Do you want to be rich? According to CNBC, six in ten adults say they want to become a billionaire one day, and 44% of U.S. adults believe that they have the available tools to become billionaires. However, digging into the numbers, the picture of an even playing field becomes bleaker. The top 1% of Americans owned a record 32.3% of the nation’s wealth [2021]. This wealth gap is growing every year, despite record numbers of Americans demonstrating frugality and DIY culture.
Frugality is not working. This is because you can only cut your spending by so much, and you’re always going to have expenses like rent and food. Indeed, major expenses like housing, transportation, taxes, and food make up 78% of the average budget. Instead, consumers should focus on building their wealth by earning more money. You can earn more money in a few different ways, like negotiating your salary every year, switching to a more profitable industry, or starting a side hustle.
In addition to earning more money, consumers should shift their focus toward investing. Investing is one of the only ways to build real wealth that can last generations. Check out the following steps to get started and boost your future financial legacy:
Instead of immediately investing, you should tackle two financial issues:
- Pay off high-interest debt. If you do not pay off high-interest debt, your losses will negate any gains you make on your investments. High-interest debt may include credit card debt – which has seen the biggest jump in 2022 over 20 years with a 15% year-over-year rise, averaging $5,221 in 2021. Not only are credit card amounts going up, but the average credit card’s interest rate is the highest it’s been since the Fed started tracking it in 1994 (4), with those who are carrying a balance seeing an average APR of 18.43%.
- Build an emergency fund. You should have at least three months of living expenses saved up. This is so that if you lost your job or if an unexpected issue were to occur, you could survive financially. Unfortunately, having this amount in savings is improbable. For instance, according to a CNBC report, 56% of Americans are unable to cover an unexpected $1,000 bill with savings. This is much less than three months of living expenses. Part of the reason that saving is more difficult is that higher costs – due to inflation – are keeping families from saving more.
After these two financial issues are tackled, try the following routes toward becoming an investor:
- Enroll in your employer’s retirement plan. In 2022, the typical American company matches 6% of employee contributions. That means if you contribute 6% of your salary towards your retirement (typically a 401k), your company will match your contribution, totaling 12% of your salary. This can be a good chunk of change! Talk to your HR team about maximizing your contributions.
- Open an IRA independently – Even though employer-sponsored 401(k)s can be great, opening an IRA can have amazing tax benefits and really build your wealth over the long term. Particularly advantageous is the Roth IRA. Roth IRAs allow you to contribute after-tax dollars so that your money grows tax-free. In this account, you can make penalty-free withdrawals after age 59.5. Your eligibility to contribute to a Roth IRA is based on your income level. If you are a single filer making under $138,000, married filing jointly making under $218,000, or married filing separately making $0, you can contribute $6,500 per year in 2023 if you are under 50 years old, or $7,500 per year if you are 50 years old or older.
- Invest in the Real Estate market – There are several ways to get involved in the U.S. real estate market. These ways can add diversification to your portfolio
- Buy REITs – Also known as real estate investment trusts, REITs allow you to invest in real estate without the physical real estate. Essentially, the REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders. Mortgage REITs don’t own real estate, but finance real estate, instead. These REITs earn income from the interest on their investments.
- Invest in rental properties – To invest in rental properties you can either “house hack” or manage it yourself. If you “house hack,” you occupy (live in) your investment property and you also rent out rooms or rent out units. What is unique about this arrangement is that investors can buy a property with up to four units and still qualify for a residential loan. Of course, you can also purchase and rent out an entire investment property, but you may need to hire a property manager if you don’t want to deal with the day-to-day.
- Consider flipping houses – Although there can be a large upside, as shown on HGTV, the risk lies in knowing exactly how much the repairs are going to cost and being able to turn the property over quickly.
- Rent out a room – This is one of the most accessible options. In this case, if you’ve got a spare room, you can rent it. Consider platforms like Airbnb or Craigslist and be sure to outline the rules of occupancy clearly to the tenants.
Hopefully, this article showed you that you should spend your excess cash in smart ways, not just frugal ways! First, you should pay off high-interest debt and build an emergency fund. Then, you should immediately start focusing on how you can maximize your investment potential. You may not become a billionaire, like 44% of Americans believe they can achieve with their available tools, but you can at least set yourself and your family up for long-term financial success.