Just Starting to Build Wealth? Then Start Here

The Squeeze

• If you have already managed your debt, and have an emergency fund and an investment account or two, congratulations! And skip ahead. You've already mastered the foundations of building wealth.
• Spend less than you earn, following the 50/30/20 rule: 50% of your pay goes to necessities, 30 percent to wants (the fun stuff of life), and at least 20% to savings.
• Debt is a surefire way to suck the life out of your wealth plans, so crush it. That means wrangling credit cards in a smart way and rethinking your student loans.
• Invest your savings to take advantage of compounding returns (as close as many of us get to free, or zero-effort, money) — the sooner the better.

Are you ready to start building wealth? We’re not talking mansions and Maseratis — not that there’s anything wrong with those things — but how about not sweating bills every month? And how about knowing that you’re on track to pay off your home and your kid’s college education, and sleeping well because your retirement nest egg is growing nicely as well?

That kind of security is within your reach. It boils down to three key steps: Making more money than you spend, avoiding debt, and investing your savings wisely.

While those principles may sound basic, we all know how challenging it can be between the costs of child care, the everyday emergency and the looming needs of our aging parents. But it can be done. Here, we break down smart advice and simple strategies that put you in control of your finances, for today, and better yet, for your future.

To build wealth, be (at least a little) broke

Wait a minute, aren’t we talking about wealth here? Yes, we are. We know the mere mention of being broke sounds wrong in every possible way but give us a minute. You have probably seen those clickbait articles about someone who retired at age 30 with major money in the bank. Usually, if you read on, the person couch-surfed and ate a lot of ramen while throwing as much as humanly possible into savings. While we’re not saying you have to subsist on noodles, this idea of living below, rather than above, your means is one to embrace.

Stop thinking of your earnings as the amount of money you have to spend every month, and start thinking about budgeting. One smart formula is the 50/30/20 rule. 

• 50 percent of your paycheck goes toward “musts” like rent, insurance, college debt, utilities, and groceries
• 30 percent goes toward “wants” like dining out, your latest sports obsession, or a high-quality whiskey
• 20 percent goes to savings and retirement.

Given that most of us aren’t smart savers — Bankrate.com finds that only 40 percent of those surveyed could cover a $1,000 emergency bill with their savings account — you might seriously consider ratcheting your monthly savings up to 30 percent and taking those wants down to 20 percent. 

We hear you that it’s easy for “wants” to be perceived as “musts,” but you consider small steps towards making a change: forgoing one premium streaming channel, not leasing the latest model car, eating out less often — none of it will be the end of you, we promise.

Consider setting up an auto-transfer of funds into an untouchable savings account, meaning your money will be whisked out of sight before it can tempt you. "Automation is the answer for people who have struggled to prioritize savings in the past," says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling, a nonprofit organization.

Just say no to credit card debt

Imagine these words in huge, flashing red type. Because this one is serious. The percentage of U.S. households with some kind of credit card debt is a whopping 45.4 percent, according to LendingTree’s ValuePenguin research, and our average debt is $6,720. 

What’s more, about half of U.S. adults with credit card debt have added to their load during the pandemic, reports a CreditCards.com survey. Credit cards often charge double-digit interest rates — with a recent average of about 15 percent, according to the Federal Reserve — and carrying a balance can quickly cause debt to pile up. Prioritize paying off such high-rate debts. It’s too easy to focus on the minimum amount due, which just sets you up for a very long haul. 

And here’s what will weigh you down: Say you have a $2,000 balance at 20 percent APR. If you pay the required 1 percent minimum payment, it will take you 186 months — a.k.a. 15.5 years — to pay down the debt, costing you an eye-watering $2,723.45 in interest, according to Bankrate’s minimum payment calculator. 

And that’s if you never charge another cent.

Indeed, one way to reduce your credit card rate is to make additional payments. (Read: Go back to point No. 1 and see if you can’t be a little broke-er.) In our scenario, paying an extra $40 per month will squelch that $2,000 debt in just 25 months and cost you just $453 in interest — saving you a cool $1,657.93 in interest charges. Another option? Transfer the balance to a lower-rate card. (Sites like Nerdwallet and Creditkarma list current offers.)

If your debt is of a college-induced variety, you have a lot of company. Forbes cited this year’s U.S. student debt as totaling a record $1.7 trillion. Again, you can work to squeeze more from your budget to pay it down or look to refinance. The important thing is to keep paying on time to protect your credit history.

Save smarter, invest sooner

Here’s the real rub: the money you save shouldn’t just sit in a savings account, where the average rate of return at this writing is a measly 0.07 percent. 

Yes, you should have an emergency fund that is easy and fast to access, but when it comes to building wealth, it’s time to consider investing — whether in stocks, bonds, index funds and ETFs (exchange-traded funds) or other such products. 

Be clear on your goals before diving in: Do you want slow and steady growth? Willing to take more risk in the hopes of nabbing super-high returns? There’s no right or wrong way to start — and an expert can help you get started — but proceed with care to make sure your funds behave as you want them too. Often, asking a trusted friend or relative about their investing habits can be a good starting point.

The goal is to get to the point where compounding returns are reinvested so that you’re able to accrue interest on ever-larger principals. Indeed, the sooner you start investing, the more benefit you gain from compounding. According to Investopedia, if a 30-year-old invests $5,000 in equities earning 8 percent a year, that money — with no additional contributions — will be worth a hefty $50,313.28 in 25 years. Thank you, compounding! 

Investing can seem intimidating if you haven’t waded into the waters before, but not to worry: today’s investing options include a broad range of ankle-deep options, where the risk is low. (This also means the returns are lower, as risk and potential reward go hand and hand, but it’s a great place to start.) 

Look for index funds and balanced funds as the place to start to get your feet wet. The word “fund” is your tip that these are managed portfolios, meaning an expert in investing has created a diversified collection of investments to create a somewhat risk-managed option for you to consider. The best part about these types of funds is that they are all readily available and often have low investment thresholds, meaning you can start with just $1,000 in many cases. 

Investing is an easy and reliable way to turn some money into more money — with time the greatest multiplier since the inevitable ups and downs of the market tend to level out over the years.

In other words, time + money is the surefire path to building wealth. And the more time and more money you have, the more money you’ll make and save. So if you are debt-free, and have emergency funds, don’t be shy about moving into investing. Twenty, ten, even just five (!) years from now, you’ll be so glad you did.