Top 10 Ways to Build Wealth
Wealth creates opportunity. It enables us to make investments that can help provide financial security, such as buying a home, starting or purchasing a business, and sending our children to college. And it opens the door to financial independence so we can retire on our own terms.
But wealth accumulation doesn’t just happen on its own. To reach our financial goals, we need a plan, which is all the more critical in the Black community where financial headwinds persist.
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Dominic Blue, Head of Third-Party Distribution and New Markets at MassMutual
Fortunately, we each have the power to effect change. The most effective way to create generational wealth is to adopt a growth mindset and create a sound financial plan to which you commit.
The following is my 10-point checklist for building wealth:
#10: Protect your credit
A credit score is a number used by most lenders to help evaluate the risk a borrower may not make timely payments. The higher the credit score (on scale from 300 to 850), the better the risk and vice-versa.
Thus, a lower credit score means you will pay higher interest rates on loans and credit cards, money that should be directed toward wealth creation.And you may not qualify for a loan at all if your credit score falls below the minimum standard of the lender, which will impact your ability to buy a home, start a business or buy a car.
Just remember, even if you’re diligent about paying bills on-time, your credit score can be negatively impacted. For example, a family member asks you to co-sign for a car loan. Although the family member owns the car, you co-own the responsibility to pay the debt. Thus, if the family member fails to make timely payments or defaults on the car loan, your credit will reflect that you failed to make the car loan.
Also, carrying too much debt, relative to your overall available credit, negatively impacts your credit score. Be careful about protecting your credit, including annually reviewing your credit report for inaccurate information.
#9 Take advantage of your employer benefits
Workplace benefits such as health insurance, group life insurance, and disability income insurance are the foundation of financial planning, helping to protect your income and assets against unexpected financial shocks. That includes a costly medical diagnosis, premature death, or illness/injury that prevents you from producing a paycheck.
If your family depends on your income, you need to ensure that your family can carry on. It’s important to research the life insurance options available, some of which offer wealth creation options for retirement and long-term care benefits.
Similarly the contributions you make to your workplace retirement savings plan, such as your 401(k), can potentially help your savings grow faster through tax deferral and compound interest, a powerful investment concept in which your account produces returns based on your original investment plus the earnings it previously received. By putting your savings on autopilot through payroll deductions, you are far more likely to reach your financial goals.
“By putting your savings on autopilot through payroll deductions, you are far more likely to reach your financial goals.”
#8 Avoid credit card debt
When I was young, I would run up credit card debt and think I had a long time to pay it off. I later realized that I was paying tens of thousands a year in interest payments to credit card companies.
Credit card balances and other unsecured debt with high interest rates weigh you down with the worst type of debt to carry. It’s expensive.
Use credit cards for payment convenience and not to pay for things you cannot afford. Credit card debt should never be more than you can afford to pay off in full at the end of each month.
#7 Build your financial literacy
Knowledge is power. Those who enhance their understanding of core saving and investing principals, such as diversification and dollar cost averaging, better position themselves to build wealth.
Spend at least 30 minutes a month learning about a new financial topic such as credit scores, individual retirement accounts (IRA), mutual funds, bonds, and emergency saving accounts.
#6 Only use loans to buy long term assets
An asset is property that has long-term economic value. A good rule of thumb is to limit yourself to using loans for the purchase of assets that, if sold, can pay off the loan with the proceeds, such as a house.
“Limit yourself to using loans for the purchase of assets that, if sold, can pay off the loan with the proceeds, such as a house.”
Cars and a college education may be good uses for loans if the car or education allow you to make more than the total cost of the loan. This is generally the case if you purchase a car for work and your net pay is greater than the car loan and interest.
#5 Always take the match
Many employers will match your 401(k) contribution up to a certain percentage of your salary — often between 3% and 8%. You automatically make 100% on your investment with the company match (if dollar-for-dollar).
Always take the match! Because 401(k) plans are funded with pre-tax dollars, they lower your tax liability in the year you contribute. They may also potentially help you build wealth faster through the magic of compounded growth.
#4 Create and stick to a budget
Be thoughtful in creating a budget. I like creating buckets or “different shades of green,” such as necessities (rent, mortgage, food, utilities), essentials (phone, car, clothes), nice-to-haves (social activities, sporting events), and emergency savings (six to nine months’ worth of living expenses).
Keep in mind that you will likely face financial difficulty such as losing your job from major downsizing. The best budgets anticipate these types of temporary setbacks through emergency savings. Also, remain disciplined by first cutting back on nice-to-haves and seek to limit accessing the emergency savings except for necessities.
#3 Live within your means
As I was entering law school at 22 years old, the financial counselor told my class of newly minted law school students and (hopefully) soon-to-be highly paid lawyers: “If you live like a lawyer when you’re a student, you will live like a student when you’re a lawyer.”
This was some of the best financial advice I received early in my career. The adage is true for anyone spending beyond their means and incurring debt with the expectation of more income.
“If you live like a lawyer when you’re a student, you will live like a student when you’re a lawyer.”
If you live beyond your means today and fail to save and accumulate wealth, the debt will likely be a financial burden for many years, including as you earn more money. The higher interest rates on this unsecured debt (15% to 20%) normally outpace earning growth, making it difficult to repay even as you earn more income. Live within your means to avoid or limit debt, which will offer you the financial freedom to save more as you gain work experience and your income improves.
#2 Start saving early, knowing it’s never too late
Because your investment returns compound over time, it’s much better to start investing in a 401(k) or IRA early. Investing 10% to 12% of your gross income starting at age 25 will make you a millionaire for retirement by age 65 (assuming you earn $40K or more, receive two annual salary increases, and achieve an average 6% return on your investments).
#1 Hire a financial professional
A financial professional can offer valuable guidance on your journey. You don’t need to wait until you have wealth. Start now. The job of a good financial advisor is to help you build wealth. Find one that can help you develop a holistic financial plan.
When I was in college, a warm-hearted Black facilities worker shared with me that he accumulated significant wealth by listening to his financial professional and as a result, he would soon retire comfortably. He worked with his financial professional for many years and stuck to a plan.
Fortunately, sound financial advice from trusted sources is more widely available than ever before, and institutions like MassMutual are actively working to eliminate the racial wealth gap. Within the Black community, specifically, we’re committed to providing access to products, services, and other resources to help Black consumers grow, keep, and pass along more of their hard-earned wealth.
By crafting a wealth accumulation plan and sticking with it, you can help secure your financial future and protect the ones you love.
Building your wealth will take time (usually many years) and following the 10 steps above will improve your chances of success. Many people mistakenly believe that a person must follow all 10 steps above to get started, which is not the case.
Start with as many as possible and add to the list each quarter or year. The most important thing is to get started and create good habits with your personal finance.
MassMutual is committed to helping you achieve your financial goals. Discover how.
This post is a sponsored collaboration between Massachusetts Mutual Life Insurance Company (MassMutual) and G/O Media Studios. MM202607-305571.
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