10 Wealth Education Lessons You Missed in School
When I first registered for college, I scoured over every class available, yet somehow failed to find one labeled “Wealth Education.” In fact, none of my classes even mentioned the idea of building wealth.
It was then I discovered that learning about wealth was not going to be taught to me in a formal education. I was on my own.
10 Rules for Building Wealth
If you want to learn how money works – and how to get rich in your lifetime – follow our top 10 rules for how to build wealth.
1. Make a Plan to Take Advantage of Your Earning Years
Earning money is great. Maximizing that money by following a financial plan is even better.
While you’re in your earning years, create a simple budget to cover your core expenses. Then you’ll know exactly how much is leftover to invest in yourself – and your future. You won’t always be working, so you need to build your wealth while you’re still earning money.
2. Automate Your Savings
David Bach (author of the Automatic Millionaire) once said, “If your financial plan isn’t automatic, you’ll fail!”
There’s tremendous power in automating your saving and investing since you’ll no longer rely on willpower to build wealth. Your ability to save money is no longer influenced by your emotions but instead happens automatically.
The simplest place to start is setting up a “recurring transfer” from your checking account after payday. Automatically transfer money to a savings account (or better yet, an investment account), and watch your net worth grow.
The best part about automation is that you’ll forget the money is even there. Building your wealth will happen in the background – and you’ll hardly notice.
3. Don’t Try to “Keep Up with the Kardashians”
Most millionaires don’t concern themselves with flaunting their wealth: They’re too busy focusing on growing their bank accounts. Trying to keep up with an elite lifestyle is a surefire way to stay broke.
Focus on enjoying what you already have and saving as much as possible. If your car is running, drive it. If your clothes fit, wear them. Buy assets and avoid liabilities. Don’t worry about what everyone else is doing: Building wealth is a quiet process.
4. Pay Off Your Credit Card in Full Each Month
Credit cards can be a convenient way to handle your monthly spending and earn a few rewards – but they can also be a wealth-destroying trap if you can’t pay them off.
Contrary to popular belief, you don’t need to “keep a balance” on your credit card to improve your credit score. In fact, having a large balance on your cards will lower your score.
If you choose to use credit cards, treat them like cash and only spend money you already have in the bank. When the month ends, pay off your credit cards in full so you don’t accrue any interest. You can’t build wealth if you are paying 15-20% interest on credit card debt.
If you want a shortcut, consider transferring that high-balance debt to a 0% interest card and focus on paying it off quickly.
5. Save Six Months of Expenses in an Emergency Fund
Building wealth isn’t always about pouring as much money as possible into investments. One of the best ways to grow your wealth is to protect your finances with an emergency fund.
For this purpose, put away six months of expenses into a liquid savings account. Or better yet, put funds into a money market account that isn’t connected to your checking account. You don’t want to be tempted to use these funds, but they should also be quickly available if you need them.
Though these savings should only be used in case of emergency, having them available will stop you from cashing out your investments or retirement accounts. Whether your car needs a new transmission or you happen to lose your job, six months of savings will help you protect your wealth building assets.
6. Avoid Habits That Drain Your Account
Bad habits can also drain your money (and can even destroy your health).
Buying a daily lottery ticket won’t build your wealth, and the odds of winning the Mega Millions jackpot are 1 in 300 Million. Casinos create games where the odds are stacked in the house’s favor (they don’t stay in business by handing out jackpots). Weekly gambling isn’t a wealth-building strategy: It’s a wealth-draining strategy.
Even smoking is detrimental to your savings. At an average cost of more than $6 per pack, a pack-a-day smoker can easily waste $180 per month on smoking. Add in the cost of higher health and life insurance premiums and smoking is a very expensive, very bad habit.
To build long-term wealth, you need to kick poor habits to the curb and replace them with healthy (and less expensive) habits. Then invest that money to build wealth – with much better odds.
7. Understand Your Tolerance for Financial Risk
When you’re building wealth, you need to take occasional risks. Investing in the stock market has great potential for growing your money in the long-term, but there will certainly be volatility along the way. Your money will be up by 10% or 20% some years, but there may be times you see your stock investments drop by 30% (or more). Before you dump all of your money into the market, you’ll need to understand your tolerance for downside risk.
If you are perfectly fine watching your portfolio value drop by a large percentage, you should be able to take more risks with your investments. If seeing your investments lose 10% in a day makes your stomach churn, you’ll probably want to take less risk. And once you understand your risk tolerance, you’ll have greater confidence to invest more and build your wealth.
