Given that 40% of Americans don’t have $400 saved for a last minute emergency, it’s clearly becoming harder to build wealth. If you aren’t saving as much money as you wish you were, you’re not alone. Many people struggle to get the kinds of money they want to have for their future.
Here are five steps to avoid when you’re trying to build wealth.
1. Never Spend Without a Plan
While you might find yourself caught up in the rat race, working all day to get the money together for bills, you need to be sure you’ve got a plan.
This means that you need to have a budget mapped out for every week and every month. If you live without a monthly budget, it’s easy to think that you’re ahead of the game when you’re really falling behind.
Every dollar should be assigned a role each and every month. That way you won’t have financial surprises.
Get yourself within your means by spending only half of what you make, investing 20% of it and saving the other 30%. If you can’t get to this figure, you need to find ways to cut down on your expenses and increase your income. This can be a challenge that takes a year or two, but it’s essential to getting your finances in order.
2. Get Yourself an Emergency Savings
When you live without savings, you’re leaving yourself open to an emergency that decimates you financially. Having $2,000 to cover a vehicle emergency is much better than putting that amount on a credit card. If you don’t have $2,000, you certainly don’t have $2,400, which is how much it could cost you with interest.
Unexpected expenses come up when you own a home as well. If your heater or air conditioning unit goes out suddenly, you could have to come up with hundreds or even thousands of dollars at a moment’s notice.
These small issues become serious issues when you have no money to go around.
The idea is to ensure that you always have at least three months of expenses in a savings account. You should have three months worth of rent, utilities, car payments, pretty much everything that you spend in the course of a month.
3. Avoid High-Interest Debt
When you need a loan in an emergency, you could end up with your back against the wall. This is the moment high-interest debt providers live for. They are always ready to offer something to those people who have no emergency savings to fall back on.
Credit cards can get us what we need in just a quick swipe, but you could spend months or even years paying off what you purchase with them. Double-digit interest payments could hit you if you don’t pay your balance down each month.
It’s hard to build wealth when you’re paying off debt at high interest rates.
As credit card debt zooms past the $1 trillion mark, it’s essential for everyone to scrutinize high-interest debt. Balancing needs and wants is a struggle but it’s a must if you’re looking to get high-interest debt out of your life on a permanent basis.
4. Never Invest Without Researching
Everyone is going to tell you how badly you need to invest your excess income. While it’s a great concept, they don’t often follow through with a pamphlet giving you details about what you should invest in and why. Without enough information, you could invest in something like cryptocurrencies that drop precipitously overnight.
If you’re relying on luck, be prepared to lose money on your investments. Otherwise, you should get to know why people invest in what you’re considering and what they hope to get out of it.
There are no true “get rich quick” schemes that work. What works is learning about how money can grow and how you’re calculating the value of your investments. Remember that money depreciates at around 3% every year. If you put $1,000 away this year, it has about $970 worth of buying power next year.
If you don’t understand how this should impact how you invest, you need to stop yourself before you put money on the wrong horse.
5. Having Just One Income Source
If you follow the news, you know that people are often arguing about “capital gains tax”. That’s because the truly wealthy in this country don’t worry about income-based wealth like you do. They have their money out there doing the heavy lifting for them.
Capital gains means that invested money makes money over time. While their money makes money, they’re only charged tax rates as low as 20% on that. Meanwhile, you could be getting charged 40% or more on your labor and income.
You need to start thinking like a rich person and have some money put aside that’s making money faster than you can as a worker.
If this isn’t possible, you need to seek out another income source. A second job or a side hustle is everything right now. It will help to build your emergency fund and back you up in case you end up losing your job.
For someone who, for example, is working for a real estate firm, they should have a hook up for showing other properties on the weekends. They could be building wealth with that side hustle while the main hustle pays the bills.
Trying to Build Wealth Is an Uphill Struggle
When you set out to build wealth, you’ll find that the path is paved with lots of hurdles and places to stumble. If you’re not where you want to be, rather than beat yourself up, start making a plan. It’s likely you’ve got everything you need to get started with your savings.
If you’re in college, check out our guide to ensure you find some clever ways to save, even while you’re studying.