How to Start (Or Improve) your Personal Wealth

If 2020 knocked your personal wealth off the charts or you never got started in the first place, now is a perfect time. The earlier you start building wealth, the more money you’ll have when you need it.

Even if you aren’t feeling exceptionally ‘wealthy’ right now, everyone can save for the future one way or another. First, there are many tax-advantaged ways to save. Second, even if you can only save a few dollars at a time, they’ll be worth much more a few years down the road.

Everyone must start somewhere, and here are 8 ways to help.

1. Know your Net Worth

You can’t increase your net worth if you don’t know how much you have. Your net worth is your total assets minus your total liabilities. Many people assume they have a high net worth because they have a lot of assets. What they forget is their liabilities deplete their assets, lowering their net worth.

Take time to take stock of what you have. Total up your assets and then total up your liabilities. The difference is your net worth.

Don’t worry if it’s much lower than you anticipated. There are many ways to increase it, many of which you can start today.

2. Pay off your Bad Debt

Now that you know how much debt you have, make a plan to pay it off. This won’t happen overnight or maybe not even in a year. But any slow, steady steps you take to paying it off, the faster you’ll increase your net worth.

Here are a few pieces of advice.

• If you have credit card debt, focus on it first. Unless your credit cards have 0% APRs, which most don’t for the long-term, you should pay them off first. Credit card interest compounds daily, making it harder to get out of debt if you don’t stay ahead of the interest.

• Reassess your student loans. The moratorium is almost over, which means all student loans will become due and payable soon. Even if your loan payments aren’t due yet, the interest keeps accruing. Look into options to bring the interest down either by consolidating the debt into one loan, refinancing specific loans, or applying for student loan forgiveness.

• Focus on other debts last. Some debts are ‘good’ debts, such as a mortgage because it leverages your money, allowing you to invest in an asset that typically provides a decent return.

3. Plan for Emergencies

There are two ways to plan for emergencies financially speaking.

First, you need an emergency fund. Everyone does. You can’t predict what will happen in life. Just look at 2020 and what it did to millions of people who unexpectedly lost their jobs.

An emergency fund should have 3 to 6 months of expenses in it and should be held in a separate account from your spend account. You should only touch the funds if you lose your job, fall ill, or can’t work for any other reason.

Another fund everyone should have is a rainy-day fund. This fund covers unexpected expenses, like car repairs, an unexpected medical bill, or house repairs. Everyone needs a different amount in their rainy-day fund, and it should be replenished as you use it.

Planning for emergencies ensures you stay on budget and can stay on track with your investment strategies. If you don’t have such an account and you lost your job, it would be difficult to continue with your investment and saving strategies because you may not be able to cover your regular expenses.

4. Invest in your Retirement

If you work for an employer that offers 401K matching, contribute at least as much as the employer will match. It’s an even better idea to contribute the maximum amount to your 401K, which for 2021 is $19,500.

Investing in your 401K is a tax-advantaged way to save for retirement. You contribute funds pretax, which lowers your tax liability today. The funds grow tax-free until you withdraw them. If you withdraw the funds during retirement, you’ll pay taxes at your retirement tax rate, which for most people is lower than the tax rate when they’re working.

You have other options to invest in your retirement too.

If your adjusted gross income is less than $140,000 for single filers or $208,000 for married filing jointly filers, you can contribute to a Roth IRA.

A Roth IRA works differently than a 401K. It’s still a retirement account, but you contribute funds after paying taxes. Your contributions and earnings grow tax-free AND you can withdraw funds after age 59 ½ tax-free.

Most people who work or own a business can also contribute to a traditional IRA, which works like a 401K, but you get the tax deductions at tax time rather than as you contribute.

5. Have a Long-Term Investment Plan

Too many of us are emotional investors, especially during 2020. It seemed smart to pull everything out of the stock market as we watched it crash.

What if you didn’t, though?

If you rode out the storm, you would have ridden the wave back up, watching your account balances soar again. By pulling out, you lose those profits and are at the mercy of the higher stock prices if you want to get back into it.

Rather than emotionally investing and pulling out of the market at the worst times, even when they feel right to you, have a long-term plan. Know that the market will ebb and flow. Set up a portfolio that can handle the ups and downs, while offsetting your risk.

How you invest will be determined by your timeline, risk tolerance, and overall goals. No two investors have the same portfolio.

6. Diversify your Portfolio

The key to building wealth is diversifying your portfolio. Putting all your money in stocks, for example, is risky. If the stock market crashes, you lose everything. If you instead had some money invested in bonds, treasury securities, precious metals, or real estate, you’d offset the risk of a total loss.

Your portfolio allocation will depend on your risk tolerance. If you’re young and/or have a long time before your goal’s timeline, you can take more risks. If you’re closer to your goal, though, you’ll need a more conservative portfolio to avoid losing too much too close to your timeline.

7. Reassess your Insurance

Insurance plans don’t build wealth (except for possibly a permanent life insurance plan), but they do protect your wealth.

For example, if you are in a major car accident that’s your fault or your house burns to the ground, you could deplete your wealth trying to cover the high costs of either occurrence. The same is true of life insurance. If you or a loved one dies, how will your family survive? A life insurance plan protects the wealth and ensures the livelihood of your beneficiaries.

It’s important to have enough insurance, but not to over-insure yourself – that’s a waste of money and can deplete your personal wealth.

8. Live Below your Means

Lifestyle creep is so common today, but unnecessary. If you find yourself ‘increasing your lifestyle’ every time you get a raise or find a new source of income, you’re not increasing your wealth – you’re satisfying your immediate needs.

In our society of instant gratification, it’s easy to fall into the trap but don’t. Instead, live below your means.

This means have what you need to live and feel comfortable, but don’t blow your salary on unnecessary items. Take a car for example. They are a necessity, but car debt is ‘bad debt.’ Cars don’t appreciate – they depreciate. If you buy a Mercedes Benz, for example, you’re not maximizing your net worth, you’re likely decreasing it with the debt it causes.

Instead, buy a reliable car that will get you from Point A to Point B, but still, be financially smart. The same is true of your home, wardrobe, and personal goods. Don’t try to ‘keep up with the Joneses.’ Do what’s right for you and what maximizes your net worth.

Final Thoughts

You have many ways to start or improve your personal wealth, but the key is starting somewhere.

If you haven’t started anywhere, use the basics. Figure out your net worth, create a budget, and get out of debt. Any money you save, put in your savings account and then create an investment plan to make your money grow faster.

If you’ve already established your net worth and want to increase it, step it up a notch. Figure out what you aren’t doing and make it your new strategy. Maybe you need to step up your investment strategies or get back into the investment game because you pulled out during the pandemic.

There is no right or wrong way to build wealth. The key is to start now and continually reassess your strategies to see if you’re achieving your financial goals.