How to build wealth: 9 key steps

For Hollywood celebrities and Silicon Valley tech titans, the word 'wealth' may mean mansions, yachts, and membership in the billionaire's club. But for most people, the definition is a little less extravagant. It means accumulating enough money to achieve financial security, retire comfortably, and hopefully leave something to their loved ones to increase generational wealth.

Regardless of what wealth means to you, building enough of it to meet your goals is likely to require commitment, patience, and adherence to a few basic steps that can simplify and even speed up the process. We can help by telling you about:

• What wealth is

• The best time to start

• Key steps to building wealth

• How to protect the wealth you’ve built

What is wealth?

In simplest terms, wealth is the total value of assets owned by an individual or household, minus any debts or liabilities. It’s also known as net worth. There are several types of assets that can be included when calculating one’s wealth:

• Financial assets: These include cash and cash equivalents (savings and checking accounts, money market funds, Certificates of Deposit or CDs), investments (stocks, bonds, mutual funds, ETFs), annuities, and retirement savings accounts, including IRAs and 401(k)s.

• Physical assets: Possessions like real estate, vehicles (cars, boats, motorcycles), jewelry, collectibles, precious metals, and any other property of value.

• Business interests: Ownership stakes in businesses or professional partnerships.

• Intellectual property: Things like patents and copyrights that have financial value.

• Life insurance policies: Permanent whole life and universal life policies that have accrued cash value, but not term life insurance which does not have a cash value.

Of course, it’s not necessary to accumulate assets from every category to achieve your financial goals and secure your financial future. So, at least initially, you should focus on assets you understand and are comfortable with.

The best time to start building wealth

When is the best time to start building up your net worth? The short answer is, as soon as possible. The more accurate answer is as soon as you can. That typically means once you have funds left over after meeting your living expenses and contributing to your emergency fund. According to many experts, your emergency savings should be enough to meet regular expenses for 3-6 months without an income.

While you may only reach that point in your early 30s or even later, it’s important to state the obvious: the sooner you start building wealth, the longer you'll have to build it. And the more time you'll have to take advantage of compound interest, which helps your money to grow faster each year.

Here’s a simple example of compound interest - If you purchase a $100 CD paying 5% interest a year, your CD will be worth $105 at the end of year one. Then, in the second year, you’ll earn 5% interest on the $105 and your CD will grow to $110.25 by the end of year two. In year two, you received more interest since you received interest on both the original $100 and the interest earned in year one as well. And so on, year after year. One quickly sees how these gains can add up. In fact, after 10 years at 5%, your $100 investment would be worth $163. If that doesn't impress you, consider how much you'd make if your investment were $10,000 instead of $100.

The benefits of compounding also apply to stocks, real estate and other investments that rise in value. However, it’s important to note that –– unlike CDs –– most investments are not guaranteed to increase in value every year.

Eight key steps to building wealth

1. Set SMART financial goals

Start by trying to define some achievable goals. To increase your chances of reaching them, use the SMART formula — make sure your goals are Specific, Measurable, Achievable, Relevant, and Time-bound.

In other words, your goal shouldn’t be to ‘save money for retirement,’ it should be to save a specific and realistic amount by a specific and achievable date, e.g., "save $15,000 a year from age 30 to age 65." Review your goals regularly and adjust them as your financial situation or needs change. And remember, writing down goals and timeframes makes it easier to implement your financial plan and track progress.

2. Develop a basic financial strategy

Once you’ve identified your goals, it’s time to do some basic planning. First, revisit your goals and determine how much wealth you’ll need to build and by when. Next, calculate the annual savings required to meet your wealth-building goal. Assess your current financial situation (income, expenses, debts) to determine whether you’re ready to start the wealth-building process. Project your future financial situation (for many people, the future can bring increased income and increased financial responsibilities) and determine how it will affect your ability to stick to your plan and build wealth on an ongoing basis.

Finally, review your findings and begin developing a strategy to get ahead. For instance, if you discover that you’re not currently able to start saving the required amount, think about what you can do to remedy the situation, such as generating extra income, cutting back on discretionary spending, or paying down debt.

3. Create a budget

While many people don't like the word "budget," the fact remains undeniable: A budget can help you gain better control over your finances and achieve your long-term goals. But where to begin? One of the most popular budgeting strategies is the 50/30/20 rule which says to allocate 50% of your after-tax income to essentials (housing, food, utilities, etc.), 30% to discretionary spending (entertainment, dining out, etc.), and 20% to savings and debt repayment. This simple formula can make it easier to track expenses, adjust spending habits, pay down debt and generally improve your financial wellness.

4. Increase your income

With a basic financial strategy and budget in place, you'll be ready to take action in ways that help speed wealth building — and improve the chances of reaching your goals. One of the first things that comes to mind is earning more money. Consider enhancing your skills to make yourself more valuable in your current job or qualify for higher-paying positions. Explore side 'gigs' or freelance opportunities such as consulting or tutoring. Monetize your hobbies or skills through platforms like Etsy and YouTube. If you own a home, you might even consider renting out a room or space in your garage.

