According to a UBS Investor Watch survey, Americans define “wealth” as having no financial constraints on activities. While no one can agree on how much money actually makes you rich—the definition changes with a person’s income—data from the IRS shows that the top 1 percent of income earners have adjusted gross incomes (AGI) of $388,905 or more.
Data from the Federal Reserve shows that the top 10 percent of income earners—families that made more than $154,600 in 2013—have a median net worth of $1.13 million.
However you define it, creating wealth won’t happen by accident. If you’re like most people, you have to work at your finances in order to build your net worth.
Here are five things that may be holding you back:
1. You spend more than you earn.
In order to build your fortune, you need to earn more than you spend. Living beyond your means will keep you in debt and prevent wealth more effectively than just about anything else.
This doesn’t mean that you have to live a super-frugal life. It means you’ll need to be creative about finding ways to earn more. Many wealthy people have multiple streams of income, and some even have their own side businesses.
2. You don’t know the difference between consumer debt and other debt.
It’s easy to say that all debt is bad and then vow never to have debt again. However, that’s not how the wealthy think. While the truly rich don’t take on debt they can’t afford, often they do take on some debt. For example, many millionaires take out mortgages on their homes or borrow money to start businesses.
There are certain types of debt that, when used judiciously, can result in net gains down the road. But consumer debt, such credit cards, expensive car loans, and other high-interest fast-money loans, is another story. Consumer debt with a high interest rate taps your resources, doesn’t offer a tax deduction, and keeps you from building wealth.
3. You’re not investing.
One of the most effective ways to build wealth over time is to save money and invest it. Investing allows you to leverage your assets and enjoy better returns. The good news is that you don’t need a lot of money to invest. You can open a brokerage account with $25 and start investing in index funds. While there are risks associated with any investment, in the stock market as a whole has yet to lose over the long term. Consistently investing in the entire market, with the help of low-cost index funds, can be a good way to build wealth over the course of two or three decades.
4. You aren’t planning ahead.
In order to create and maintain wealth, you need to have a plan for your money. This plan should include short-term and long-term financial goals. Rather than mindlessly spending, you need to figure out what’s most important to you. The wealthy have priorities, and they have holistic plans that help them achieve their important goals. When your money has a purpose, you’ll be less likely to waste it on things that don’t matter and more likely to find ways to put it to good use.
5. You don’t take charge of your finances.
Even if you are struggling, it’s possible for you to make a plan and begin improving your financial situation. A business professor of mine once said that someone with a good money mindset could lose everything in an unexpected catastrophe, be down to $100, and still find a way to make that money grow. On the other hand, there are people who win the lottery and find themselves, five years later, broke and in debt because they don’t understand how money works.
Take charge of your finances. You might be surprised at what you can accomplish.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the author of Confessions of a Professional Blogger: How I Make Money as an Online Writer and the writer behind PlantingMoneySeeds.com.
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