Building up a strong financial portfolio is an ongoing process for most people. There are few who inherit their wealth. Here are some steps that can help individuals and families develop a great financial situation over time.
Assess Net Worth
It’s hard to know where you’re going if you don’t know where you are. That’s why it’s important for the would-be wealthy to assess where they currently stand. Figuring out net worth is a simple calculation that takes into account assets and liabilities. If there is a higher number on the assets side of the ledger, a person or family has achieved a positive net worth. If the opposite is true, there is a negative net worth.
Pay Off High-Interest Debt
It’s hard to build wealth while holding a massive amount of debt. That’s why it’s important to start tackling high-interest credit card debt. Every dollar that goes toward interest on a credit card is a dollar that cannot go toward buying investments to build wealth. Few people will be able to build real wealth while carrying credit card debt. Paying off a card with an 18-percent rate is like getting an automatic 18-percent return on those dollars.
Invest Through Work
Investing in a work-based plan is a great way to ensure higher returns. Many employers offer matching funds to any dollars saved in a 401(k). A common match is 50 percent on the first 6 percent of an employee’s salary. That provides an immediate 50-percent return on the amount matched. Few investments can reach that return. If possible, it’s a good idea to get as close to saving as much as the IRS allows within work-based retirement plans because of the tax benefits they provide. Those who don’t have access to a work-based plan can still likely save for retirement through a Roth IRA.
Build an Emergency Fund
A lack of available funds for emergencies can lead a person right back into debt. Therefore, most personal finance experts recommend having a hefty emergency fund saved up. The amount that’s recommended varies, but most will encourage their followers to stash between three and six months of expenses. Note that the recommendations are for expenses, not income.
Buy a House
Renting an apartment goes toward building the wealth of the property owner. The purchase of an affordable house will eventually lead to a strong position because real estate falls on the asset side of the ledger. For this reason, a mortgage is effectively a forced savings account. It also has the added benefit of requiring less money than rent after the mortgage gets paid off.
Those who take these steps and avoid debt should be able to improve their finances. Over time, it’s possible to build a strong portfolio with a great deal of diversification. With time and compounding interest, people can see their wealth increase exponentially.