It’s easy to make up excuses for why you haven’t achieved your financial goals yet. We can all come up with endless excuses. You may be telling yourself that you’re still young enough to build wealth right now, or that you’ll start saving after your next big milestone. Oftentimes, our reality is that we either don’t realize the importance of starting to save early. Other times we just aren’t motivated enough to do the research.
The longer that we wait, the harder it can be to start saving. This is especially true when you start to deal with the endless list of important, but pricey, costs of living.
There is never a wrong time to start building your wealth. You can be a recent university graduate fighting off student loans. Or perhaps you are a 30-something who has never gotten a grip on their own finances. Fortunately for most younger folk, we are living in a time where risks can pay off. We also have time to learn from our mistakes.
Do you find yourself overwhelmed with the idea of finances, stocks, and savings? Then it’s time to take the first steps in learning how to build wealth when you’re starting from scratch/nothing/nada/zilch/zero!! You get the idea, right? Let’s jump right into it.
The Seven Fundamentals of Building Wealth
1) Figuring Out Exactly How Much You Make
Before you begin your journey on accumulating wealth, you need to understand a few things. This includes your own financial profile and the money that you make. The first step is to find out how much money you actually bring in. This includes the amount of money you are paying in taxes compared to how much you’re taking home. This may be fairly simple for those who earn a fixed salary.
If you’re given any additional benefits such as health care, paid time off, or matched investments, take note.
2) Keeping A Track Of All Your Expenses
You also need to take the time to go over the money that you’re spending. This includes everything that you spend money on. Yes, I mean EVERYTHING!
If you haven’t been tracking your monthly subscriptions, chances are you could be losing dozens of dollars every month. Fortunately, there are free services available such as Truebill or Trim that can help in managing all your subscriptions and recurring payments.
You will also need to account for any debt that you’re working towards paying off each month. Hopefully, you’ll find a number that is smaller than the money that you’re bringing in. If you’re spending more than you’re making, it’s time to revaluate the budget and make serious adjustments.
Henry David Thoreau, a 19th-century American philosopher, and a poet once said…
You may love your house or your car. However, if you can’t afford to keep spending so much on monthly payments, a lifestyle change might be necessary. Consider downgrading to an older model or selling your car in favor of public transportation. This can save you hundreds per month on car payments and insurance.
When it comes to housing, roommates are often a smart choice if you don’t have one already. Fortunately, being young can make finding a roommate easy.
3) Becoming Debt-Free
Many young adults who are starting their financial journey have at least some sort of debt. For you, this may be repayment of student loans. It may also be credit card debt or car payments. Seeing such a high number might scare you off from even wanting to look at it. It’s important to start figuring out how you’re going to pay it all off as soon as possible. Putting it off will only make that number even scarier.
3.1) Do I Qualify For Any Loan Forgiveness Program?
If you have student loans that seem never-ending, your first starting point should be looking at student loan forgiveness programs. There are programs which are based on the type of career you have. For example, those who have been working on in the public sector should look into the Public Service Loan Forgiveness program. More information on this can be obtained from the Federal Student Aid website. This program can grant up to 100% of student loan forgiveness after you’ve made a certain amount of payments.
Similarly, those who are in the teaching profession should look into the Teacher Loan Forgiveness program. Although not 100% loan is wiped off, a substantial amount can be removed from the total amount of student loan. The program was introduced to incentivizes those students who enter education career, right after completing their studies. Visit the Federal Student Aid website for more information.
Other options include income-based repayment programs or loan discharges for other special circumstances. Checking out if you’ll qualify for loan forgiveness takes very little of your time but it may save you thousands throughout your life. So stop procrastinating and click here to find out if you qualify for any loan forgiveness, cancellation, or discharge.
3.2) Should I Refinance My Debt?
If you don’t qualify for any loan forgiveness programs, you are still not doomed. When you have multiple loans, you’re probably making multiple payments with different payment timelines and with different interest rates.
When you refinance a debt, you replace it with a new one (which can also be debt consolidated). The point of refinancing is to get better terms such as lower interest rates. Having a lower interest rate can dramatically reduce the hassle and time you’ll spend paying off your loans. Refinancing is not for everybody though and can cost you, especially if your credit score isn’t great.
Related: What Is Debt Consolidation?
“As ironic as it may sound, but sometimes taking on more debt to get out of existing debt may be the only viable solution left”
3.3) Pay More Than Your Minimum Payment Every Month
You should never be making just the minimum payment. This increases the amount of interest that you’ll have to pay overtime. One of the simpler options for paying off debt is to pay more than the minimum installment each month.
