Introduction:
Saving money is important, whether you are building an emergency fund or working toward a long-term goal like a vacation or retirement. However, there is a difference between saving money and building wealth.
If you save 10% of your income annually, the money will accumulate over time, and you will end up with savings that you can utilize when needed. But if you invest the money you save, your money can generate more money through earning interest or dividends.
This is where you begin to accumulate true wealth.
How Investment Builds Wealth
Using the money you save to earn more money is the secret to building wealth. Investing allows you to do this in two ways.
The money you invest earns interest, so eventually you will have a larger amount of money than what you initially put in. If you invest in stocks and funds that pay dividends, you will see your money grow.
Investment allows you to benefit from compound interest. Over time, you earn interest not only on the money you save but also on the interest you’ve earned in previous years. This automatically increases your wealth over time.
If you save $50 a month for 30 years, you will save $18,000. But if you earn 5% in compound interest each year, by the end of the 30 years, you will have more than $39,000.
That additional $21,000 is the wealth that your money has built.
Steps to Start Building Wealth
Investing money is often a learned behavior. Some people come from families that taught them saving strategies, but it didn’t go beyond putting money in a bank savings account.
Some people come from families that were never taught about saving and always lived on the edge of their income. And some people come from families that view investing as part of financial planning and actively teach it to the next generation.
Regardless of the type of financial environment you grew up in, you can decide on the strategy you want to use when you are an adult and making your own financial decisions.
Step 1: Set Savings Goals
If you are focused on building wealth, it is helpful to have a clear goal in mind. Decide if you want to:
- Achieve financial independence
- Save enough for a comfortable retirement
- Be able to retire early
- Have money to start a business
- Generate extra monthly income
- Have a financial safety net
Once you know your goal, it will help you determine:
- How much time you need to reach that goal
- How much you need to save
- How risky your investments can be
- The type of investments you should make
- How much to allocate to investments each month
You should also have savings that you can easily access for things like:
- An emergency fund
- Travel and vacations
- Unexpected repairs on your home and car
Step 2: Start with a High-Interest Savings Account
Before you begin investing, you should save for the initial investment. Many institutions require a minimum initial investment, usually between $1,000 and $10,000, although $3,000 is a common minimum.
However, you can benefit from compound interest while saving that $3,000 by using a high-interest savings account. This allows your money to grow faster while you save, before you start investing. High-interest savings accounts also offer higher returns on deposits compared to traditional savings accounts.
If you cannot open a high-interest savings account through your bank, you may be able to use a local credit union or an online savings platform like Smarty Pig.
Some institutions also offer high-interest checking accounts, although these usually require you to jump through hoops to earn your interest, such as making a certain number of debit card transactions each month or maintaining a specific deposit amount within a certain timeframe.
Option
using a variable that changes at a sufficient number of periods.
Having a financial planner is a way to ensure you are making informed decisions about your investments and your financial future.
If you aim to put 10% of your income directly into investments, especially if you are allocating other funds for retirement savings, you will start building wealth and create a more stable financial future for yourself.
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Sources:
Internal Revenue Service. “Tax Exempt Bonds.”
Investor.gov. “Certificates of Deposit (CDs).”
U.S. Securities and Exchange Commission. “Saving and Investing, A Roadmap to Your Financial Security Through Saving and Investing,” Page 11.
Source: https://www.thebalancemoney.com/how-do-i-begin-to-build-wealth-2386145
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