The Two Most Important Components of Building Wealth
One of the questions we ask every guest is, “What does wealth mean to you?”
Overwhelmingly, the answers have focused on flexibility and options. It’s all about being able to have enough money to live the kind of life they want.
So far, all our guests have been women.
In addition to co-hosting the podcast, I am an attorney and trust officer on the bank's Wealth Management team, and in my experience, men and women approach money differently. Oftentimes, men are expected to build wealth and focus on the overall number on the balance sheet. Women see money as safety for their family and the luxury of having choices.
Regardless of gender, people from the Midwest don’t like to discuss money openly and often don’t have role models for acquiring and building wealth. As people start climbing the ladder and making more money, they don’t always know what to do to make it work on their behalf, rather than just meet their basic needs.
The Essential Steps to Building Wealth
Jumpstarting your net worth comes down to a couple of key things: mindset and behavior.
First, let’s address mindset. It’s okay to have money! It doesn’t make you greedy or petty or power hungry. Instead, it gives you the opportunity to make an impact on your life and the world around you. One of the concepts we explore on Wealthways and during our conversations with clients is the notion of success, and how it translates to financial decisions.
You have permission to think big and take steps to bring your goals to fruition. However, it does take planning and careful use of your resources. As we say on the podcast, the only way to really grow wealth is by paying attention to it in the first place.
Now let’s talk behavior. This is the tough one. Every time you allow for a little “lifestyle creep,” you reduce your ability to build wealth. Surprisingly, this one can happen with big things – a nicer car or bigger house – or can accumulate little by little with every trip to Target.
Lifestyle creep is sneaky because it’s easy to live within your means by only spending what you make, and feel pretty good about that. However, you are just “maintaining” in that scenario. The only way to actually BUILD wealth is to live BELOW your means and save or invest the difference.
There is no freedom like living below your means. Wherever you are financially, living below your means enables you to get ahead. Through my work over the years, I have had the unique opportunity to get a peek behind the curtain of how my clients manage their money. I’ve got news for you: the people who are enjoying the freedom that wealth provides are usually not the people you expect. They are not spending their money in visible ways, but rather are putting their money toward their long-term goals.
In short, your mindset and your behavior should match and represent your core values for the life you want to live.
Tips & Takeaways
When it comes to wealth management, the following financial goals are considered the first rung on the ladder of building wealth:
- Pay yourself first. Set aside something to save or invest before establishing the rest of your budget. Some people say “spend less than you make,” but I like the connotation and positivity of paying yourself rather than sacrificing.
- Pay off your credit cards in full every month. If you have established credit card debt already, make it a priority to pay it down as quickly as possible.
- Build an emergency fund. If nothing else, 2020 validated the importance of having some cash available to cover unexpected hardships. There is no hard-and-fast rule about how much to maintain in an emergency fund, but getting it started and contributing to it monthly as part of your budget should be part of your plan.
- Maximize your employer match to your retirement fund, if available. And once you have maxed out that opportunity, your goal should be to meet the maximums for all available retirement account options. This likely won’t be possible at first, but continue to raise your contributions each year until you hit that goal.
- Consider ignoring your raise, if you get one. One way to add to your retirement contributions or emergency fund annually is to avoid incorporating your raise into your budget. Think “lifestyle creep.” If you’ve been living adequately on your existing income, then treat your raise like it never happened by immediately having it deducted to a retirement account and watch the magic unfold.
To me, wealth means financial independence. It means I can make decisions based on what I want, rather than what I need. It offers the ability to create a lifestyle I enjoy, but also a lifetime I enjoy.