The extra amount reduces the principal balance.
Once you’ve managed to chip away a good chunk of the principal amount, the interest portion built into the minimum payments automatically start to decrease. Even when you are getting closer to the finish line, keep paying the extra amount. It’ll reduce the amount that you’ll pay on interest even further.
3.4) What Is Debt Snow Ball Method?
This process of paying off debt is fairly simple. List down all your debts, starting from the smallest and ending with the largest. The idea is to tackle the smallest debt first, while still making the minimum monthly payments on all the other debts.
Once the smallest debt is paid off, the debtor now moves on to the next, larger debt in line. This process continues while still paying the minimum payments on the other debts until all the debts are paid off.
Soon you may find yourself with more money to put towards paying your debts and end up paying your debts faster than you had otherwise anticipated.
Need further clarification? Check out this article which explains the concept of Snow Ball method in much more detail.
4) Saving A Little Extra Every Month Will Not Hurt
You may be content with your current lifestyle. Or you may think that you’re holding steady with your monthly budget. Or perhaps you just haven’t really discovered what lies ahead of living paycheck to paycheck. Whatever the case may be, saving a little more each month will help you in the long run.
The extra savings can go towards your retirement fund. Little things like grabbing fast food for lunch or buying coffee every morning start to add up. Cutting back on as little as $5 a day can save you hundreds per year. Any extra savings is money that could be used to start investing in something more important than your daily caffeine fix.
5) You Need To Earn More Money – It’s As Simple As That
Think about your retirement for a second. How much do you think you will need to save up before you retire, let’s say at the age of 65? You can do the math yourself with this retirement calculator from nerdwallet.com and figure out how much do you need to save up every month. As a general rule, one should aim to replace 70% of their annual pre-retirement income.
If the current salary and current savings are sufficient to take care of your post-retirement expenses, kudos to you. Reach out to us and we would love to hear your story.
However, many of us need another stream of income to supplement our paycheck. Having a second source of income, or a “side hustle”, has become a common income boost for most young adults. A side hustle can be anything that provides extra income outside of your full-time job. This includes things like driving for ridesharing apps, providing tutoring, or even dog walking.
According to 2017 survey, over 44 million Americans had a side hustle. Their median income? An extra $200 a month!
6) Invest In Yourself
The word “investment” often brings up thoughts of stocks and savings. We rarely think about how we can continue to invest in ourselves. Though we may be finished with our formal education, we never really stop learning. If you want to present a version of you to the world that is smart, competent, and ready to build a world of wealth, you need to take some time to invest in yourself first.
The best way to continually invest in yourself is to keep learning. This can be through reading more books, blogs, or listening to podcasts. Keeping yourself up to date with the world and learning new skills is an invaluable ability that will provide you with a boost through your financial and personal journeys.
“The best investment you can make is in yourself. The more you learn, the more you earn”Warren Buffett
Investing in yourself can also be taking some downtime to think about what is most important to you. This isn’t just a one-time deal, but an on-going process. Taking some time out can reduce the risk of burnout. It also gives you the time to keep considering how you’re doing in your plans and to reflect on how far you have come.
Are you working hard enough to accomplish what you want out of life? If not, continue to invest in yourself and your abilities until you make it there.
7) Take Risks While You Still Can
One of the non-prominent benefits of being young is having the ability to take risks. This is especially true when it comes to new career opportunities. Leaving a comfortable but unfulfilling job to start at an exciting new start-up may seem risky but consider if this type of risk would make you happier and bring more benefits in the long run.
There are other new and exciting risk-taking opportunities that are new to our generation.
New forms of investment, such as cryptocurrencies, for example, can be a risk that pays off. These investments can be unstable, but this just means you need to pay close attention to them. Check out this pretty neat Bitcoin calculator which calculates return on your Bitcoin investments. According to this, for someone who invested $100 in Bitcoin on 1/1/2017, their total return as of 06/30/2019 would have been a staggering 951%.
Another option with the potential for a huge payoff is an investment in real estate. You may think you know very little about the housing market, but the internet makes it seem easy. Websites like Fundrise.com allow you to diversify your investment portfolio with real estate projects.
Peer To Peer Investing
The ability to invest in peer-to-peer (or P2P) lending is another investment opportunity made easier by the internet. This type of lending allows you to invest in businesses that you are passionate about or think have great potential. Because of its online life, you have little overhead costs, but high returns.
Read more about P2P Investing platforms here.
