“Success leaves clues” is one of my favorite quotes. There are wildly successful people who have built wealth from meager, humble beginnings, but not everyone knows how or where to begin to build wealth.
The key to wealth building is knowledge, a reason to join the financial literacy campaign to learn financial concepts and strategies to improves one’s financial quotient. Financial fundamentals are missing from the classrooms in schools or universities, but knowledge is only powerful if you apply it and use it to act.
Here are seven tips to start building wealth in 2022 for you and your family. These are simple tips that are “tried and true” and could improve anyone’s finances.
1. Hire Professional Advisors or Licensed Professionals
It is important to surround yourself with knowledgeable financial professionals. You do not have to be rich to hire an advisor or a licensed financial professional. However, you want to hire the best person that you can afford. Financial professionals can be fee based or they can receive compensation from the financial companies. You can locate a fee-only planner near you at NAPFA.org, the website of the National Association of Personal Financial Advisors. Know that wealthy people are not DIYers when it comes to managing their money. You should not try to do it alone either.
2. Hire Tax Professionals
Tax planning is very crucial to ensure that you are able to reduce the amount of taxes you pay to the government upon the accumulation and distribution of your assets. You should never wait until January 1st of each year to start thinking about your tax returns. Rather, you should take steps throughout the year to lessen the impact of taxes. There are three provisions for taxes: Tax Now, Tax Later or Deferred, and Tax Advantaged. A tax professional who specializes in the mitigation of taxes could help you to avoid costly tax mistakes.
Additionally, you can protect your savings by creating a “giving” plan for your charitable contributions (cash, goods, or both) to qualified organizations throughout the year. The more you give, the more you reduce your income subject to taxes.
3. Learn the Difference Between Asset Location and Asset Allocation
Asset allocation is having a mix of investments such as life insurance, bonds, stocks, and real estate. Rule of thumb is do not put all your eggs in one basket. This provides a balance between the asset classes to reduce risks. However, how you save or invest your cash (stocks, certificate of deposit, life insurance), the types of real estate (commercial, residential, or investment trust) allow you to diversify the type of accounts where you put your money (brokerage, banks, 401K). The type of investments in these varying accounts (tax deferred, tax advantaged) can have a profound effect on long-term gains upon distribution. The federal government may tax gains at an ordinary income tax rate up to 39.6%, capital gain rate up to 20%, or tax free at 0%. It is better to have a mix of investments in different account types to balance asset allocation against asset location and to reduce the impact of taxes while outpacing inflation.
4. Calculate the Costs of Investing
Every fee that you pay means less money in your pocket, The rule of thumb is to look for investments in which the annual fee is less than one percent. Look for hidden fees in the fine print and calculate what your investment would cost over a three-, five-, or ten-year period as unexpected costs and fees could easily subtract from your wealth. According to a study by the National Association of Retirement Plan Participants, more than 50% of workers do not know that they incur fees with their employer sponsored retirement plans. Small fees can cost you tens of thousands of dollars less in retirement.
5. Keep Cash on Hand
Cash still reigns as king, and you should have adequate liquidity to cover your short-term needs. You must discipline yourself to save for a rainy day. Your goal should be to save nine to twelve months of expenses in an emergency fund but not necessarily in a bank. Did you know that mutual funds can serve as emergency fund accounts as you can access your money within 24 – 72 hours? Automate your savings to transfer a set amount of money from your paycheck to your emergency fund every pay period. You can achieve this goal one paycheck at a time.
6. Do not Waste Money
Do not waste your money trying to impress other people who do not know or care about you. You should not care what other people think as long as what you are doing aligns with your values and what matters most to you and your family. Affluent people do not spend their time and money trying to impress others. In fact, they would not have attained their wealth if they spent their hard-earned money to keep up with others.
Living below their means and resisting lifestyle inflation are key secrets of America’s wealthiest individuals, according to the bestselling book, “The Millionaire Next Door.” Forget the Smiths and focus on accumulating wealth in the years to come.
7. Align Spending with Your Goals
Do not waste your resources on things that give no return. You must have goals, smart goals to build wealth. Goals that are specific, measurable, attainable, relevant, and time based. You must know what you want, what you care about, and what is important to you and your family. Where you spend your money is where you give your power.
We all can learn from these tips and apply them in 2022 to spend, save, and invest according to our values and accumulate wealth to pass to another generation. If you want to get started but do not know where or how to begin, contact me, the Money Master, to help you apply these tips for a brighter future.