If you ever look at the wealthiest self-made individuals in the world—Warren Buffet, for example—you will quickly come to realize that their wealth was not built overnight. Creating wealth is something that typically requires a significant amount of time and effort in order to do on your own.
Fortunately, even if you are unfamiliar with some of the more complex wealth building strategies used by Buffet and company, there are still many different ways you can begin improving your future financial situation in the status quo. We take a quick look at how to start building wealth for beginners and the various risks and rewards associated with each of these strategies.
Look beyond your commercial bank
When people think about where to “store” their money, the first thing that likely comes to mind is an FDIC insured bank. However, though these banks are typically a very safe place to store your money, they are generally considered a horrible place to actually grow it.
The average annual interest rate (APR) for commercial banks in the United States is an astoundingly low 0.06%. Even the best paying bank accounts still have interest rates below 1%.
When considering that the average inflation rate for the United States has historically been over 2% per year, this means that keeping your money in an ordinary savings account causes you to functionally lose money as each year goes on.
Though with a savings account, you will be able to enjoy the clear benefit of your money being secure, there are many other ways you can actually begin creating wealth without having to assume significantly higher risks.
Pay off all of your debt as quickly as possible
The step in how to begin building wealth is to pay off your debt as quickly as you possibly can. Remember, when comparing different investment opportunities, the two things that matter most are the risk (potential of losing) and reward (possibility of gaining) associated with the investment.
In order for a person holding debt to justify investing it elsewhere, their return on their investment will need to be greater than the cost of taking longer to pay off their debt. Unfortunately, for most individuals with student loans or general debt, the rate that their debt is accumulating is significantly higher than the 9.8% average that can be earned from investing in an S&P 500 index fund. Because the risk of holding debt is almost always higher than the reward for investing in a marketable asset, paying off your debt should be your top priority.
Begin investing in a mutual fund
Once your debt has been tamed to a reasonable level, you may want to consider looking to invest in the stock market. However, contrary to many people’s high levels of confidence, “beating the market” is almost impossible without a genuinely profound understanding of the financial industry.
Instead of actively picking one specific stock and hoping that it does well, it makes much more sense to passively invest in many stocks and hope that the market itself does generally well. As stated, the annual return for an S&P 500 index fund has been 9.8% over the past 90 years. This fund contains 500 of the largest stocks in the nation and has been generally growing over time (though there have been some down years). Investing in a mutual fund that has stocks in each of these companies is one of the best ways you can begin building wealth over time.
Invest in real estate
Though there are certainly many risks involved in the industry (such as what happened in 2007), the real estate market has the potential to be quite lucrative. Instead of losing a large portion of your income every month by paying rent, getting a mortgage and owning property allows you to begin building equity on a monthly basis.
Investing in real estate does not require you to be significantly wealthy in the status quo. There are many affordable properties available, often for as little as 10% down. If you can pick the right location and time the market correctly, your investment in a real estate property may be functionally the same as having lived rent-free your entire life once you sell it. You may also want to consider buying a property with multiple units and begin earning money from monthly rents.
Purchase a universal life insurance policy
Another way to begin building wealth from a young age is to purchase a universal life insurance policy. Generally, life insurance can be categorized as either a term life insurance policy or a permanent (universal) life insurance policy. Term life insurance policies can often be incredibly cheap (under $10/month), but only last for a specific amount of time. Universal life insurance policies will cost more each month, but they offer the tremendous benefit of a tangible cash value in addition to a lifetime of financial security.
Life insurance is something that is often worth purchasing but will certainly not pay off until the distant future. However, if you are young and healthy, you will be able to lock in the lowest monthly rates available. As time goes on, the amount of cash value your policy accumulates will dramatically increase each year. This cash value is often used as a safe way of rounding out a financial portfolio.
Open a retirement savings account
Lastly, one of the most common methods used for how to make money over time is a retirement savings account. The most common forms of retirement savings accounts are a 401(k), Individual Retirement Account (IRA), and a Roth IRA.
The type of retirement savings account that will be best for you will depend on your long-term financial goals, your tax preferences (paying now versus later), and whether or not your employer is willing to make matching contributions to your account.
You can take the money in these accounts and invest them over time in equities and other investments.
These are just a few of the ways you can begin building wealth today. It is important to remember that the accumulation of wealth will require a significant amount of time. But if you can be patient, disciplined, and willing to look towards the future, building wealth is something that might be considerably more possible than you had otherwise assumed.