Wealth is in the eye of the beholder. For some, it’s a huge house, several flashy cars, dining at fancy restaurants every night, and frequent lavish vacations. For others, it’s knowing that they will one day be able to live on their retirement funds without having to work. Still others may want to work in a career they love and make ends meet.
For everyone, there are actions that can help them create wealth as they define it.
The first is to live within your means. If you’re racking up debt for your day-to-day expenses, your finances are going in the wrong direction to build wealth. There are legitimate reasons to borrow — to buy a house or a vehicle, or to get an education for a good career. There are parameters regarding reasonable amounts to borrow for these items. Mortgage lenders often use 35% to 40% of gross income (income before taxes and other deductions) as a measure of total debt, including mortgage payments, that is sustainable. Student loans are generally considered viable if the amount borrowed does not exceed the annual salary of the chosen career path shortly after graduation.
Living within your means isn’t everything. You also need to save some of your income. Like debt levels, there are certain rules of thumb. Saving 10-15% of your gross income is a good start. You can first have it as an emergency fund, which would be in something stable like a savings account at a financial institution or a money market fund. Having an emergency fund, instead of putting emergency expenses on credit cards, will help you build your wealth. Once the emergency fund has about six months of basic expenses, start saving that money for long-term goals.
Get your financial information from trusted sources. Your friends from work may be doing well with their money. But they are not you and may not be doing as well as you think. There are seminars, online videos, and articles to peruse, but their advice might not be right for you. Although professional advice is not free, a good financial professional who has a philosophy that matches yours can be worth it.
Bad decisions are one of the biggest obstacles to building wealth, but the ability to avoid bad decisions is within your power. It is almost impossible to completely separate money and emotion. Money allows us to meet our basic needs and fuels our dreams. Decide on a course to achieve your wealth building goals and realize that the time you need to stick to your plan is when you may want it the least. Many people want to withdraw their money from the stock market after it has gone down, and they want to invest more money when the market is up. But that might not fit your plan. Use good decisions to build wealth and don’t let emotions derail you.