If you’re someone who’s fully committed to financial planning/wellness, start with yourself by breaking down ways you can build your own wealth. If you can’t put in the time and effort to do it for yourself, how can you create an interest that aligns with your clients?
To start, you must understand that there is no secret formula to get rich quickly. The goal is to break down life-changing habits that can help you develop better financial management skills for a strong financial foundation until retirement. Here’s how you can get started.
Kill Off Bad Debts
First, let’s break down bad debts and good debts to make it easier to direct where your money should go. Putting it simply, good debts are things that will accumulate value over time, such as your small business, a home, or student loans. Bad debts don’t; these are things like a recent vacation, a car, or credit card debt. These types of debt will limit your ability to increase wealth.
Why? Having debt can hurt your financial security. It prevents you from having more free income, starting an emergency fund for a rainy day, and even slowing down the process of contributing to your retirement earlier in life.
It is unrealistic for many to pay off all the debts in one go. The trick is to tell your money where to go instead of wondering where it all went. Here are two of the best ways for you to start decreasing debt.
- The Avalanche Approach: With this method, you want to short your debts based on the highest to lowest interest rates. From there, you’d want to make minimum payments on all of your debts but focus more on the debt with the highest interest rate by paying a bit more than the minimum each month. When the debt with the highest interest rate is paid off, allocate all of that money onto the next debt and so on like an avalanche. This is an excellent strategy because you’re saving more money by paying off the least amount of interest possible when you get to the bottom.
- The Snowball Method: This method is great for working with your brain’s psychology to make paying off debts less overwhelming. Just like with video games, you get positive reinforcements when a task has been completed. The same thing can be applied to paying off money owed by listing your debts by balance from lowest to highest. Like the avalanche approach, you want to pay a minimum amount on all of them; but now, your goal is to add a bit more to the debt with the smallest amount first.
When that’s all paid off, roll the extra cash onto the next debt with the highest balance. This method allows you to celebrate victories early on to keep you motivated. Like upgrading to the next level in a game, your brain will continue to chase for that success even if the levels start to get more challenging.
All of us have made poor financial decisions, and that’s completely normal. We’ve all forgotten about a monthly subscription or spent a bit too much on a meal. But repeatedly spending money on things you don’t need can put you in a hole. Living with a budget may not be fun, but if you want to build wealth while preparing for the future, you’ll need to have your spending under control.
There are plenty of methods to budget your finances from creating a spreadsheet of your expenses to downloading a budgeting app, but if you don’t want to go through the process of assigning a role for every dollar, go ahead and try the 50-30-20 rule. The basic rule is to divide up after-tax income and allocate 50% of your budget to your needs (rent, insurance, and food), 30% to your wants (smartwatch, treadmill, or a lifesize replica of Chewbacca), and 20% to your savings.
Applying the 50-20-30 method, tracking your expenses, and knowing where to minimize spending can be much easier. Now you can fine-tune your expenses without feeling overwhelmed. Once you know how to allocate your money, you can set aside money for savings and invest in your financial future.
Start Investing Early
You don’t need six figures to start investing; all you need is time, patience, and a tiny portion of your income. Set yourself up for an excellent start to investing by putting in as little as $100 – $200 a month into ETFs or Mutual Funds that match the annual growth of the stock market (assume a growth of 7% average per year). The earlier you start, the more money you’ll make over time.
Why does starting time matter more than how much money you invest? Investing early is the key to building financial wealth because the market is only kind to those who play the longest.
Let’s say you started investing $200 per month at the age of 25. By the time you’re 65, you’ll end up with more than $520,000. But wait a bit longer to invest at the age of 35, and you’ll only end up with $245,000 at 65, gaining half as much compared to starting ten years earlier.
You don’t have to dump a large sum of money into the market right away; use what you need to pay off important bills first. Starting small is a significant step, and you can always increase your investment contribution later. Maintaining your $200 contribution per month for 40 years will give you $500,000, but adding a 5% increase per year, you can earn up to $1 million in the same timeframe.
Freelance to Build Income and Skills
Being a Certified Financial Planner is a great career choice for building wealth outside your company or institution. According to research done by Mintlife, 65% of people don’t know how much they spend.
Using your knowledge of financial planning is a great way to help individuals meet their short and long-term financial goals in a market full of people who are lost. By spending your free time working with others, you could start earning an extra $500-$2,000 or more per month.
With the extra money, you can use it to pay off debts quickly, contribute more to your investments, and save up for an emergency fund. On top of bringing in more money, freelancing is a great way to build financial planning knowledge.
Great financial planners strive to learn more about the industry. At the same time, those without an ingrained interest for finance tend to struggle with new information within the industry, separating a good planner from a bad one.
Freelancing will help you stay up to date with what’s new in the industry as you help those with different financial backgrounds.
Practice, Practice, Practice
While there’s no exact formula to build wealth, having a strong foundation in understanding how to budget and spend your money can be a great start to develop strong wealth-building skills. At the end of the day, it’s about creating financial comfort until old age. Give yourself time to understand best practices and grow. With dedication, you can manage your money along with your clients with confidence.
If finance is your thing, getting certain certifications will help you get ahead. Pocket Prep has you covered with study support through the convenience of a mobile app.