Studies have found that many Americans do not anticipate retiring in their lifetimes. This is a sad state of affairs when millennials and Generation Zers think they will be working until the grave. Does this have to be your reality? Not at all!
In order to build wealth, you need to pay yourself first from every paycheck, delay some of your instant gratifications, make sacrifices, and choose reliable investment strategies that have succeeded for generations. And it doesn’t take much: you start building wealth with as little as $25, $50, or $100 per month.
Building wealth is not about pouring your life’s savings into a meme stock. Building wealth is about long-term efforts, from buying an index fund to automatically saving a percentage of your paycheck.
By the time you seek to cash out, you will have a handsome nest egg by the end of it all. How do you begin? Here are six great ways for building wealth in the long term:
Table of Contents
1. Stay Out of Bad Debt
U.S. household debt is the highest it has ever been, soaring to $14.3 trillion by the end of the third quarter of 2020. While consumers saved more because everything was closed amid COVID-19 lockdown measures, many households were either out of work or saw their hours slashed, meaning their incomes were not the same as they were before the pandemic.
As a result, millions of people had to take on additional debt to keep their heads above water. It could take years before many Americans catch up and get out of debt.
Debt can be burdensome to any budget since servicing payments can eat a chunk of your earnings. Whatever your situation is, the critical aspect is to remain as debt-free as possible. Or, at the very least, stay away from bad debt, such as credit cards or payday loans, because of how enormous interest rates can be, even in a low-rate environment.
When your debt is zero, you have more dollars and cents to save and invest.
2. Build an Emergency Fund
Ask yourself: What would happen if your refrigerator broke down, your washer and dryer stopped working, or your car engine battery ceased functioning today? You would be on the hook for hundreds or thousands of dollars in a short period. That is a lot of money.
Polls have found that a large portion of the population would not scratch together $500 to cover an emergency. This is concerning, particularly when you think about the alternatives: credit cards, payday loans, and other high-interest debt.
What is the solution? An emergency fund.
The financial experts say that every household should have an emergency fund that can pay for your lifestyle – albeit a humbler one – for at least six months. This makes sense. Indeed, you have the threat of inflation, so you could always sock away an emergency fund into something like an all-in-one checking and investment account, a CD, or an index fund. Whatever you choose to do, be sure you have an emergency fund that can cover these unforeseen circumstances.
3. Dollar-Cost Averaging Your Investing
If you invest a portion of your paycheck into the stock market, it is best to do so regularly and not on a whim. For example, if you recently allocated your hard-earned money into GameStop shares at the height of the buzz, you likely lost most of your capital. Or, if you make erratic purchases, you might lose out on a lower price share.
Enter dollar-cost averaging (DCA).
This investment strategy consists of dividing the total amount of money to be invested across periodic purchases to minimize the effects of volatility. No matter what the price is, you buy shares at regular intervals. It is a workable strategy because you can avoid timing the market and getting caught up in something like the GameStop or AMC chaos; in short, an easy solution to build long-term wealth.
4. Diversify Your Investments
Like life, financial markets have their peaks and valleys. Right now, commodities are going through a boom phase that many analysts are calling a “commodities supercycle.” Consumer staples are still down to start 2021. When one sector is up, another one will inevitably be down.
Is it time to diversify?
Diversification is something that all billionaire investors recommend. At the same time, they also recommend avoiding being too diversified; its all about striking that delicate diversified balance! That said, here is what a standard, balanced, and diversified investment portfolio should look like:
- Bonds: 40%
- U.S. Stocks: 35%
- Foreign Stocks: 15%
- Short-term Investments: 10%
5. Purchase Dividend Stocks
Speaking of stocks, history has proven that dividend-paying stocks are the go-to source for a successful long-term investment endeavor.
A dividend is a portion of profits that companies pay every month, quarter, or year. By acquiring shares in a stock that pays a dividend, you can earn a regular income, whether from a monthly exchange-traded fund (ETF) or a multinational corporation stock that issues payments every three months.
Unsure where to begin? Here are some stocks that pay handsome dividends each quarter:
- Walmart (WMT): 1.59%
- TD (TD): 4.11%
- Exxon (XOM): 6.65%
- IBM (IBM): 5.48%
- McDonald’s (MCD): 2.43%
6. Own a Home? Pay It Off Early
If you have achieved the American Dream, and have successfully paid off your mortgage, you are one step closer to accomplishing a near fully-funded retirement! Since housing-related costs can imbibe about one-third of the typical household budget every month, you have more money at your disposal by eliminating this monthly cost.
What better way to build wealth? Historically, much like stock indexes, real estate goes up. Once you are mortgage-free, you can enjoy more money in your pocket. Put simply, your financial freedom begins once you pay off your home as early as possible, so it’s smart to prioritize shrinking this debt as part of your long term wealth-building strategy.