How to build wealth slowly in a few simple steps
The promise of ‘get rich quick’ opportunities are as old as time, and they continue to catch the attention of those looking for a financial lifeline. Unfortunately, many of them tend to either be overpromises, short lived or outright scams. The contrary way of building wealth — slowly — is the realistic, attainable and sustainable way to hit your financial goals.
Here’s what it means to build wealth slowly, and the strategies people use to build wealth.
How to build wealth slowly
Building wealth slowly comes down to a few key principles — consistently investing for the long-term and living below your means. It’s not a fancy strategy, but rather consistently doing these two things right over time. This isn’t the flashiest way to grow your wealth, but it’s the tried-and-true method.
And it doesn’t mean you need to give up enjoying your life either. One book that dives into this is “I will teach you to be rich” by Ramit Sethi, where he suggests readers to consistently invest and cut back on spending, except in the areas that make your life ‘rich’. So if you enjoy travel, don’t take less trips to save money. He encourages people to do the big things right like investing consistently and asking for a raise, so you can enjoy your life to the fullest.
So how do you get started on your wealth building journey? Here’s three simple ways to begin.
Live on less than you make, with an emergency fund
It’s a simple goal, but it takes major discipline to consistently live below your means. This means that you aren’t spending more than you bring in each month.
If you’re consistently spending at or above your means, you could be caught in a sticky situation when a life situation happens. For example, let’s say your car breaks down and you have a $2,000 repair. Without spare money stowed away in a savings account, you could be caught without the needed funds — forcing you to rely on a credit card with a high APR to make ends meet. Now that $2,000 repair may cost you over $3,000 total with interest charges.
So first and foremost, it’s vital to analyze your personal budget. It doesn’t have to be anything fancy, but it should show much money you have coming in as income and going out each month for expenses. Once you figure out how much money you have left over each month, you can decide to fill an emergency fund. It’s typically recommended to have at least six months’ worth of expenses stashed away. This can help protect you from unexpected job losses, medical expenses or other unforeseen circumstances.
And once you have that shield against the unexpected, you can continue to build your financial life out.
Eliminate and avoid high interest debt
Americans are riddled with debt right now. The total non-housing debt among all Americans is over $4.6 trillion, according to the New York Federal Reserve. With mortgages included, that figure shoots up to nearly $17 trillion.
Of the non-mortgage debt, student loans and auto loans are the largest balances owed at $1.6 trillion and $1.55 trillion, respectively.
So how can you avoid this disastrous situation in your own life? First, do your absolute best to avoid high-interest debt like credit card debt. As interest rates rise, these debts become more and more expensive to hold onto.
For example, if you have $10,000 in credit card debt at 19% APR (the average credit card interest rate as of November 2022) and only pay off $500 per month, it will take you two full years to pay off — and will cost you $1,910 in interest charges.
- But if you have debt like a mortgage or low-interest student debt (>5%), you may have more flexibility to focus on other financial goals as you may be able to get a larger return investing for the long-term.
So if you have high interest debt, be sure to crush that first. Lower-interest loans are easier to manage and keep up with. And once you get your high interest debt out of the picture, you can then begin burying money into your investments to grow over time.
Continue to invest with a long-term strategy
If you’re able to live below your means, have an emergency fund, and avoid high interest debt — then the real magic of investing can begin.
But where do you start? What do you invest in? How much do you invest?
Here’s a few ideas to consider:
- 401(k) or other employer-sponsored retirement plan
If you work for an employer that offers a 401(k)-retirement plan, consider investing regularly in this account. With a 401(k), you will be able to have money regularly deposited from your paycheck in the account pre-tax and allow it to grow over time. Additionally, many employers will match some part of contributions to incentivize employees to participate. This typically is a percentage of your paycheck they will match.
Taking money out of your retirement account can cause taxes and penalties, along with limiting the potential of your money growing over time.
An IRA, or individual retirement account, is worth considering as a supplemental retirement account. There are several types of IRA accounts, including traditional IRA, Roth IRA, and SEP IRA. Each comes with its own tax structure, so be sure to find the one that works best for you.
You can open a traditional or Roth IRA with M1, and it only takes a few minutes to set up.
- Health Savings Account
If you have a qualifying high-deductible health plan (HDHP), you may consider using a Health Savings Account (HSA).
This account comes with significant tax benefits to help you save for future medical expenses — which all of us will incur at some point. However, if you can put money away in an HSA and avoid using it — the account also has an investable brokerage portion to it.
If you can stack your retirement savings within a 401(k), IRA and HSA, you’re really setting yourself up for a potentially fruitful investing journey by building wealth slowly.
Long-term patience and consistently can pay off
Between these three investing accounts, you can quickly begin growing your nest egg.
For example, let’s say you’re 30 years old and between these three accounts you pledge to put away $25,000 per year until you’re 60 years old. At a 6% return each year, you will have nearly $2.1 million.
For another example: If you’re starting a bit later at 40 years old but decide to completely max out these three retirement accounts ($32,850 in 2023), and you do this consistently for 20 years. At a 6% return, your investment will amass to nearly $1.3 million.
The M1 bottom line
In a world of meme stocks and popularity of investing in risky short-term bets, these are the methods some take to build wealth slowly. The truth is that the path to real wealth isn’t quick and easy, but rather a consistent strategy that works for your situation, executed over a long period of time.