Let’s face it, we would all love to build wealth and have financial freedom. The problem is, most of us are unsure how to get there. This was me as well.
We are going to walk through a few basics of building wealth. After this, you will be well on your way to financial freedom.
As a disclaimer, there is no one way to invest or build wealth. Many experts have very different strategies and opinions on this topic. There are a few steps that most would agree on, however. Those are what I will outline in this post. They might not be glamorous and they certainly won’t make you rich quick. But they will get you there.
Payoff Debt to Build Wealth
It is hard to have financial freedom when you are in debt to credit cards and banks. The total amount you owe will continue to increase as you incur interest on it.
The goal here is to pay off any high-interest debt you may have first. This can be credit cards or student loans for example. The average interest rate for credit cards is 19.24% for new accounts and 14.14% for older existing accounts. That is a lot of extra money getting added to your total that you could be doing something much more productive with like investing.
Even if you are investing in stocks and funds, the average return on index funds can average 5% to 8% per year. That is still falling 8% to 10% short on the interest rates of the credit card so you are still losing money. That is why it is so important to pay off the higher interest loans and debt first.
The first step for getting out of debt is to take inventory and figure out exactly how much you owe and what the interest rate is. You can then use a free online loan calculator such as Simple Loan Calculator from Credit Karma or Loan Payment Calculator from Calculator.me. Using these you can figure out how much you will need to pay each month to pay off the entire loan and be debt-free.
Make sure to set up a schedule and a system to help you make the full payments every month. Don’t overburden yourself with the payments, but the sooner you pay it off, the more you will save in interest and the sooner you can start earning more money with investing.
Choose Better Accounts and Create a System
Many of us have chosen to give our money to a large bank. Whether it was a random decision or we chose a bank with a branch just down the street. Unfortunately, many of the large back pay next to nothing in interest and charge you an arm and a leg in fees. They are making huge profits using your money to invest as well as directly with all kinds of fees.
The first thing we want to do here is to open a higher-yielding savings account to keep our money in. Might as well make more money in interesting while we are waiting to make a big purchase or invest the money. Two options that I would recommend are Ally Bank (which I am using now) and Charles Schwab (which I am also using). At the time of writing this, the APY for the Ally Bank online savings account is 2.1%. Compare that to the Bank of America (which we just left) savings account which is 0.02%. Yes, that is a 100X higher interest-earning with the Ally Bank savings account.
You will also want to open an investment brokerage account. This you will use to do all of your investing with. Some of the options here are but are not limited to, Charles Schwab, Prudential, Fidelity, TD Ameritrade, etc. Using these accounts you can start investing in stocks, bonds, mutual funds, ETF’s, etc.
You will also want to link your checking brokerage account to be able to easily transfer money back and forth. You will be able to schedule monthly transfers to your investments to make sure your investments keep growing and compounding.
Investing is a massive topic and will be covered more in-depth in a later post. Here I will be going over a few of the basics to get started. There are so many different types of investments and investment accounts. From 401k’s to Roth IRA’s, stocks to mutual funds. It is very difficult to know what you should be doing. Most people have their way of investing and every expert has a different strategy. But here are a few basics that most experts can agree on.
First, if you are working at a company with a 401k plan, take full advantage of the company matching. The matching the company offers is free money. Let’s say your company offers a dollar for dollar matching up to 4%. That means if you contribute 4% of your salary to your 401k, the company will contribute an additional 4% on top of what you put in. To put some numbers on it, if you are making $60,000/year and you contribute 4%, that is roughly $2,400/year you will be investing in the 401k. Then your company will put an additional $2,400 in your 401k for you for a total of $4,800, doubling your investment right there.
If you are ready for some additional investing and don’t have a ton of time to research individual stocks, I would recommend investing in an index fund. These are mutual funds that own a portfolio of stocks that mimic a stock market index such as the S&P 500. These tend to perform quite well and you can let them grow for a long time. There are also ETF’s that mimic indexes so it is up to you which you invest in. I will go over the difference between mutual funds and ETF’s in a later post. Either one will be good to get started with.
If you want something even less risky than an index fund, a money market might be for you. They tend to have a lower growth rate but are a bit more stable and are more liquid giving you quicker access to that money.
There are a million different ways to invest and build wealth. These are just the first couple of recommendations I have to get you started and on your way to building wealth and achieving financial freedom. Look for a more in-depth post on each of these topics coming soon.