When you’re in your twenties and early thirties, you have a huge advantage in growing wealth: Time. The longer invested money has to work, the better the return is likely to be.
But what’s the best way to grow wealth?
The truth is that there is no single best way. The best choice of wealth building strategies for you depends on your risk tolerance, your skills, your time horizon, and how much time you want to spend on managing your money.
There are some time-honored options to consider:
Before embarking on a wealth building program, however, it’s important to have a stable financial foundation in place.
Fundamentals of good personal finance
Without a basic savings plan under way, as well as checks against excessive debt or financial over-extension, building wealth will be challenging. To that end, it’s important to keep certain guidelines in mind.
- Have a disciplined approach to savings. For many, that means living within or even below their means, and socking away extra money every month. That provides an important cushion if a job gets lost or income decreases.
- Avoid lifestyle creep. As your income grows, don’t allow your expenses to grow with it. Use the extra money to fuel your investments.
- Stay away from high-interest consumer debt. Never carry a credit card balance.
- Don’t let your cash lose value to inflation. Keep your emergency fund in a low-risk investment like CDs or government bonds.
- Buy insurance to protect your wealth. Buy life insurance to protect your family and disability income insurance to help protect your income.
- Work with a tax professional to minimize your tax liability.
- Max out your retirement accounts every year to take full advantage of tax-deferred growth.
- Consider working with a financial professional to obtain expert advice and investment management that is aligned to your financial interest and goals.
This last point is all the more important if you plan to take your finances to the next level. Investment strategy and wealth management can get complex as holdings grow and assets build. Getting good wealth-building advice that fits your existing financial plan and points you toward your goals is key.
Building an investment portfolio
One of the most common ways to start building wealth beyond simple savings is to invest in securities that will likely provide a greater return than a bank account. And for many people, the primary investment is in stocks or stock funds.
Most people do this indirectly through tax-advantaged retirement investment plans, like 401(k) plans, offered through their employer. But many also invest through direct, taxable accounts with investment brokers.(Related: Investing basics)
While past performance is not a guarantee of future performance, stocks as a whole have had excellent returns over the long run. But stock markets will pull back from time to time. That’s why many investors diversify a portion of their investment holdings into bonds, which tend to offer lesser returns but also tend to be less volatile. Some investors diversify even further with holdings in commodities or foreign exchange, which tend to offer the chance of greater returns but also have greater risk.
Over time, a steady investment strategy with a diversified portfolio has proven to be a consistent way of building wealth. But time horizons differ from investor to investor. That’s why every investor needs to know their own risk tolerance and timeline before committing money to an investment strategy. (Related: Understanding your risk profile)
In addition, each investor needs to appreciate how much time they are willing to spend learning about various investments and what the implications are.
Many investors opt to work in conjunction with a financial professional who can provide information on various investments, tax implications, and how they fit into a longer term tax and wealth management plan. This can become particularly crucial when considering how investments may fit into any real estate ventures or business holdings you are considering.
Investing in property
The most common way to invest in property is to own a home. Indeed, for many people, home equity represents a substantial portion of their overall net worth. And, as an added benefit, you get the immediate value of a place to live.
But if you are looking at your home strictly as an investment, there can be drawbacks:
- It can be expensive to maintain.
- Most people pay tens of thousands in mortgage interest over the years.
- You can’t get your equity out permanently unless you sell and go back to renting, buy a smaller property, or move to a less expensive area.
A better strategy for wealth building may be to keep your housing expenses as low as possible so you don’t tie up all your wealth in your home.
Real estate investments can offer varying degrees of financial return. But they also carry significant risk and financial obligations, like taxes and debt commitments. Most successful investors in this area have spent time educating themselves about the real estate market and relying on the advice of financial professionals to inform their decision-making.
Starting a business
Starting a business can be expensive, risky, and all consuming. And, more often than not, businesses fail. It’s not easy coming up with a service or product that is an immediate success. It often takes inspiration, expertise, commitment, perhaps a little luck, and in many cases, time.
But, should those forces come together, a business venture can also pay off big time. And being a business owner can offer great independence and schedule flexibility, but it also entails a level of liability that being an employee does not. (Related: 3 reasons an entrepreneur needs insurance)
You must be prepared to accept that risk and insure against it. Business failure can also be more financially and emotionally devastating than getting laid off.
It is not a decision to be considered lightly. Many spend a significant amount of time doing research on the move and consulting with experts and financial professionals about the consequences before taking such a step.
What ties all these wealth-building strategies together?
Starting with a strong financial base, then taking the time to understand the rewards, risks, and commitments each wealth building strategy will take. Taking advantage of expert advice is often a key step in the process and one that should be considered by anyone serious about building wealth.
Learn more from MassMutual…
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Working with a financial professional vs. DIY