Building wealth requires a lifelong commitment, irrespective of when you start. It is wiser to start as early as possible. Someone in their twenties is likely to have fewer liabilities than a person in their forties with a family and children.
On the flip side, someone in their forties is likely to have a higher and more stable income, as well as substantial savings to fund investments. There is no rule of thumb for building wealth. You can start at any time. The steps you take shall determine whether or not you accomplish your objective.
6 Strategies for Building Wealth
Many paths lead to financial independence. You may take any that suits your objective, skills and acumen, way of life, and other preferences. These are the six strategies for building wealth, relevant for people of all ages and socioeconomic origins.
The first strategy is to reduce expenses. You do not have to live an extremely frugal life, but you cannot indulge in expenses without meticulous planning. You should have a stringent budget, weekly and monthly. You should review your budget periodically to identify wasteful expenditure. Anything nonessential should be avoided. Otherwise, you will be continually caught up between paychecks.
Save before you spend. The importance of savings cannot be overstated. It is impossible to build wealth unless you are unfailingly disciplined and committed to saving. You must also keep growing your savings.
Have a steady income and try to earn from multiple sources. Employed professionals can use their aptitude and acquired skills for part-time gigs. Self-employed people and entrepreneurs can be involved in more than one business. A single source of income leaves a person vulnerable to job loss or business closure. Multiple sources provide the required safety net. Also, it is relatively easier to increase your earning when you are not limited to one source and the policies of that employer, or limitations of that business.
Invest, as much as you can, but after weighing all the potential risks and rewards. Savings will only grow by a few modest percentage points over the years in specific programs. Savings can grow exponentially if invested wisely. Do not invest all your savings. Don’t put all your eggs in one basket. Investing has to be your way of life if you want to build wealth. Unless you have a million-dollar idea that you can patent and get rich, you must diligently work on the building blocks to acquire a fortune.
Smart financial planning is necessary, not just in the thirties or forties. It is crucial from the very moment one gets their first job. Everything expense should be reviewed. It is almost impossible to build wealth if you are not in total and firm control of every cent you earn, spend, save, and invest.
Wealth Building in Your 20s
Your 20s brings a world of opportunities and innumerable challenges. Twenty-somethings have the least exposure to the world of savings and investments but also have more time at their disposal. Here are some of the imperative steps someone in their twenties should take to build wealth.
Prepare a budget. Abide by it. Most young people live from one paycheck to another. This is the antithesis of what rich people do and what wealth creation requires. Saving is a habit. It only gets better with age.
Prepare an emergency fund. A young person is much more likely to be fired from a job than a veteran. The emergency fund should be separate from the savings. Reduce expenses, don’t buy a car if you live in a city and public transportation is abundant, rent a smaller place, and don’t think about buying a flat or house.
Do not take on any nonessential debt. Limit your use of credit cards. Buy what you need. Your savings and emergency fund should be your priorities.
Start investing. A young person should focus on developing a portfolio. Stocks are certainly worthwhile for young people. Mutual funds are a worthwhile option. A 401(k) is imperative.
Your 20s should be about building the foundation, to have a robust financial safety net, and to acquire enough experience that will serve as the launchpad for your 30s.
Wealth Building in Your 30s
Building wealth in your 30s is trickier than in your 20s. Financial obligations should be met, short term plans should be laid out, and there should be a long-term strategy in place.
Switch from stocks to bonds in your 30s. Bonds are less volatile than stocks, but also less rewarding. The risk and reward assessment has to be more pragmatic, as thirties are when people get married and start a family, buy a house, and have more financial liabilities. However, none of these should affect basic wealth-building practices.
Take advantage of tax savings programs. There are retirement schemes that can save tax and also secure a substantial fund in the long term. There are schemes enabling people to save on tax when setting aside a fund for their children’s education. There are quite a few deductibles one can use to save money. This is when a tax consultant and a financial planner become instrumental.
Wealth Building in Your 40s
Your 40s is about sharpening your strategies and making adjustments.
Revise and tailor your investments. This is also the decade when your retirement fund should get a substantial boost.
Reduce your exposure to risky stocks. Move towards midterm and long-term investments, those with potentially enormous rewards in ten to twenty years. New investments should be planned in a manner that they do not weaken your safety net.
Wealth Building in Your 50s
In your 50s, you can look forward to your most generous paycheck. Hence, this is the decade your savings target should be increased substantially.
Save more than you spend. Certain new avenues are available in your fifties, many of which can boost your retirement fund. IRA contributions can be increased to make catch-up contributions. This is just one example.
Review your financial obligations. Towards the later years in this decade, children may be self-sufficient and hence do not always need to be handheld financially. Also, there is a reduced need for immediate returns on investment, so funding viable business ideas or minority shareholding in a few enterprises can be rewarding considerations.
Wealth Building in Your 60s
Your 60s should be about wealth preservation.
Figure out what investments have fully matured. Those ripe for cashing out should be capitalized upon.
Take stock of every aspect of your portfolio. Every government and employer-driven program or scheme should be fully utilized. All deductibles and tax breaks must be used. Every major financial liability must be reviewed. Downsizing can be considered, if viable.
Your 60s is the decade when you secure as much cash as possible and park it safely, away from the risks of the market or a particular sector. You should continue to invest, save, and earn, but after securing and safely parking a majority of your net worth.
Image by Stephan Bauer