Set up your Asset Allocation
Balancing your risk with investing is typically done by setting up your asset allocation. If you have a higher tolerance for risk, you can put more of your portfolio into stocks. If you don’t enjoy the stock market roller coaster, allocate a portion of your investments to fixed-value assets (like bonds and CDs).
8. Understand the Power of Compound Interest
Albert Einstein once referred to compound interest as “The 8th Wonder of the World.”
Compounding interest is when interest earned adds to your investment and you earn interest on that larger balance. Once you understand how to harness the power of time and consistent investing, your wealth will grow exponentially.
Compound Interest Example
If you invest $10,000 and earn 5% interest annually, you’ll earn $500 in interest in Year 1. During Year 2, you will earn 5% interest on that $10,500 balance (as your $500 is added to the original investment). So your interest earned in Year 2 would be $525.
As you can see with our savings calculator, simply investing $100 per month for 30 years at 8% can grow to almost $150,000 – that’s the power of compounding.
9. Get Your Company to Match Your Contributions
One of the best values in the investing world is a company match on employer-sponsored retirement plans. This is an immediate 50% or 100% return on your investment – and it also helps you save money on taxes.
If your company offers a 401(k) plan with a company match, make sure you invest enough to earn all of it.
Example of Employer-Sponsored Retirement Plans
Maddie Match works for a company that matches 50% of your 401(k) contributions up to 6% of her $100,000 salary. If she invests $6,000, her company will contribute $3,000. This is “free money” – and an immediate 50% return on her investment!
Not only will Maddie earn $3,000 each year (tax-free), but her taxable income will also be reduced by the $6,000 she contributed to her plan.
10. Max out Your Retirement Accounts (if You Can)
Retirement accounts – like 401(k), 403(b), and Individual Retirement Accounts (IRAs) – provide special tax advantages that can significantly grow your wealth. Due to the advantages of these accounts, there are income and contribution limits for each.
Max out an Individual Retirement Account (IRA)
IRAs allow you to contribute up to $6,000 per year (or $7,000 if age 50 or older). By simply putting away $500 per month, you can max out your IRA. If you’re married, both you and your spouse can max out an IRA by investing $1,000 per month. If you’re 50 or older, you can contribute $583 per month to hit the maximum amount and take full advantage of the IRA tax benefits.
Max Out a 401(k) Plan
In addition to your IRA, each year, you can contribute up to $19,500 to your work 401(k) plan or $26,000 if age 50 or older. This breaks down to $1,625 or $2,166 per month, respectively. Add a company match to that amount and that’s a significant investment – but also a significant tax savings over your working career.
If you can max out both your IRA and 401k plans, you’ll be investing over $25,000 per year while taking advantage of the tax savings on those investments. Simply investing that money in the stock market at 8% for 20 years would net you over $1,200,000!
How Discrimination Impacts Income Inequality
According to EquitableGrowth.org, “In 1968, the median African American family income was 57% of the median white American family income. In 2016, the ratio was 56%.” Clearly, the income gap has not disappeared in the past 50 years. In fact, it’s gotten worse.
Building wealth from a place of income inequality means that it’s more difficult to earn enough to invest – let alone build wealth over a lifetime. While changes to national and local policy will help drive us toward more equal income opportunities, the current reality is that the wage gap exists (and it hasn’t moved very far since the Civil Rights Movement in the 1960s).
Though building wealth with a lower income is a challenge, some of the same rules of wealth apply, such as investing early and often. Harnessing the power of compound interest and letting time do the work can still help those affected by income discrimination start building wealth.
With so much work to do, becoming financially educated and applying these rules of wealth can help start the journey of wealth building in your own family.
Building Generational Wealth
Building wealth doesn’t have to stop after you’ve passed away. Generational wealth is the act of leaving behind significant assets to your family when you die (like cash, real estate, investments, or other assets).
This wealth is built over a lifetime and continued by following the principles of wealth, including: owning assets and not liabilities, continuing investing for growth, and avoiding debt. Be wary, however, as 70% of inheritances are depleted by the next generation.
To maintain your generational wealth, financial education is a must – not only for your kids but also for your grandchildren. Teaching the basics of personal finance will set them up to handle the money wisely and possibly grow it even further.
Make Wealth Education a Priority in Your Life
No matter your age or income level right now, making financial education a priority will benefit your future. Following these rules of wealth and applying them to your life will help you grow your wealth while building a solid financial foundation.
As you grow in your career (and income), continue putting time and energy into learning how to invest for a brighter financial future.
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