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  • Sylvia Singleton, CPA

Thinking You Can't Build Wealth? Here's How

If you have ever heard the expression, “You need money to make money,” I can understand how you might be wondering how you can build wealth when you are a low or middle-income wage earner covering debt and increasing daily living expenses. Many believe that building wealth under these circumstances is impossible, so they never start trying. But this is a misconception; you can build wealth by implementing a few key strategies.

8 Keys to Building Wealth

1. Create and stick to a budget and save as much money as you can each month:

Creating a monthly budget is one of the critical strategies for building wealth. There are many apps available that can be used to create a budget, monitor your spending, and even set alerts for when you are approaching a spending limit you have established for yourself. Some apps are available free of charge, and others range in price. Since the goal is to save as much as possible, I recommend using a free app, an Excel spreadsheet, downloading a fillable budget form, or creating a paper budget in a notebook. You can visit the Federal Trade Commission to download a fillable PDF form at You can also find monthly budget templates provided by Google Docs and Microsoft.

As you work on creating your monthly budget, it is essential to carefully review how you spend your money each month. The key to saving is to identify categories of spending where you can cut back so you can save. The fastest way to start saving is to cut back on entertainment, such as going to the movies or dinner. If you usually eat out at a restaurant once every week of the month, skip a week. Even if you only can start saving fifty dollars a month, it will have an impact. You do not need to save significant amounts of money to start on the path to financial security. The key is to start saving earlier in life rather than later and increase your savings as your income increases, keeping in mind that to meet your savings goal, you must be disciplined.

2. Look for ways to earn extra money, such as working a second job or freelancing:

Earning additional income from a second job or freelance work can be a great short-term option when you have a goal, such as purchasing your first home. Investing in real estate is a wise choice as real estate customarily increases in value. The home you purchase will be an asset in your portfolio, adding to your net worth. The income from the second source of income should be solely used towards accomplishing the goal. If your goal is to purchase a home, you should save the additional income to cover the down payment and closing costs.

You can also consider using some of this income to pay down credit card debt. It is essential to have a good credit score when you are applying for a mortgage, so keep the balance of your credit cards below fifty percent of the limit or lower if possible. When making purchases on a credit card, you should always ask yourself do I really need this? If the answer is yes, ask yourself, can I find a cheaper substitute to save more? Keep in mind that the lower your overall debt, the higher mortgage you will qualify for, which could get you into your preferred neighborhood.

Before starting a second job or freelance work, ensure your current employer’s approval. Some companies do not allow employees to hold outside employment or may have restrictions regarding what types of outside jobs employees can have. Do not jeopardize your primary source of income for a second job.

3. Open an investment account and start investing for the long term:

Instead of placing all your savings in a bank account with a low-interest yield, consider investing for a greater long-term return. Understandably, recent market fluctuations may make you worried about investing. However, if you rely on historical market data to assess the risk of investing, you will discover that market investing is a proven avenue for building wealth, and with a sound investing strategy, you can hedge against some market risk.

If you are wondering whether you should start saving or investing first, the answer depends on whether you have sufficient savings. You should aim to save first if you do not have adequate funds to cover emergencies. Everyone should have enough funds to cover living expenses should a job loss occur. These funds should be liquid enough to be accessed when there is an emergency. The recommendation is to maintain enough cash to cover up to three months of living expenses in the event of lost employment. The number of months can vary depending on the job role. For example, someone in the service industry, such as a server, may be able to find a new job in weeks, while someone in a management position may take several months to find a new role. Thus, you should adjust the amount of savings needed to cover emergencies based on your expectations.

4. Consider starting a small business or side hustle to generate additional income:

Starting a small business or side hustle presents a significant opportunity to generate additional income to help you reach your short-term and long-term financial goals. The focus here, if possible, would be to generate “passive” income, defined here as earning income with minimal effort. This is a set-it-and-earn strategy. For example, if you are a cybersecurity expert, you could create a how-to manual that can be purchased via download, or you can create a course focused on some aspect of cybersecurity that can be sold online to the masses. You can also earn passive income by renting a room in your home or by renting your home occasionally as a vacation rental through a vacation platform such as Airbnb.

Before you start a small business or side hustle, verify that your employer will not deem it to present a conflict of interest. You must consider that your employer may see what you are planning as posing competition or may be concerned that you may share proprietary knowledge inadvertently, in which case your employer would most likely not approve of your venture. Disclosing to your employer what you intend to do will protect your job. Share the details with your employer to ensure management is clear on what you will be doing to avoid future issues. You know your company's culture and leadership best; if anything makes you feel like starting a new venture would risk your current position, do not pursue this option.

