Everyone has a different definition and understanding of what building wealth means. Because of the confusion that surrounds this topic, a lot of people have been sucked into get-rich-quick schemes that promise everything without any downside.
However, building wealth is a long and complicated process that takes a lot of planning and careful consideration of each decision taken. That said, there are certain things you can do to build wealth and ensure your portfolio keeps growing.
How to Build Wealth for a Comfortable Financial Future
Make More Money
While it may seem obvious that if you want to build wealth, you need more money, it is a lot more nuanced than that. Making more money gives you the ability to save a lot more than you otherwise would if you were making less money.
Through the power of compounded interest, the additional savings can make a huge difference in the amount you have in 5 or even 10 years.
A good way of making more money is by establishing passive income streams. Passive income streams are derived from things you do not have to actively work on to make you money. These include things like investments and side businesses.
If you do not have passive income streams and rely on earned income, you can take a shot at negotiating your salary. If you have not had a raise in a few years, it might be time to ask for one. To prepare yourself, list down all the reasons why you need that raise and remember that timing is key.
A Friday afternoon is usually a good time to ask, as the office or workplace is usually in a good mood. If you cannot get the raise, try seeing if you can get a better paying job elsewhere if you have the experience.
This last option is not for everyone, so only go for it if you are sure you have a good chance of success.
If you make enough money to live comfortably, you should formulate a plan to save. Although the general rule is to save 15% of your income, that is not feasible for everyone because that amount might be a sizable chunk of their income. Instead, find areas where you can cut down. To do this, start with a budget and stick to it.
When coming up with the budget, track your spending for at least a month first. This will show you what you are spending your money on.
Once you have a breakdown of your expenditures, find areas where you can cut down. The only things you should not cut down on include food, shelter and clothing, but everything else is up for consideration. For example, if you are spending a lot of money eating out, you might consider reducing that frequency and cooking at home.
Other ways to cut down include reducing the number of subscription services you have, or reusing instead of always buying new.
Do note that the budget you come up with should be flexible because your needs will change over time and you need to take that into account.
Work on Clearing Your Debts
While some debts like loans are strategic, some debts are not worth it. The amount of money you spend repaying the debts, as well as their potential interest rates, is money that does not end up in your savings account or retirement fund.
If you do not know where to start, start with your credit cards. A lot of people have huge debts because they put expensive items on their credit cards and then are unable to repay the amount. Once you clear these debts, try to pay with a debit card or with cash as much as possible. This ensures that if you do not have the money to pay for something, you cannot afford it and should look for an alternative.
Another tip to reduce your debt burden is to repay the debts with the highest interest rates first. These are the debts that can get out of hand very quickly compared to those that have low interest rates.
If you must, you can reduce the amount you send to your savings and instead redirect it to paying off your debts. Once the debt is cleared, you do not have to think about repaying it or its interest rates ad can instead focus on other things.
Learn How to Invest
Investing might feel too serious for you, especially if you are in your 20s or early 30s, but it is one of the best ways of building wealth. If you are already saving some money in a savings account, that is good, but it may not be enough. When you consider the effects of inflation on your savings, you will see that investing your money wisely is the better option.
There are lots of investment options available to you with the ones you choose depending on how much risk you are willing to take on. A good option for a lot of people is buying stocks. Learning how to trade stocks is easy, but making money on stocks is a lot more complicated.
A great place to start is finding resources that teach you how to buy stocks as well as how to make money on them. Wealthsimple has a great resource on how to do both of these as well as additional resources on how to invest as well as what to invest in.
Wealthsimple also has a rich portfolio of financial tools to help you trade, invest and grow your money in addition to knowledgeable staff that are always standing by to answer any questions you may have.
If you want to go beyond investing in stocks, you can talk to a financial advisor to put together a mixed portfolio of investment options. This diversification gives you a major upside in that if one of your investments is underperforming, another will be overperforming.
Since you want to build wealth, do talk to them about long term options that have very low risk.
Pay into the Registered Retirement Savings Plan (RRSP)
The number of people who ignore their pensions is staggering. This practice is prevalent in people who are in their 20s and early 30s. The Registered Retirement Savings Plan (RRSP) is a retirement plan for both employed and self-employed people.
When you place money into the RRSP, it grows tax-free until you withdraw it, at which point you will be charged the appropriate tax. Because it is not taxed, the money in the RRSP often grows faster than if you put it in most other saving plans or accounts.
Since there is no limit on how much you can put into your RRSP, you can increase the amount as you make more money and find other areas where you can save some more. Since the amount is compounded, try to start saving as early as you can.
If You Can, Buy a Home
It might seem counterintuitive to spend money on a mortgage when you are looking to save money, but there are several advantages to doing this. One, if the mortgage is lower than rent, you are paying less for a property that you will end up owning when you complete your payments. If you live in a rented apartment, you are paying for a property you will never own.
Second, you have a property that you can take out a loan on. Many lenders allow you to take on a loan on your home equity or refinance your home. The amount borrowed can then be used to invest in other areas that contribute towards helping you build your wealth.
If you are buying a home strategically to help you build wealth, ensure you do your research so you buy a house whose value is going to increase. This is so that you do not pay a mortgage on a property that you cannot sell later on or borrow against.
Also, try to pay off your mortgage as fast as you can. Repaying fast reduces the amount you pay in interest over the life of the mortgage and absolves you of the responsibility much faster. Once you are done with the mortgage, you can focus on other wealth-building initiatives or even retire earlier.
Seek Advice on Finances
Many people do not like talking about their finances but talking it out with a partner, family member or friend is a good idea. All these people will offer different pieces of advice that you can use to either save better, invest better, or find ways of building your wealth that you might not have thought about.
If you need professional advice, talk to a qualified financial advisor. They will be able to look at your situation and help you come up with a plan to not only build wealth but also prepare for your retirement.
While everyone is in a different financial situation, there is no doubt that we all want to have enough money to be comfortable in the future. To do this, we need to start thinking of building wealth, and the best time to start doing so is right now.