5 Strategies for Building Your Wealth While Living Your Life
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It’s so easy to put off building your wealth by using the excuse “I just don’t make enough.”
It feels like each month is a balancing act of paying your bills and trying to live a life – so it’s just straight up laughable to think you could also be seriously building any sort of net worth.
But the thing is – you totally can. It’s the small, actionable steps you take today that can ensure you’re a millionaire by retirement.
1. Become best friends with compound interest
In order to start building your wealth, you need to become intimately familiar with the glories of compound interest. It’s more than a mathematical equation; it’s the reason you can become a millionaire with what feels like a modest salary.
Compound interest is when your money earns interest on your interest. Think of it this way: you invested $100, and it earned $8 in year one. In year two, you’re earning returns on $108, not just the initial $100 you invested. That process starts a slow, but effective snowball course toward building your wealth.
Compound interest can also be your money’s greatest foe when you’re trying to pay off debt. The interest makes it feel like you’re never making a dent in the principal balance of your loan.
Getting on the right side of compound interest by starting to invest early, especially for retirement, can ensure you reach your financial goals without having to save what feels like impossible sums of money each month. It also enables you to live a little today instead of delaying it all for the future. Trying to play catch-up later by even doubling-down with how much you’re going to save isn’t always as effective. The advantage of time and starting early plays a huge factor in building your wealth.
2. Take advantage of “free” money
Once you embrace compound interest being the eighth wonder of the world, you want to see how best you can bolster your savings and investments. The simplest way for the traditionally employed to boost their wealth is to take advantage of an employer-matched retirement plan.
Generally, an employer-matched retirement plan requires you also to contribute. For example, if you’re employer offers a four percent match, then you also need to put four percent of your salary toward your retirement plan. Some plans only match the amount you contribute, so if you can only afford to contribute two percent right now – you won’t get the full employer match. But, of course, two percent is always better than nothing. Just be sure to check all the details of your plan to help you determine the best course of action.
You’ll also want to understand your retirement plan’s vesting schedule. That schedule determines when your employer matches are 100 percent yours to keep if and when you leave the company. Your contributions are always yours to take, but your employer can attach strings to their portion. There are three types of vesting schedules:
- Immediate: as soon as you receive your employer’s contributions, they’re yours to keep.
- Graded: each year a portion of the match vests. For example, 20 percent in year one, 40 percent in year two, 60 percent in year three. If you left after year three, you’d only get 60 percent of your employer’s contributions to your retirement plan.
- Cliff: this is the unfortunate version. You won’t get any of your employer’s contributions until they fully vest, which is often after five years of working for the company.
3. Incremental increases add up when building your wealth
Feeling stressed about the fact that you can’t afford to take full advantage of your employer match or put any money into savings or other investments? That’s okay. Set a goal and then start small by pushing yourself a little bit every six months to a year.
Try starting with just one percent – you honestly will barely notice a difference in your paycheck, especially if you’re putting money in a tax-advantaged account. Then, push it up by half a percent to 1.5 percent in six months and keep adding half a percent until you’re at your goal.
4. When you don’t have work perks for backup
The self-employed usually don’t have the advantage of an employer match, so it’s important to be proactive about watching out for yourself. One way is to save 40 percent of every paycheck.
I know that sounds crazy, at first. But you generally should save 30 percent of each paycheck to set aside for taxes; putting aside 40 percent is a way to “force save” for retirement. Each time you pay your quarterly estimated taxes, you can dump the surplus funds into a retirement account like a SEP IRA or Solo 401(k).
Can’t get there yet? Employ the incremental increases strategy! Start by putting aside 31 percent of each paycheck and keep pushing yourself to increase it.
If you simply don’t have a retirement plan option at work, try setting aside a percentage of each paycheck and put that into a Roth or Traditional IRA each year.
5. Try the silliest savings strategy
Finally, there is one silly savings strategy that can be quite effective – but it requires you actually to carry cash and spend it. I know that might sound crazy, but going on a “cash diet” can also help you reset your financial life. That silly savings strategy is all about saving five dollar bills. Yup, it’s that simple.
Each time you make a purchase and get a five-dollar bill back, you put that money in an envelope to save for the future. Personally, I deposit the money into my savings account each time I accumulate $100 – but you can do whatever feels worth it to you. It doesn’t sound like much, but I use cash semi-regularly and managed to save about an extra $1,000 in under a year with that strategy. It’s a way to make a small game out of your savings habit and make a little extra push toward increasing your efforts with building your wealth.