Start A Business
Many of the best options for financial risks utilize the millennial mastering of the internet. With all of this knowledge and ability to connect with thousands to millions of other business savvy folk, it also gives anyone the opportunity to start up their own business. Figure out how you can utilize this online world in new and innovative ways. Create your own blog and make money with Google Adsense. Or how about making extra money with retail arbitrage on Amazon? Options are endless.
The Average 401(k) Balance by Age
401(k) vs Roth IRA
Retirement may seem like it’s worlds away, but the earlier that you start saving, the more prepared you’ll be when the time comes.
Fortunately, many companies make it a lot easier to save for your retirement by matching your investments. This is the sort of thing that you should be aware of when job searching, and before you accept any offers. Some places may offer a slightly higher salary, but a lower-paying job may have a better match plan. This can sometimes make up for the difference in pay.
A 401(k) plan is one of the most common workplace retirement plans. This plan is offered as a benefit to the employee. You are given the ability to contribute from your pre-tax paycheck to a tax-deferred investment. This means that the more you invest in your 401(k), the less you will end up paying on taxes at the end of the year. The company that you work for during your investment periods will match up to 6%. With a 401(k), however, their investments may not always move with you if you change your job. Be sure to check your company’s policy. They may have a minimum period of investing before you’re able to bring their contributions with you.
You may work with a company that doesn’t offer a matching plan. An IRA, or Individual Retirement Account, maybe a better option for you. This type of investment allows you to place money into an account. This money is then invested in things such as stocks, mutual funds, ETFs, and bonds. You have the option to make your investment decisions yourself. You could also hire someone else to do it for you if you’d rather let it grow passively. When you’re contributing to an IRA, you can deduct the contributions from your income tax returns if you don’t also have a 401(k) plan.
Like the typical IRA, there is also the option of a Roth IRA. These contributions are made from money that has already been taxed. You will not need to pay taxes on them later. This includes when you withdraw the fees. Most retirement accounts have harsh penalties for early withdraw. The Roth IRA, however, allows you to withdraw without penalty starting five years after your initial investment. You’re able to contribute to both the typical IRA and a Roth IRA at the same time. You cannot contribute more than a combined $6,000 per year, though.
The 401(k), the IRA, and the Roth IRA are the most common retirement investment strategies for Americans. There are, however, other plans out there. There are also unique plans for people who own small businesses or are self-employed. Be sure to do your research on what type of plan seems right for you. Be sure to take into consideration your retirement savings when starting, or leaving, any job.
Make More Money With Less Work
Making money is a great feeling, but sometimes the hard work that you put into it can be exhausting. The benefit of making money from passive income is that you can literally make money while you sleep.
Naval Ravikant, founder of AngelList.com and co-founder of Vast.com once said …
“Build wealth, not money or status. Wealth is having assets that earn while you sleep. Money is how we transfer time and wealth”
Passive income is all about income that generates on a regular basis with little work or maintenance. It may seem like a dream, but there are many ways to generate a passive income. Any way of making money is going to require some work upfront. It is a strong option for those motivated enough to put the work in. Selling already completed products like webinars, e-books, or available online courses requires research, but the financial benefits can last far longer than the work that you’ve put in.
Other options include drop-shipping, affiliate marketing, blogging, or even real estate if you have enough money to make an investment.
Many younger adults will hear the word “stock” and imagine professionals working on wall-street. It is often one of the most daunting steps in your finances. Involving yourself in stocks and investing in companies is a lot less scary than we’ve made it out to be. A stock is, essentially, very simple. You purchase a stock, or share, in a company. This stock gives you a small amount of ownership in that company. This means that you will make money if the company does well. Unfortunately, this means that you can also lose your initial investments if the company does poorly.
You can speak to financial advisors or hire someone to invest in stocks for you. It can also be as easy as setting up an online profile. You’ll just need to shop around for some companies that you’d like to invest in. Once you’ve made your initial investment, your only other choice is to decide when to sell and get your money back. You can also decide if you’d like to purchase even more stocks based on their performance.
Another option, mutual funds, lets you buy a unit of an investment with other investors. The fund is made up of multiple investments, often in different areas. This mix of investments is chosen by a professional fund manager. One of the perks of investing in a mutual fund is the diversification. Because there are different types of investments, each carries its own risks and performance strength. A loss by one can be made up with again for another.
All this financial information may seem like a lot, especially if you’re just getting started out. Working towards building a solid base and starting an accumulation of your wealth can be a lot easier than you think. You may also be surprised to see that it can require a lot less work.
You may be young now. Your 65-year-old self, however, will be thanking you for taking this advice when you find yourself retiring comfortably.