5. Take advantage of tax breaks such as tax credits and deductions:

The tax code offers various tax credits that benefit individual taxpayers and businesses. Tax credits serve two primary purposes. One purpose is to allow taxpayers to reduce the amount of income taxes they owe; credits reduce the amount of the tax owed dollar-for-dollar. For example, if you owe $2000 and qualify for a tax credit of $1000, you would only owe the balance of $1000. The second purpose of a tax credit essentially causes the credit to function as a subsidy. For example, a refundable tax credit allows taxpayers to receive a refund of the balance of a credit not used to reduce the tax in the current year. For example, if you owed $1000 and qualified for a tax credit of $2000, you would receive a refund for the balance of $1000 of the credit. Refundable credits mainly aim to provide financial support to taxpayers in lower and middle-income tax brackets.

Even very low-income wage earners, individuals at or below the federal poverty level, can build wealth. The Earned Income Tax Credit is one of the most advantageous refundable tax credits available for very low-income taxpayers. The credit is intended to support those taxpayers at the lowest level of the income scale. There are also many other tax credits available; if you are a lower to middle-income taxpayer, you can claim them on your annual tax returns. For example, there are dependent children-related credits, credit for retirement savings, environmental impact credits, business-related credits, and more.

The goal should be to use the funds available as a result of qualifying for tax credits and deductions to add to savings and investment accounts or towards generating other sources of income.

6. Control credit card spending:

Managing the balances carried on your credit cards will help you save on the interest charges you pay. Credit cards serve an essential role in building our credit history, offer convenience when making purchases, may offer beneficial incentive plans, and can even help in an emergency. However, credit cards can quickly get you into financial trouble and make it challenging to meet your wealth-building goal. If you carry a balance on your credit cards in the hundreds or thousands each month, you are using your available cash to pay significant interest instead of saving or investing it.

Each time you think about making a significant purchase, ask yourself, do I really need this, and if I buy it, can I pay it off in a reasonable amount of time? If delaying the purchase will help you meet a goal, consider delaying it. If you need to make the purchase, plan to pay off the item as soon as possible. Setting a goal to pay off the purchase in a number of months will help you stay on track and reduce the overall amount of interest you are paying.

It is essential to pay attention to the applicable interest rates when selecting credit cards. Some credit cards offer rates as high as thirty percent. When applying for credit cards, look for cards with lower interest rates. It would be best to look for credit cards that do not require annual fees. If a card requires an annual fee but also offers an incentive that can be quantified, compute the maximum benefit you can expect to earn, based on your usage of the card, from the incentives and only apply for the card if the benefit exceeds the amount of the fee. If traveling is a significant factor in your quality of life, an option with free miles will help you save more by reducing future air travel costs. If not, a card with a cashback option would be most advantageous to help you increase your savings.

7. Take advantage of employer-matched contributions to your retirement plan:

One of the most readily available opportunities for building wealth is employer-provided retirement plan benefits. If your employer offers a retirement plan, take advantage of employer-matched contributions. At a minimum, you should contribute to the extent that your employer will match your contribution. When you do not contribute, you are giving up a valuable benefit.

Your company may offer different plan options. For example, you can contribute to a Roth 401k and a tax-deferred 401k plan. These plan types differ in how they are taxed. Contributions you make to a Roth 401k are not tax deductible currently but, upon distributions in retirement, are not subject to income tax. Contributions to a tax-deferred plan reduce your present-year taxable income, so you receive a tax benefit currently, but distributions from the plan upon retirement are taxable. Which plan and how to contribute will be guided by your goals and forecasted financial position in retirement, amongst other factors.

Companies offer other types of employee benefits which can help you build wealth. For example, publicly traded companies may distribute company stock as part of their employee benefits packages or as incentives for meeting performance goals. These stock plans are known as stock options or restricted stock units. There may be different criteria to qualify, but they are all generally tied to the employee's years of employment and performance. Stock-related employee benefits have unique and complex tax reporting requirements, so it is advisable to consult with a financial advisor with tax expertise to plan strategically to minimize your tax exposure when possible.

8. Automate your savings and investments:

Set up automatic transfers to your savings or investment accounts. This is a set-it-and-forget-it approach to building wealth. Setting up automatic transfers will help you stay on track with your financial goals. It also helps get you used to having fewer funds at your disposal, which will help you adjust your spending habits. As time passes, having less cash at your disposal will become less noticeable and, as a result, less psychologically painful. This strategy's most significant benefit is ensuring your money continuously works for you. Albert Einstein referred to compound interest as the eighth wonder of the world. Put simply, the longer you have your money earning a return while reinvesting the periodic returns, the faster you will build your wealth.

In closing, your opportunity to start building wealth does not require magic or a miracle. It is not a mystery for you to solve, and you surely do not need a top-paying job; it only takes strategy and commitment. So, if trying to implement most of the keys noted above is overwhelming, start with one and build. Remember, every major past accomplishment you have met in your life started with you being brave and dedicated enough to take the first step.

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