At the end of the year you will not remember every single thing you’ve done, but by recapping your progress on a weekly basis, you will be able to have dozens of talking points a year from now. Every single employee that I’ve hired, have been encouraged to keep a document like this, to track all the “wins” they have had through the year.
Finding a job has never been easier due to the internet. There are dozens of websites online that allow you to browse jobs from the comfort and convenience of your home. It does not hurt to browse jobs, and you may be able to secure a job which pays more.
Due to technological advances, we are also living in a time where the “gig economy” is more popular than ever, and it has never been easier to pick up a “side hustle” to earn extra cash. Many apps and websites allow you to work on your time, and on your schedule. There are so many options such as dog walking, cleaning, tutoring, being a driver, simple home repairs and handyman work, delivering food, picking up groceries, and helping others move just to name a few. It never hurts to try something new that puts additional money in your pocket.
Pay-off and eliminate debt:
Debt can rob you of your future because you are using the money that you earn today, to pay off things from the past. And if unpaid, debt can grow larger and larger with interest and fees adding up. Debt can also cause a lot of stress.
In terms of paying off debt, initially I used the debt snowball method, but then switched to the debt avalanche method. The debt snowball method is the better method to stay motivated, empowered and less overwhelmed, and this is how I needed to feel when initially tackling debt. This method focuses on paying off debt with the smallest balances first, to get them out of the way quickly. With this method, I was psychologically motivated by seeing the progress of smaller loans being knocked off. The snowball method can feel more empowering, and it motivated me and encouraged me to keep attacking my debt. For many, staying motivated is very important.
However, because I was prioritizing paying off small balances first, instead of balances with the highest interest rates, I ended up paying more money in interest in the first few months. After becoming more financially savvy, I switched to the debt avalanche method, which is the better method for saving money in the long-term. This method focuses on paying off balances with the highest interest rates first. Because of this, this method results in paying less interest over the life of the loan, because you are focusing on paying off the debts that carry a higher interest rate. Based on math, the debt avalanche method is the best strategy that uses money as a tool, because it will save you money due to paying less interest in the grand scheme of things. Mathematically, it makes sense to pay off debt first that charges a 21% interest rate, over debt that is only charging a 4% interest rate to borrow money.
Invest in index funds long-term:
Investing in index funds has been a great way to build wealth for many, and even Warren Buffett recommends that the everyday person invests in an S&P 500 Index Fund instead of picking individual stocks. To quote Buffet from his annual shareholders meeting in 2020, “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”
The S&P 500 comprises of 500 of America’s largest companies, across all 11 industries, so investing in the S&P 500 is an easy and stress free way to invest for the majority of people, because you’re not betting on a single company but instead, 500 of America’s largest companies. According to historical records, the average annual return since the S&P 500’s inception in 1926 through today is around 11%, per year. So, for example, if you invested $10,000 in an S&P index fund, and contributed $10,000 a year for 20 years, you would have invested a total of $210,000 cash, but this amount would have grown to $793,274.56 based on the S&P 500’s historical records of an 11% rate of return compounded annually! The power of compounding is one of the greatest tools in wealth creation, and the earlier you start investing, the better. Compound interest can be thought of as “interest on interest”.
Getting started is easy, it’s only 2 steps! Step1 is choosing the S&P 500 index fund that you want to invest in. Step 2 is purchasing shares of that index fund! $VOO is Vanguard’s S&P 500 Index Fund, $SWPPX is Schwab’s S&P 500 index fund, $IVV is Blackrock S&P 500 Index Fund, and $FNILX is Fidelity’s S&P 500 Index Fund.
Take advantage of a Roth IRA:
IRA stands for “Individual Retirement Account”, and is a very powerful way to save for retirement, allowing your money to grow tax free. With a Roth IRA, you pay taxes when you contribute money in, and then you are not taxed on capital gains or dividends while your investments grow in the account, or when you make a withdrawal at retirement.
Invest in Real Estate:
I believe that money is a tool which can be used to build wealth. When you rent, your money is solely being used to provide shelter. However, owning provides numerous benefits in addition to just providing shelter. When you own a residence, your monthly payments create many benefits such as building equity in the residence, building additional equity over time though price appreciation of the property, being able to leverage equity in the home to take out loans or use for another real estate investment, tax incentives with home ownership such as the interest paid on a mortgage being a tax deduction, as well as many people being able to write off a portion of their home used as a home office due to how common remote working has become during the pandemic. These are a few of the many excellent benefits that owning offers and renting does not , which can help you to build generational wealth over time. I like to think of money as a tool, and use my dollars to my advantage. Additionally, you should definitely consider buying a home if you have the cash available for a down payment. First-time homeowners are able to purchase a property with as little as 3.5% down or 0% down if you served in the military.
Understand Your Goals:
At the end of the day, personal finance is personal because everyone’s situation is different, and what works for one person may not be the best option for another person. But with one step at a time, you can achieve financial empowerment. Consistency is key when pursuing financial freedom!
(Equally worth noting, is the importance of understanding that all investments involve some degree of risk, which includes the possibility of potential financial loss. Investments can be volatile or lose value if market conditions change. You should seek the advice of a qualified investment advisor and fully understand any and all risks before investing. Historical results of our products are no guarantee of future results.)
If you enjoyed this read, feel free to also follow me on other social media:
My Newsletter on SubStack: The Newsletter
My Blog on Medium: Andrew Lokenauth on Medium
Facebook Page: @FluentInFinance
My Reddit Community: r/FluentInFinance