Do you want to be rich? Or would you rather be wealthy? Most people regard rich and wealthy as the same thing, but considering what they mean on a more profound level can make all the difference in your finances.
Rich means having a substantial income, windfall, or inheritance. It means having enough income to spend on luxuries the average person with an average salary can’t afford. Expensive cars, big, modern homes, flashy brands, and epic vacations — rich means spending your money in ways that other people can see.
Wealthy means having means that aren’t dependent on a paycheck. It means making, keeping, and growing money over time through the ownership of assets. Real estate investments, shares of stock, owning one or several profitable businesses — wealthy is a measure of net worth and gaining assets while downplaying debts.
How do you build wealth?
The path to wealth starts with a laser focus on the long game. At its foundation, wealth is based on net worth. Build your worth, build your wealth. The average net worth for U.S. individuals between the age of 18-34 is just shy of $11,300. While everyone will have a different view on what qualifies as officially wealthy, we can all agree that it’s well above a five-figure net worth. There’s no quick fix to building wealth, instead, there are processes and a mentality to adopt that will transform your finances.
There’s an old fitness saying: Abs are made in the kitchen. What this means is that you can’t out-crunch a poor diet. Similarly, it’s impossible to out-earn poor spending habits, crushing debt, or bad decisions. Think about all those millionaire athletes that go bankrupt all the time as a result of poor spending habits.
Learning how to budget and getting in the habit of recording your expenses is crucial to creating wealth, and it’s important to develop these practices early. Many people hear budgeting and think “no fun ever” but that isn’t the case. A budget is you telling your money where to go. Without a plan, you will have no accounting for your spending. To build wealth, you must follow a plan.
Budgeting is basically looking at what you have coming in minus what you spend. With what’s leftover you have options: pay down debt, save, invest, or spend. If you don’t have much leftover after your obligations are met, you have two options: Spend less or earn more.
There are a million fancy ways to say it and countless interpretations of the situation, but it’s a simple concept of income vs. outflow.
Once you have a handle on your budget, it’s time to establish your basic savings accounts. Starting a mini-emergency fund of around $500 to $1,500 is the first step in establishing a fully stocked emergency fund. With this safety net in place, life’s little problems won’t put you in debt. Next up, you should consider funding a big emergency fund that will cover your expenses for three to nine months. The best place to stash both of these accounts is in a high-yield savings account that allows your money to earn interest.
Investing for the long-term
Investing in anything inherently focuses on long-term growth. There are a few different categories designed to build wealth and they can all be incorporated simultaneously to grow your net worth over time.
Traditional IRAs, Roth IRAs, SEP IRAs, and your employer-sponsored 401k are all examples of retirement investments. IRA contributions are typically made with post-tax dollars (meaning the money in your checking account) and can be factored into your budget. The limits vary by type of IRA and individual details, but you’re generally able to contribute about $7,000 per year.
If you’re lucky enough to have an employer that offers a match on your 401k contributions take them up on it. 401k contributions are made with pre-tax dollars (meaning them money comes out of your paycheck before you see it), so play around with the numbers to see how much you can contribute. Always put in at least enough to get the match, never pass up free money!
Mutual funds, stock purchases, and ETFs are all great examples of traditional investments that grow your net worth over time. These investments can be made through online brokers like Public. Our unique platform allows investors of all financial means and experience to buy and sell stocks and ETFs at their own pace. To help make investing even more accessible, we’ve provided sliced shares that Public account members can invest in real-time, commission-free. Our mission is to accelerate all people’s prosperity, and providing sliced shares for those investing in the stock market is just one way we accomplish that goal.
Real estate investments
The purchase of actual brick and mortar real estate or taking part in a REIT can be a strong move in building wealth. A REIT or Real Estate Investment Trust is a company that owns, manages, or bankrolls income-producing real estate. The rent generated from the properties is distributed to shareholders in the form of dividends. REITs are similar to mutual funds and trade on the major market exchanges.
An alternative investment is an asset that does not fall into one of the traditional investments like stocks, bonds, and mutual funds, or ETFs. Peer to peer lending, cryptocurrency, and even gold are considered to be alternative investments.
No matter what you decide to incorporate in your strategy for building wealth, the most important part is your mindset. You are not in competition with and do not need to impress anyone. There may come a time when you look around and see that your friends and coworkers having nicer things than you do, but they’re just things. No amount of flashy new stuff can replace wealth.
Growing wealth truly in a long-term project and not a get-rich-quick scheme.
Overcoming the adversity of youth
While it’s absolutely true that, when it comes to investing, having time on your side is a plus, it would appear that there’s one downside: Experience. Adults born between 1946-64 have more than half (57 percent) of the nation’s wealth, while those born between 1965-80 own just 16 percent. The youngest group of adults, born between 1981-96 hold just 3 percent of the wealth.
What’s more, that the same group who hold the smallest amount of wealth are also missing out on stock market returns by not investing at all. Be it a combination of fear of another recession, student loan obligations, or just plain unwillingness — it’s a missed opportunity.
Platforms like Public aim to provide greater access to the world of investing. All Public accounts come with a zero minimum balance requirement, meaning you can buy and sell sliced (AKA fractional) shares at any amount that makes sense for your financial lifestyle.
Fractional investing means that you don’t pay full price for each share, you pay what works for you and the shares you’ve chosen are sliced up to fit into the purchase. Public portfolios are built around themes, so you’re able to invest in what you know or what interests you. Better yet, with a Public account, you have the opportunity to connect with fellow investors, comment on their activity, and exchange ideas in a transparent environment. Our community features allow you to discover new companies that fit into your existing ideals and can help you reach your investment goals.
The bottom line
Building wealth requires a different mindset than getting rich. It’s a permanent lifestyle change that impacts everything you do.