While having a high income certainly helps to build wealth, creating wealth that you can rely on for years to come requires more than just making money. It also requires using your money wisely. Being intentional about the resources you have can have profound effects to help you build wealth, but it will take time and effort.
Starting as early as possible will set you up for long-term success when it comes to your personal finances. However, it is never too late to work toward better financial health.
You can use the following financial planning tips to help point you in the right direction. Starting today can set you up well for years to come.
1. Spend less than you earn
Although this tip may seem like a no-brainer, there are millions of individuals and families who spend more than they make on a consistent basis. According to research done by the Association of Young Americans (AYA) and AARP in 2018, more than half of Americans spend more than they earn each year. In addition, of those surveyed, over half stated that they have nothing saved for retirement.
However, living at or below your means will help you get ahold of your largest wealth-building tool—your income. Using your income smarter, rather than using it to pay for items you have already purchased, will set you up for long-term success.
2. Have a budget (and use it!)
Creating and using a budget has many benefits. It will keep you focused on long-term goals, even over a short-term time period. Perhaps you are saving for retirement, a big vacation, or for the down payment on your dream home. Knowing exactly where your money is going will help you put your dollars to work for you. It also helps implement the first tip and confirms that you are not spending money that you do not really have.
Sticking to your budget will help you get a better handle on your bad spending habits, too. Knowing how each dollar is spent will help you realize just how much you are spending on unnecessary things that could go to more beneficial items, such as retirement planning or saving for a down payment.
3. Pay off or avoid credit card debt
According to WalletHub, the average credit card has an interest rate of 17.98%. As of February 2020, Americans have over $1.1 trillion in credit card debt. At the end of 2019, Americans were paying $121 billion in interest and fees per year. For individuals, keeping credit card balances can cost you hundreds of dollars over just a few months.
Paying off your credit cards or avoid credit card debt altogether can be a great strategy for long-term wealth. You avoid paying credit card interest and simply throwing your money away, and you also get to point your money forward rather than paying for purchases you already made.
4. Build up an emergency fund
An emergency fund is really just a pile of money you set aside to use if an unexpected cost pops up. Those unexpected costs could include things as major as a job loss, or they could include something more minor like a broken dishwasher.
Having this ready source of cash available not only helps you avoid going into debt if something expensive happens, but it can also provide general peace of mind. It can be used in case of a sudden illness or accident too, which can set your family up to avoid financial struggles if the unthinkable happens.
In general, three to six months of expenses is a good idea for an emergency fund. However, if your income is unstable or irregular, it might be a good idea to have more money stashed away in case your income drops below normal levels.
5. Contribute to an IRA or 401(k) retirement plan
IRA stands for “individual retirement account.” You can use both IRAs and 401(k) accounts to save for retirement in various tax-advantageous ways.
Contributing to a traditional IRA, for example, often allows you to deduct that contribution from your taxable income. In a traditional 401(k), contributions occur before tax, which means that any contribution you make is not taxed as income tax in the year in which you contribute.
Both IRAs and 401(k) plans may offer a Roth option, too. Under either of these options, you can contribute to these retirement accounts after-tax to avoid having to pay tax on the income when you withdraw it in retirement. That also means that you can enjoy the growth in these accounts tax-free as well.
6. Take full advantage of any company match for your 401(k)
Those who contribute to a 401(k) account often do so as part of a plan with their employer. Many employers offer a company match, which means that your employer will match a portion of your contribution to your retirement plan. Taking full advantage of your employer’s match portion is a great way to save for retirement without any cost to you.
7. Use non-retirement plan investments
Both IRAs and 401(k)s have upper limits in terms of how much you can invest each year. They also have restrictions on when you can use those funds without penalty. By using non-retirement investments, you can increase your overall wealth without tying up your funds until retirement.
These non-qualified accounts allow you to have more control over which assets you invest in, how much you can invest, and a lot more. Many people who want to retire early choose to use these non-retirement accounts as a “bridge account” between the time you can withdraw from your retirement account and when you want to retire.
8. Use diversified investments
You may have heard the term “diversification” and that you should do it, but you might not have a real understanding of what the term means. Diversification means that you invest in a wide variety of assets with varying return levels to get the overall highest return possible. Your investments may include risky stocks to very safe bonds, for example. By diversifying properly, you decrease the impact that one asset may have if it decreases in value significantly.
9. Use multiple bank accounts
Although this tip might not be the right fit for everyone, for some, having multiple bank accounts can help you save and budget more effectively. You can use each bank account for a specific purpose. For example, perhaps you want to save up for a home renovation. You can transfer a specific amount of your paycheck into that savings account and watch it grow much more effectively. You know that money is only supposed to be used for the upcoming renovation and nothing else.
