Everyone wants to have some level of wealth to retire. Whether it is to live comfortably or not having to worry about every dime they spend. To achieve this goal, you must start with a steady income, understand how money works, and live within or below your means. You should reduce and/or eliminate debt and then save and invest. These points are all good. However, they do not explain how to build wealth from nothing by Investing?
Income To Build Wealth
You are going to need some form of income to build wealth. Your income must at some point begin to work for you. This is in the form of compounding interest or by purchasing something you can later sell for a profit i.e., real estate. However, before you get started you must become financially literate.
Financially Literate Is How To Build Wealth From Nothing
You must learn how money, interest, savings, and debt all work towards moving you towards growing wealth or taking you away from generating wealth. Interest from savings generates wealth. While interest from debt reduces wealth. Your goal should be to remove as much debt from your budget as possible. To learn more about this topic read Financial Literacy For Beginners – 5 Basic components. Learning about finances is how you build wealth from nothing by investing.
Then, read all you can about finances. I suggest these 4 books to start:
Rich Dad Poor Dad By Robert T. Kiyosaki
The Richest Man in Babylon By George S. Clason
The Simple Path to Wealth By JL Collins
The Total Money Makeover By Dave Ramsey
You do not need to read them in any particular order.
How to Build Wealth from Nothing by Investing with Additional Income Sources
In addition to having a steady income, you should also explore additional sources of income. Side hustles, second jobs, and/or gig work are great sources for supplementing income. These are active forms of income. However, I believe passive forms of income should also always be explored. Many online jobs such as eCommerce, selling online courses, using affiliate networks while blogging, and/or using social media, are examples of passive incomes. All can generate income while you sleep. However, these forms of income do take a while to get started and require a great deal of time and effort in the beginning. Now let’s talk about how to create a budget and track spending. The next step towards learning how to build wealth from nothing by investing.
Create a Budget
A budget is a great way to see how your income and your expenses stack up. A budget gives you a visual view of if you are living within your means or are if you living for the Jones or just working to make ends meet. If you need help with creating a budget, here are two resources you can use to create a quick budget. Here is my free pen and paper version of my free Budget Planner or the Google Docs link to help you create a budget using a spreadsheet.
Also, here are some digital apps to teach you how to budget by following their step-by-step guidelines during the set-up process. Check out EveryDollar.com (Free), YNAB (Fee), Pocket Guard (Free), Marcus (Free), and Good Budget (Free).
Track Your Spending
Your budget will answer these basic questions.
Where is your money going?
How much is going towards debt?
Are you saving enough?
Is there any money available for investing?
Where are you spending your money?
This is the big one to track. Spending can take away from saving, investments, and debt. Getting a handle on your spending and debt is the first step toward freeing up money for saving and investing. We must all learn to stop spending money on things that do not count towards building wealth. Get your mind on your money. To learn more about why your mind should be on your money read Mind Over Money Budget. It will show you how some mindless purchases prevent your money from working for you. Hence, you are not building wealth. Once you have a budget it is time to work on removing debt and creating an emergency fund.
Build An Emergency Fund And Sinking Funds
An emergency fund will always give you some breathing room to take care of the unexpected. A sinking fund is to save for those expected expenses like a vacation, special holidays and events, or special gifts for yourself and others. Both types of saving accounts are essential to your financial well-being. Start by saving $500 to $1,000.00 This will give you a little breathing room. Then continue to a fully funded Emergency Fund with 3 -6 months of living expenses. Let’s review three types of savings accounts.
Types of Savings Accounts
The three types of savings accounts are regular deposits, money markets, and CDs. Each one works a little differently regarding accessibility and amount of interest. For the regular deposit, I prefer a high-interest savings account. They give you more bang for your buck than just a regular savings account with higher interest rates. It is insured by the FDIC and there is no risk of losing your savings.
Most money market accounts pay a higher interest rate than regular passbook savings accounts and often include check writing and debit card privileges. They also come with restrictions that make them less flexible than a regular checking account, per Investopedia.com. A certain amount is needed to open the account and the balance on the account must be above a certain level. It is insured by the FDIC for up to $250,000 or $500,000 for joint accounts.
CDs are a Certificate of Deposit. A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest per Investor.gov. It is insured by the FDIC for up to $250,000.
Once your savings for Emergency Fund and Sinking funds have been established now think about investing.
How can I build wealth from nothing and not lose it all by investing?
If you are not ready to take the plunge into the risky world of investing in stocks, mutual funds, etc. Here are some additional low-risk investment properties to consider. Please research and review each of these properties with a trusted financial advisor:
- Series I savings bonds are a low-risk savings product. During their lifetime they earn interest and are protected from inflation.
- Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value.
- Notes sometimes called T-Notes, earn a fixed rate of interest every six months until maturity. Notes are issued in terms of 2, 3, 5, 7, and 10 years.
- Bonds pay a fixed rate of interest every six months until they mature. They are issued in a term of 20 years or 30 years.
- Treasury Inflation-Protection Securities (TIPS) protect against inflation. The principle of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.
- Corporate bonds are a loan to a company for a predetermined period. In return, the company agrees to pay interest (typically twice per year) and then repay the face value of the bond once it matures.
What is the biggest problem with building wealth from nothing by investing?
One of the biggest problems that most people face is having enough available funds to invest. New investors are mostly youngsters and people unaware of how this ecosystem works. This is only compounded when the cost to invest prohibits entry into these financial products. Earmarking at least 10-15% of your gross income is the benchmark for saving and investing. Taking this amount off the top of your income may seem prohibitive to most but it can be done. However, creating a budget and paying down debt will afford you the best opportunity to invest. Let’s first review the types of financial properties you can invest in.
“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”Warren Buffet
Types of Investments
Stocks are an investment in a specific company. When you purchase stock, you are buying a small share of that company.
Mutual Funds allow you to purchase many investment properties in a single transaction. Funds are acquired from many investors that a professional manage by investing the money in stocks, bonds, or other assets.
Index funds are a type of mutual fund that tracks an index rather than paying a manager to choose investments. For instance, an S&P 500 index fund will attempt to mirror the performance of the S&P 500 by holding stocks of the companies within that index.
ETFs are Exchange-traded funds and are a type of Index fund. They track a benchmark index and aim to mirror that index’s performance. They tend to be cheaper than mutual funds because they are not managed by a professional
Options are a contract to buy or sell a stock at a set price by a set date. You are not obligated to buy or sell, doing so is an option. Most options contracts are for 100 shares of stock. When you buy an option, you are buying the contract, not the stock itself.
Annuities are long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income.
Individual Retirement Account (IRA) An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.
Saving for Education in a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
How do you invest?
The easiest way to begin investing is to join the 401k plans offered by your employer. It has the easiest point of entry. The lowest hanging fruit on the tree. Whenever I started a new job that offered a 401k, I would first check for a matching contribution.
Typically, most companies match 50 cents on the dollar, up to 6% of an employee’s salary. So, start at the lowest amount you think you can afford after you see your first paycheck. Start with 1% and increase it each week, each month, each quarter, or each year until you reach your company’s match. Or you can just jump right in and contribute the full company match and continue to increase until you reach 10 to 15% of your salary. Especially, if you receive any raises throughout the year. Make a habit of earmarking 1 or 2% or more of your raise to your 401k.
Once your 401k is fully funded begin to consider other options. For instance, begin to research other investment options that match your risk tolerance (stocks, bonds, mutual funds, real estate).
Is a 6% rate of return good?
If you’re estimating how much your stock-market investment will return over time, it is suggested to use an average annual return of 6%. Understand that you’ll experience down years as well as up years. However, it is a good benchmark for most investments.
Steps to take when reviewing your ROI and risk appetite
- Give your money a goal. For instance, at least 6% Return on Investment (ROI)
- Decide how much you can afford to invest
- Pick an investment account based on an investment strategy
- Make sure to choose investments that match your short-term vs. long-term goals, active vs. passive investments, and your overall tolerance for risk.
Here are six types of investments that are well-suited for beginner investors
- 401(k) or employer retirement plan. (See information above)
- A Robo-advisor. Robo-advisors provide financial planning services through automated algorithms with no human intervention. They are online or use mobile apps. I talk more about apps below.
