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Considering most Americans have the lowest savings rates in decades, according to Statista, any discussion about building wealth might seem a little out of touch with their reality. But, saving doesn’t need to be as challenging as it is often assumed to be.
In most cases, getting started is the hardest part, but eventually it just becomes part of your regular tasks. Although you might feel building wealth is only a habit of the rich, there are many small and easy steps through which almost anyone can start growing their net worth right away.
Yes, it’s scary to start saving, but building wealth is crucial for stability in the face of a potential financial crisis, for your retirement, and for any future large purchases like a house or car. Starting today sets your financial well-being up for the future. Here are seven of the best ways to build wealth.
Create Multiple Streams of Income
Even if you already have a full-time job, consider the financial benefits of creating a second or third stream of income. This is often called a side hustle, and the possibilities are virtually endless. Whether you start freelancing on the side, get into real estate, or even develop more streams of income from your current business, having a second, separate source of income is essential for wealth development.
Sixty-five percent of millionaires have at least three streams of income, according to a survey on the habits of wealthy people. Get creative, find something you love doing, and try to monetize it.
Focus on Paying off Debt
Building wealth while paying down debt can be challenging – it might not get you very far and brings to mind a hamster wheel. Before you can really focus on wealth development, it’s crucial to focus on paying down debts. Two techniques can provide direction: the avalanche technique and the snowball technique.
The first technique focuses on paying down debts with the highest interest rates. The borrower pays only the minimum payments on all loans and diverts the rest of available funds toward the loan with the highest interest rate. The second method, the snowball debt technique, is the opposite. The borrower makes minimum payments on all debts, with any extra funds going toward the smallest loan.
Stick to a Reasonable Budget
Why not try out one of the many online budgeting tools available today? Mint is one example, YNAB is another. Some banks even have free budget platforms built right into their online banking. You can also pull roughly six months of your transactions from your bank and credit cards, and start crunching the numbers yourself.
Just how much did you spend on gas last month? How much on coffee? Even looking at the hard numbers can be a healthy wake-up call to just how much money you spend on frivolous things each month. Whatever your budget looks like, create one and stick to it. If you allocated $300 a month for eating out, and you’ve already used it up by the 15th, that means no more eating out until next month.
Invest Early to Take Advantage of Compounding Interest
There are many benefits to investing early, it helps you get experience with the process, and it takes advantage of something called compound interest. Compound interest is money accrued on the initial investment, but also on all the subsequent interest accumulated annually.
For example, if you invest $100 annually for 40 years, at 5 percent interest and one compounding period a year (there can be up to 12 per year), you’ll have $13,387 by the end of the investing period. That’s almost $10,000 more than your physical investments. The longer the period of investment, the higher the exponential returns you’ll get through compound interest.
Pay Yourself First and Automate
Most people pay their bills, their debts, or even pay for groceries before they consider their own savings. An excellent way to save is to always pay yourself first. This can be automated to make it even more difficult to forget or entirely neglect. Speak with your employer, or bank, to set up automated withdrawals on payday into your savings account. Better still if you have a difficult-to-access savings account. If saving first sounds terrifying, start small. Even starting with 10 percent of each paycheck helps you get comfortable with the process.
Find Ways to Earn More Money
Start brainstorming ways to earn that extra bit of cash. For example, could you start selling things online, have a semi-annual yard sale, or ask for a raise at work? What else can you offer your job? Could you take some additional courses, perhaps even paid for by your employer, that would increase your experience and technical know-how? If you are an entrepreneur or a freelancer, there are tons of free online courses to explore that can help boost your rates and services. There are also freelance writing websites out there if writing is one of your passions.
Work With a Financial Adviser
Unfortunately, in some areas, it doesn’t take many credentials to become a financial adviser. Which is why when you do seek professional financial advice you need to be careful. Start with your own financial institution; they might offer free services to their clients. If you don’t feel comfortable with the first adviser you’re offered, feel free to ask for someone more experienced or who fits with your personal ideology better. You can also check the NAPFA website to find a Certified Financial Planner in your area.
Author: Jeff Gitlen