You can also use multiple checking accounts for certain types of spending. For example, you can use one main account for all of your “must-have” items, such as your mortgage payment and utility bills. You can then use a separate checking account for your “like to have” items, such as going out to eat, clothing, or other discretionary items. Of course, what some classify as “must-have” might not be the same as someone else, so you should create a plan that is unique to you.
Regardless of what kind of plan you create, having your money compartmentalized into separate accounts can be a helpful way to keep your spending and saving on track with your wealth-building goals.
10. “Downgrade” your lifestyle by simply spending less money
One of the simplest personal financial planning tips is to just “spend less money.” Of course, this tip is much easier said than done. However, if you take a hard look at where you spend your money, you can likely find places where you can cut.
How many times did you make a quick trip to Starbucks for coffee or the gas station for a quick snack? Making things at home and planning ahead can help you “downgrade” your lifestyle slightly so you can use that money in ways that make more sense in the long term.
Think about how much money you spend to “keep up with the Jones,” for example. Did you decide to renovate your kitchen because you really needed it? Or did your neighbor, friend, or co-worker get theirs done, so you decided you should as well? Comparing your lifestyle with others can be a good way to get yourself in debt or spend money on things you simply do not need.
You can use that money much more wisely by paying off debt or saving for retirement—and chances are that if you are doing your budget and tracking your spending, you can find areas where you can scale back.
11. Make efforts to pay yourself first
The phrase “paying yourself first” is a financial strategy that focuses on saving before anything else. If you ensure that you are saving before you spend money on anything else (unless you need to pay off debt), you make saving a priority rather than an afterthought. Paying yourself first puts your money to work for you, rather than forcing you to work for your money for the rest of your life.
According to Bankrate’s survey in early 2019, roughly 60% of Americans could not cover an unexpected $1,000 expense like a car repair or an emergency room visit. By paying yourself first, you can set up this type of emergency fund, often relatively quickly.
Paying yourself first allows you to create a habit of savings and living on less than you earn that can set you up to create long-term wealth for you and your family.
12. Update your will and ensure you have enough life insurance
Part of creating an effective wealth strategy also means planning for your loved one’s future. When you pass, you do not want your loved ones to have to deal with mountains of debt and financial obligations. Instead, effective planning with the use of life insurance and a will can help loved ones deal much better with your passing from a financial standpoint.
They will have to deal with enough stress and emotional turmoil when you pass—don’t force them to deal with your financial mistakes too.
13. Check your credit score
Your credit score is simply a measure of how well you deal with debt. If you have delinquent payments or have accounts in collections, your score will be much lower than someone who always makes their payments on time. However, the score itself does not necessarily matter—but paying off your debt and keeping up with your payments does.
Checking your credit score is also a good way to ensure that you have not become a victim of identity theft or credit fraud. Review your credit report at least once a year to keep an eye on this aspect of your financial status.
Having a poor credit score can mean that you will not get as favorable mortgage rates, and it can result in outright loan denials in some cases.
14. Understand that building wealth takes time, discipline, and commitment
There is no real “get rich quick” scheme. Instead, you need to commit to a plan and be disciplined enough to stick to that plan over a long period of time.
While some people may be concerned that they do not have enough time to effectively save for retirement—it is important to know that it is never too late to start. Your planning just might look different from a millennial’s plan.
15. Know when it is time to hire a financial advisor
Getting professional help with your finances may be a good idea, depending on your unique situation. Keep in mind that utilizing a financial planner is not just for the uber-wealthy. Instead, everyone can benefit from professional advice from an experienced financial planner from time to time.
Effective financial planning certainly takes time and effort, and not everyone wants to invest that time to make the right decisions to set up their financial future. While you can learn financial concepts and make informed decisions, it takes a lot of time to teach yourself these concepts.
Some people are also just not interested in learning personal financial planning tips in their free time—they would much rather be doing anything else. If that is the case for you, using a financial planner will make a lot of sense.
If you want more information about where you stand, how to plan effectively, or whether you are set up properly for retirement, a good financial planner will be able to sit down with you and work through these issues. While you can teach yourself, you don’t know what you don’t know—and it can be easy to miss very important aspects of key financial decisions. A financial advisor will be able to help you fill in the gaps and set you up for success today and in retirement.
At Dechtman Wealth Management, we work with you to not only help you pinpoint your financial goals, but also help you achieve them.
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