Hardly anyone likes to call themselves rich. Even some multimillionaires will say they're "upper middle class." But many of us would like to get rich, or at least wealthy enough to where we don't need to worry about money.
This isn't easy to do, but it's possible if you follow the right strategy: Invest consistently and increase the amount you invest regularly. Here's a step-by-step look at how to do it.
How to build wealth through investing
When done correctly, investing is the most powerful way to build wealth. The stock market's annual return is about 10% per year on average (over several decades). If you invest $500 per month at an 8% annual return (to be conservative), then after 40 years, you'll have $1.68 million.
The challenging part is doing it correctly. Some people only invest sporadically, so they end up making a lot less money. Or they invest in high-risk ventures, such as options or crypto, to try and speed up the process. You don't need to swing for the fences. It's all about consistently taking a few simple actions.
Invest a percentage of your income
Start by deciding how much of your income you can afford to invest every month. If you already have money saved that you'd like to invest, you can do that, too. Just keep in mind that you'll get the best results if you invest regularly.
A popular starting point is 10% of your income. If you make $6,000 per month, then you'd invest $600. If you need to do less, such as 5%, that's fine. What's important is getting into the habit of investing. And if you want to do more, you'll get even better results.
See what works with your income and your financial situation. If your employer offers a 401(k) plan, try to at least max out any contribution match it offers. This is as close as it gets to free money, so it makes sense to take full advantage.
Make your investments automatic
One of the best money moves you can make is automating as much as possible. It saves you time and helps ensure you follow through on the financial habits you're trying to build.
If you need to manually invest $600 per month, you might decide to skip it every now and then because you'd rather use that money elsewhere. If that money is getting invested automatically, it's a lot more likely that there won't be any interruptions.
With a 401(k), this is done for you, as your contributions will come right out of your paycheck. That's not the case with individual retirement accounts (IRAs) and regular brokerage accounts, but you can still set up automatic investments with both of these. All the best online stock brokers give you this option.
Increase the amount you invest every year
This is the secret to building wealth much more quickly. It has worked for me, and I recommend it to everyone. Don't just invest the exact same amount year after year. Aim to bump up your investments. There are a few ways to do this:
- Increase the percentage of your income you invest: If you invested 10% of your income last year, raise that to 11% this year, 12% next year, and so on.
- Increase your income: Seek out opportunities to get a raise at work, launch a side business, or apply for higher-paying jobs. If your income goes from $6,000 to $7,000 per month, then a 10% investment would go from $600 to $700.
- Both of the above: The best option is to do both. Increase the percentage of your income that you invest and pursue opportunities to raise your income.
Where to invest your money
Your investment options will depend on the type of account you're using. For example, if you have a 401(k), the plan administrator determines what you can invest in. Most 401(k)s have mutual funds and target-date funds. With IRAs and brokerage accounts, you can make any type of investment you want.
One convenient option is to simply put your money in a target-date fund. These are designed with a retirement year in mind, so they essentially do all the work for you. If you want to retire in 2055, you just invest in a 2055 target-date fund, and you're good to go.
You could also invest in an index fund that follows the entire stock market. That's what I do, and it means your portfolio will follow the performance of the stock market as a whole. As mentioned earlier, the stock market goes up by about 10% per year on average, although it does have its good years and bad years.
Whatever investments you choose, remember that you won't get rich overnight. Very few people do. But if you make investing a habit and gradually invest more and more, it can deliver incredible results.