5. Reduce your spending

Start by tracking your expenses to identify areas where you can cut back, such as dining out, entertainment, and vacations. Be sure to review all your streaming and subscription services, and stop paying for things you no longer use. Consider using cash instead of credit cards to limit overspending. Take advantage of sales, discounts, and coupons for necessary purchases. Wait 30 days before making a discretionary purchase to determine if it's truly necessary. And where possible, embrace a 'minimalist mindset' by focusing on quality over quantity and finding joy in experiences rather than material possessions.

6. Reduce or retire debt

One of the key obstacles to wealth building is high-interest debt — which drains resources and limits your ability to save and invest. To reduce or retire high-interest debt, pay off debts with the highest interest rates first –– making more than the minimum payment on your target debts while maintaining minimum payments on others. Consider consolidating high-interest debts into a single loan at a lower interest rate. If you have good credit, explore balance transfer credit cards with low or 0% APR offers. If possible, pay credit card bills more than once a month to reduce your balance faster and potentially improve your credit utilization ratio. Finally, avoid accumulating new debt!

7. Start saving

Saving money is the foundation of virtually every wealth-building effort. So, if after you cover living expenses, pay off some debt, and contribute to your emergency fund, you have money left over, start your savings plan. For short-term savings (funds you may need in the foreseeable future), consider cash equivalents, including high-yield savings and checking accounts, money market accounts, and Certificates of Deposit (CDs).

For college savings, consider a tax-advantaged 529 plan. For retirement savings, take full advantage of employer-sponsored plans like 401(k)s, especially if your employer offers matching contributions. Also think about adding a tax-advantaged Individual Retirement Account (IRA). If you're self-employed explore SEP IRAs, Traditional IRAs and Roth IRAs, all of which grow tax deferred. You might also consider annuities –– financial products that can help ensure that you won’t run out of money in your later years –– and life insurance or universal life insurance, which allow you to save money in a tax-advantaged manner. Finally, remember to regularly review and adjust your savings plan as your financial situation or goals change.

8. Learn how to invest

Once you've saved some extra funds that you won't need in the near future, it may be time to shift your wealth-building plan into higher gear by investing. Simply put, investing means buying assets that have the potential to increase in value over time. The goal of investing is to build wealth gradually by earning returns on these assets, whether through interest, capital appreciation or dividends.

Some of the most popular investments include equities, or “stocks”, (which can be accessed through individual stocks, mutual funds, and Exchange Traded Funds), bonds (Treasuries, T-Bills, municipal bonds or “munis”, and corporate bonds), and real estate. There are many other investments including cryptocurrency (crypto), commodities (oil, gas and agricultural products), precious metals, and collectibles (art, jewelry and antiques, but most require a high level of sophistication and are best left to those with a lot of experience and expertise.

Before you begin investing, take some time to learn about the most popular investments, assess your ability to handle investment risk, and decide which investments may be most appropriate for you. If you need help getting started, consider consulting with a financial professional who can help create an investment plan tailored to your specific situation and goals.

9. Protect your wealth

Once you've made some progress and built some wealth, the next step is to ensure it is protected. Three of the most widely used protections are:

Insurance - One of the best ways to protect your wealth is to ensure that it won't be depleted in the event of an unexpected event or circumstance such as illness or incapacity, death of a breadwinner, or natural disaster. That is why many experts recommend that you hold five key types of insurance policies:

1. Health insurance to protect you from paying catastrophic medical bills

2. Disability insurance provides an income stream if you are unable to work due to illness or injury

3. Homeowner’s insurance to ensure that you’ll be reimbursed should your home or property be destroyed by fire, flood or natural disaster

4. Umbrella insurance to protect your assets should you be sued for liability by a third party

5. Life insurance to protect your family finances in the event of an unexpected death

Also, remember that permanent life insurance (as opposed to term life) can also serve as a tax-advantaged savings vehicle, thereby serving double duty.

Tax planning - Tax planning is a strategic approach to managing your finances in a way that minimizes your tax liabilities while remaining compliant with tax laws. By engaging in thoughtful tax planning, individuals can potentially reduce their tax burden, increase their after-tax income, and allocate more resources toward their financial objectives. It's important to note that tax planning is usually done in conjunction with a Certified Public Accountant (CPA) or other pre-screened financial advisor.

Estate planning - Estate planning involves arranging for the management and distribution of your assets in the event of your incapacity or death. It involves creating legal documents such as wills, trusts, and powers of attorney to ensure that your wishes are carried out and your loved ones are provided for. Estate planning also includes strategies to minimize taxes, avoid probate, and protect assets. Estate planning should be done in conjunction with an estate planning professional.

Guardian can help

Our financial professionals can take a comprehensive look at your needs and help with investments, retirement planning, annuities, and life insurance to help achieve your goals. To find a Guardian financial professional in your area: