You daydream about quitting your job if you won the lottery. The truth is, for most people, accumulating wealth takes time. Getting rich slowly isn’t what most people talk about, but it’s the real path to wealth.
It’s not sexy or exciting — it’s pretty much like watching paint dry. Very few people develop an app they sell for millions of dollars, or make a fortune flipping houses. Most millionaires become that way through diligent saving, investing, and accumulating assets over a long period of time. (Some people become millionaires because they receive an inheritance, but with that comes its own challenges.)
Every new client we work with comes to us at different stages of their financial life. They may be going through a big life change, like a new job or recent move to a city with a different cost of living. Some love organizing their money and prepare detailed spreadsheets. Others want someone to hold their hand, metaphorically speaking, as they untangle their finances.
But here’s what they all have in common: they’re about to start on the path of managing their money, which will allow them to build wealth while staying organized, so they know exactly where their money is going. Here’s a peek into how we set clients up for long-term financial success, with some tips on how you can do this yourself. (If you’d rather work with a financial planner than DIY, we’re here for you!)
The first year: simplifying, streamlining, and automating
Depending on your situation today, taking stock of your assets and debts and developing a money management system that works for you can take around six months to one year. Here we go:
Begin by taking an inventory of where your money is now, and where it goes. There are two documents that can help:
- A net worth statement shows what you own (assets like cash, retirement savings, and your home) minus what you owe (liabilities like student loans, credit card debt, and the remaining balance on your mortgage). You can download a free net worth spreadsheet here.
- A budget or spending plan that shows your income flowing in, and money you spend flowing out. This can help you pinpoint unnecessary expenses and areas for potential savings, like subscriptions you no longer need. We have lots of budgeting tips here.
By listing your assets, debts, and expenses, you’ll more easily identify all of your accounts: checking, savings, retirement, and investment. You’ll also list out all of your loans and credit cards. This can help you begin to streamline. Ask yourself:
- Does this checking account serve me? Is it with a bank that’s located near where I live, or is it still my old account from college or from when I lived at my parents’ house? Am I paying any fees on this account? Could I qualify for an account with features that better match what I need today?
- What amount of interest do I earn with this savings account? Online savings accounts pay more than 2% APY right now, while most accounts offered by traditional brick-and-mortar banks pay less than 0.5% APY. Why earn less when, for ten minutes of effort, you can move your money over and earn much more?
- How am I doing when it comes to saving for retirement? Am I contributing enough to my 401(k) to get the full employer match? Can I afford to contribute more? Do I have any retirement accounts from former jobs that I can transfer into an IRA to lower the number of accounts I have? Am I also contributing to a Roth IRA if I qualify? Am I on track to save 10-20% of my income for retirement?
- What about my non-retirement investments? Do I have a goal for that money? Am I choosing appropriate investments for my time horizon? Am I making thoughtful choices or just following “hot” stock tips? Am I ready to invest in a taxable brokerage account, or should I prioritize paying down debt or maxing out my 401(k) first? Do I have a bunch of investing accounts through apps that I opened and forgot about?
- Am I carrying the right credit cards? Am I still using the no-frills card I’ve carried since college? Would I qualify for a rewards card that would earn cash back or points I can redeem for travel? Would transferring credit card debt to a card that charges no interest for the first year or more be a good way to save on interest while I aggressively pay down my debt?
- Should I refinance my loan? Will that allow me to save on interest, or would I be better off sticking to the loan I currently have?
Once you make adjustments to your accounts and loans (and this can take a few weeks or even a couple of months, by the way!), you can begin to do one of my favorite things that makes money management easier: automate.
Set up periodic automatic contributions from your checking account to savings, retirement, and investment accounts. You can also set up autopay for credit cards and loan payments so you never risk missing a payment again. Just be sure you have enough money in your checking account to avoid overdrafting and paying fees. If you have multiple short-term savings goals (like buying a home in the next year, replacing your old car within two years, or taking a big vacation when you turn 35 in three years), you can even automate money transfers into multiple savings accounts earmarked for each goal.
Here’s the thing: doing all of these things isn’t exactly fun (unless you’re me — I live for this stuff). But by completing these tasks a few at a time over a year, you’ll set yourself up to save more money into the right accounts with less effort.
Checking in and making adjustments
No, you’re not “done.” One of the most important parts of a wealth-building plan is keeping an eye on your money and making changes as needed over time. Depending on your situation, that can mean doing things like:
- Increasing your 401(k) contributions or adjusting your investments as you age.
- Changing the beneficiaries on your account if you get married, divorced, or have children.
- Checking in on your short-term goals to see if you’re on track or can increase your contributions.
- Reassessing your accounts and making sure they still work for you.
- Dealing with financial issues that arise during big life events, like buying a home or receiving an inheritance.
At Gen Y Planning, our motto is “simple first, sexy later.” Building wealth generally isn’t the result of one genius investment or one stroke of good luck. For most people, it’s the result of a series of small decisions over a long period of time, and the careful management of money as you earn it.