- Target-date mutual fund. Helps to manage investment risks by targeting your anticipated retirement date. As you move towards your retirement date this fund will gradually adjust risk by changing the investments within the fund.
- Index funds. An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index, such as the S&P 500.
- Exchange-traded funds (ETFs) are a basket of securities. EFT shares are sold on an exchange. EFTs like individual stocks are traded throughout the day at prices that change based on supply and demand. ETF shares represent partial ownership of a portfolio that’s assembled by professional managers similar to mutual funds.
- Investment apps – Financial technology that enables investors to trade on their phones. It is a low-cost, mobile-friendly investment platform.
More on Investment Apps
Per USNews.com here are the 8 Best Investment Apps
Acorn: Best for investing with little money: – Fees $3 or $5, depending on account type. Account Minimum: None
Stash: Best for beginners Fees: $1, $3, or $9, depending on account type. Account Minimum: $5
Robinhood: Best for low costs – Fees: None. Account Minimum: None
TD Ameritrade: Best for investor selection – Fees: None. Account Minimum: None
E-Trade: Best for investment selection – Fees: None. Account Minimum: None
Betterment: Best for socially responsible investing – Fees: annual fee of 0.25%. Account Minimum: None
Public.com: Best for community-oriented investing – Fees: None. Account Minimum: None
Wealthfront: Best for automated investing – Fees: 0.25% per year. Account Minimum: $500
Above all, you should research and review each of the listed options for the best one suited for your investment needs.
Consult a trusted advisor or use a Robo-advisor
We consulted a trusted professional to rollover funds and for other investment properties. You should find someone that knows more than you about investing yet is responsive to your personal financial goals. Another option is a Robo-advisor. What exactly is this? Per Investopedia, Robo-advisors (also spelled Robo-adviser or Robo advisor) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. There are currently hundreds of Robo-advisors to choose from. See the listing above under Investment Apps for a list of mobile Robo-advisor. A few also have an online platform as well. Choose whichever you feel comfortable with. This is how to build wealth from nothing by investing.
When should you begin to Build Wealth from Nothing?
Start investing as early as you can because compounding interest is your friend. Most people work at least 40 years and that is a lot of time for compounding interest to work. It is enough time to become a millionaire investing in just index funds. In conclusion, investing is a long-term goal and involves lesser risk, while trading is short-term and involves high risk. Similarly, both earn profits, but traders frequently earn more profit compared to investors when they make the right decisions, and the market is performing accordingly.
What Are Some Common Investing Mistakes?
Investing can be overwhelming at times. Invest in only what you can understand at the time. Here are some common mistakes to avoid when you are learning how to build wealth from nothing by investing.
- Not doing enough research
- Failing to diversify enough
- Not starting as soon as possible
- Not having clear investment goals
- Buying high and selling low
- Trading too much and too often
- Not committing to your goals
- Paying too much in fees and commissions
- Focusing too much on taxes
- Not investing enough
- Expecting too much or using someone else’s expectations
- Focusing on the wrong kind of performance
Social Security and Building wealth by Investing
Social Security will still be available even if we only receive three-quarters of your promised benefits. However, this is the worst-case scenario. Today, pensions no longer exist for many Millennials, Generation Z, Generation X, and the last of the Boomers. My husband and I certainly did not have one we are Gen X and part of the last of the Boomers. Hence, we made a point of investing in our company’s 401k as early as we could. Similarly, whenever we lost our jobs, we just rolled over the funds into another financial product to continue our investing. It is not easy to learn how to build wealth from nothing by investing because it takes time, commitment, and a vision for your future.
Please research each of these different savings and investment properties. This blog in no way advocates how you should invest your money. It simply offers information for you to continue to research the best options for you and your family. Good luck and I hope you found this information educational and informative. This should answer most of your questions on How to Build Wealth From Nothing By Investing.
I did not discuss investing in Cryptocurrency or real estate in this blog in any depth. I believe each requires a blog of its own.
Here are additional resources:
Let’s Budget, Spend, and Live!