What does it mean to be wealthy? Some would tell you it’s having an abundance of money and assets. Others might say that it’s about living a fulfilling life and being content with what you have. One thing is certain: it always represents freedom, and to be “free,” you need financial stability and security. In today’s article, we’ll break down our five best tips for building wealth over time.

What is wealth building?

Wealth building is the process of increasing your net worth over time. Your “wealth” from a financial standpoint is the total value of your assets minus your outstanding debt. In simpler terms, it’s the value of everything you own (such as investments, properties, and savings) minus any debts or loans you have (such as a mortgage). Broadly, wealth building encompasses the following four activities:

The importance of building your wealth over time cannot be overstated. Not only does it help you achieve financial stability and security, it gives you the resources to pursue your long-term financial goals.

It allows you to retire comfortably, provide for your family, or start a business. It also gives you the freedom to make choices that align with your values and passions. Nearly half of Americans have no retirement savings. However, these five tips make it easier than you think to start now.

Tip #1: Understand the meaning of “net worth”

Net worth is a term that’s thrown around a lot but isn’t always well understood. You can calculate it by subtracting your liabilities (debts) from your assets. Let’s consider the case of Sarah, a software engineer. She has the following financial assets and debts:

Assets:

  1. Savings account: $15,000
  2. Investment portfolio (stocks and bonds): $50,000
  3. Retirement account (401k): $40,000
  4. Car (current market value): $10,000
  5. Personal items (like jewelry, electronics): $5,000

Total Assets: $120,000

Debts:

  1. Student loan: $25,000
  2. Car loan: $5,000
  3. Credit card debt: $10,000

Total Debts: $40,000

To calculate her net worth, Sarah subtracts her total debts ($40,000) from her total assets ($120,000).

Net Worth Calculation: $120,000 (Assets) – $40,000 (Debts) = $80,000

Sarah’s net worth is $80,000. A positive net worth indicates she’s in a good financial position. By understanding this figure, she can make informed decisions about how to allocate her funds for further wealth building, like investing more in her retirement account, paying off her debts faster, or taking on riskier investments like building a business. For reference: The average net worth of an American under the age of 35 is $39,000.

Tip #2: Create and stick to a budget

Budgeting is the foundation of financial stability. You need to create one that works for you.

  • Figure out what matters most: For instance, do you have a student loan that needs to be paid off? Are you trying to save for a down payment on a house? Create a hierarchy of your financial priorities and allocate funds accordingly.
  • Assess your income: Determine your monthly income after taxes and deductions. If you have multiple sources of recurring income, factor them all in.
  • Track your expenses: Use budgeting apps like Mint or You Need a Budget (YNAB) to keep track of where your money is going.

Your ability to save money aside sets you up nicely for making that money work for you, which we’ll explore next.

Tip #3: Hire a wealth management firm to manage your finances

Investing is really important because of compounding interest. When you invest or save money, you earn interest on your initial principal (the original amount of money). With compounding, you not only earn interest on this principal amount but also on the interest that has been added to it in previous periods.

Let’s say you start investing $100 every month. This money earns interest (suppose, for this example, the interest rate is 5% per year). At the end of the first year, not only do you have the money you’ve put in, but you also earn a little extra on top of it (5% of your total investment over the year).

Over time, this compounding effect can significantly increase your wealth. If you continued to invest at this rate, you’d have $83,225.86 30 years from now, compared to $36,000 had you simply let it sit in savings.

Hiring a Houston wealth management firm can really help you get to the next level with the money you’ve saved from budgeting. Rather than making your own investment decisions, you can take advantage of their expertise and experience in this area.

Final thoughts

Building wealth isn’t an overnight process. It takes time, effort, and discipline to reach your financial goals. Remember: the earlier you start, the better. By understanding net worth and creating a budget that works for you, you can build a strong foundation for long-term financial success. When it comes to investing, consider hiring professionals who can help you make strategic decisions that align with your financial goals.