Some people are born rich. For them, the challenge of wealth becomes keeping it. For the rest of us, building wealth means a lot of hard work, determination and planning, with distinct milestones along the way. If you’re in the latter group, here are six key points in your journey that are key to building and keeping your wealth.
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1. Build an Emergency Fund
Life happens — and it’s often expensive when it does. Whether it’s an unexpected medical bill, car repair or other life event, it can reverse your gains toward financial freedom.
An emergency fund can stop the bleeding and keep your journey on track. Without one, you’ll likely rely on credit cards or personal loans, which come with wealth-crushing high interest rates. How much should your emergency fund hold? Start with $1,000 and then work toward saving three to six months’ worth of expenses.
2. Create a Budget
Yes, budgets are tedious and boring. They’re also essential — you can’t build wealth if you spend more than you make. Success means doing the budget thing right, though.
First, track your spending. Use an app, a spreadsheet or pen and paper — whatever works for you. Most people are shocked at how much they spend on non-essentials. Then, set realistic goals for cutting back and saving. Pick a plan, such as the popular 50/30/20 rule: 50% for necessities, 30% for wants, and 20% for savings or debt payoff. Finally, review your budget often to stay on track. Next stop: Wealthytown.
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3. Buy a Home
Buying a home is an important milestone in building lasting wealth. One, as you pay down your mortgage, you build equity in your home — unlike renting, which leaves you owning nothing. Two, real estate typically appreciates, raising your net worth. Three, paying your mortgage not only bolsters your credit rating, but it also gives you a healthy tax break every year.
4. Start a Retirement Account
With the average Social Security benefit coming in at around $1,200 a month, it’s unlikely that Social Security alone will fully fund your retirement years. That’s why it’s important to start planning for retirement early. If your employer offers a 401(k) program, participate. Or, you can open an IRA or Roth IRA.
Retirement accounts allow you to ensure a comfortable post-work life but can also provide tax advantages during your career. They also give you the benefit of time and compounding to supersize your investment growth.