Building wealth isn’t hard. Young or old, high-income earner or not. It doesn’t matter. It all begins in your head with your beliefs. What you belief you can or cannot do. You learn basic financial concepts, and you progress.
You set goals, spend less than you make, invest, and you succeed. Changing your financial situation is simple, really.
Getting Started, Learn, and Stay Focused
Did you know a 25-year-old who saves $450 a month, earns an average investment return of 7% will have over $1 million by age 65? Start saving at age 35 and you’ll need to save about $1,000 a month to have $1 million or more by age 65.
Are you self-employed or do you have income from a side hustle? Consider a Solo 401(k). A solo 401(k) can help you build a sizable nest egg. Say a 30-year-old contributes $10,000 a year to a solo 401(k) and has an annual return of 6%. By age 65, he or she will have contributed $350,000, but the next egg will have grown to nearly $1.2 million. That’s building wealth the smart way.
Set Financial Goals
My goal is to be financially independent and retire early. That’s great, but “specifically” how do I achieve that goal? I set specific goals and I created a plan to reach them. Where do you start?
I started with my short-term goals: spending less, saving more, and paying off debt. More specifically, I started with a goal of saving $300/month to pay off debt. Next, I continued saving a fixed amount per month so I could buy a house and turn it into a rental property. I had renters living with me the day I closed on that rental. I also became more serious about setting up an emergency fund.
It took me a while to establish my long-term goals, which included funding my retirement account and purchasing another house. Get specific and realistic with your goals.
One of my first goals was to always contribute the maximum to my Roth IRA. At the time, I wasn’t a high-income earner but I focused on that one goal. It became easier and easier to max out my Roth IRA as my income increased over time.
Target saving 15% of your income, if you can. If you can’t, just start saving whatever you can; say $25/week. It is easier and easier to save once you cut wasteful spending. It is also easier as you get financially wiser and your income increases.
Start young and start building wealth by making it automatic. Rest assured, it is never too early or too late to save for the future.
How Do You Get Started?
Start putting away money in a tax-deferred retirement account; a Roth IRA is a good place to start even if you have a company supported 401(k) plan. The principal and interest (or investment growth) in a Roth IRA is available tax free at retirement age.
You fund Roth IRA accounts with after-tax dollars, so you pay taxes the year you make the contribution. However, the withdrawals are tax-free once you reach the age of 59½ and you have held the account for at least five years. Also, note you can withdraw your contributions tax- and penalty-free in case of an extreme emergency.
Another benefit is you don’t need to take required minimum distributions (RMD) from a Roth IRA when you reach retirement age. You do with traditional IRAs and 401(k)s. This benefit allows you to withdraw the money strategically (with respect to taxes).
One more thing, withdrawals from a Roth IRA aren’t reported to the IRS as income. Therefore, they won’t increase the taxes on your Social Security benefits when you start collecting your Social Security income.
If you don’t already have one, open a Roth IRA account now and start making small contributions. When your income improves, contribute the maximum allowed to your Roth IRA each year.
For 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you’re age 50 or older), or. your taxable compensation for the year, if your compensation was less than this dollar limit.
If your employer has one, contribute the maximum to your 401(k) plan. Definitely take full advantage of your company’s 401(k). You can contribute up to $18,500 ($24,500 for people 50 and older) to a pretax account. Your employer may offer a matching contribution of a few percent (3% to 6% of your pay, or even more). Consider it free money and make sure you take it!
The 401(k) contribution limit for 2018 is $18,500 for employees. Over the age of 50? You can contribute an extra $6,000 as a catch-up contribution to a traditional 401(k).
It’s important to create an emergency fund. Unexpected bills can be really bad news because they can put you in credit card debt. A major car repair, medical expenses, or job losses happen to all of us at some point in time. Be prepared and try to save at least three to six months’ worth of living expenses. Keep the emergency funds in a separate account with easy access.
Open an account that earns you higher than average interest, such as an online savings account or money market account. I use Barclay’s Online Saving and Discover Online Bank because they pay 2% interest and they also paid a new account sign-up bonus.
Look for an online savings account with no monthly fees and a low (or no) minimum balance requirement. Pick one that also offers a new account sign-up bonus, if possible (I did and I made several hundred dollars by opening new online savings accounts).
Improve Your Credit Score
Having good credit is important given it helps you get lower interest rates and better terms on credit cards, mortgage loans, auto loans, etc. Your credit history may also affect your insurance rates and your ability to rent a house or apartment. It may also affect your job prospects.
Target improving your credit score until it reaches 750 or higher. Credit scores range from 300 to 850, as you likely already know.
What’s most important to building credit? Pay all of your bills on time. Setup automatic payments, when possible, so you don’t ever pay your bills late.
Open a Brokerage Account
OK, you have a bank account, an online savings account, and you might be participating in your employer’s retirement savings plan. What’s next? You’ll need a brokerage account for your Roth IRA. A brokerage account allows you to invest your money and make it work for you.
Many brokerage accounts require a minimum of $2,500 to open an account, such as Fidelity. Other accounts require less, such as Charles Schwab which is $1,000. Note the minimum requirement may be waived by some firms if you sign up for automatic monthly deposits.
Several banks and financial firms, such as Vanguard, Etrade, Edward Jones, Wells Fargo, etc., offer brokerage accounts. Ask around, do your homework, and select one or more that work for your current financial situation.
Setting goals and tracking your results helps you stay focused. Here are a few financial tools that can help you get started as well as help you stay on track:
- Mint.com – I use Mint for tracking all of our accounts, basic budgeting, and net worth tracking.
- HelloWallet.com – tool from Key Bank that helps you organize your financial life.
- See more financial tools you can use for building wealth here.
Consider talking to a financial adviser; I do and most of it is free or available for a reasonable hourly rate. A certified financial planner (CFP) can help you create a long-term financial plan. Most folks like to use fee-only financial advisors and you can find one at napfa.org.
Why fee-only? Your advisor avoids conflicts of interest by accepting no commissions from selling you their investments or other commission-based products.
For tax planning, get recommendations for a certified public accountant (CPA) with a personal financial specialist (PFS) designation from others you know that are financially independent. You can also find them at aicpa.org.
You don’t need a ton of money to get help. Read books and blogs such as Boss Man Jax. There are plenty of financial planners that charge hourly rates and require no asset or income minimum. Also, consider Betterment and Wealthfront to learn more about investing and building wealth.
By the way, “7” may be your new lucky number. Set your goal to build wealth until you reach a seven (7) digit net worth; that’s a million. Others are doing it and you can too!