Building wealth is the process of accumulating, keeping and growing your assets. Assets can include your cold hard cash, but they are more than that.
They include real estate, like your home. They include financial securities like stocks, bonds, currencies, commodities and options. They can even include valuable alternative investments like works of art, fine jewelry and collectibles.
Building wealth isn’t something you do for a short stretch of time. Building wealth is an entire approach to living. It is a lifestyle and you need wealth-building strategies in order to do it. By building wealth, you can eventually reach the goal of achieving true financial freedom.
Let’s take a closer look at what it means to build wealth.
Earning Income vs. Building Wealth
Oftentimes, people get confused between earning income and building wealth. You may hear that a person makes $1 million per year in salary and think that this person must be wealthy. But you might be wrong.
Income is an essential part of building wealth. But it is not identical with it. That is because income becomes wealth only if you preserve and grow what you earn.
In other words, making money helps only if you don’t spend all the money you are making. If you earn $1 million dollars but spend $1 million dollars, you are left with nothing. You have no wealth generated.
But if you earn $1 million dollars and spend only $100,000 of it, now you have a nest egg. You now have $900,000, which you can save in a bank account (not highly recommended) or invest (highly recommended).
How Much Wealth Do Americans Have?
So far we have mentioned income, saving, investing and spending. These are all key components of building wealth.
But there’s another essential factor that we have not yet touched on: debt. Debt is money owed to someone else. That means that when you have a substantial amount of debt, some of the assets you “own” do not really belong to you.
Let’s say you have a savings account with $100,000 in it. But you also have total outstanding credit card debt totaling $15,000. This is a substantial amount of credit card debt.
In reality, your wealth here isn’t equal to the $100,000. Instead, your wealth is actually what you have left after you subtract the credit card debt from the assets and savings.
In other words, your true wealth here is:
$100,000 – $15,000 = $85,000
This number is known as your net worth. And net worth is equal to the sum of your assets minus the sum of your liabilities (debt).
What Is the Net Worth of the Average American?
Now, there are two ways to figure out the average net worth of American households. You can look at the mean. Or you can look at the median.
The mean is what most people think of when they think of an average. It’s the total net worth of all American households divided by the number of American households.
The mean net worth of all American households as reported by the Federal Reserve is $692,100. This may sound shockingly high to you.
Do half of all households in the United States really have a net worth of that much when adding up all assets and subtracting out all debt?
The answer, actually, is no. They do not. That’s why it may be even more enlightening to look at the median value of all U.S. households. This can give us a better idea of what most people are worth.
The median wealth of the United States per household is $97,300. This probably sounds much more realistic to you.
What accounts for the difference between mean and median net worth? The mean is so much higher because it includes millionaires and billionaires in its simple average calculation. This rockets the simple average higher.
But the median net worth is not affected in the same way. It simply shows that half of all U.S. households have more than $93,700 in value. It doesn’t indicate how much more.
So let’s now turn to the question of how to actually build wealth.
How to Build Wealth
Building substantial wealth is not easy. It takes time, dedication and patience. But it is possible to amass significant wealth if you apply some grit and determination and stick to these basic keys to building wealth.
In order to build wealth, you need to tackle all three of the following: income, debt and investing. Otherwise, it will be nearly impossible to do.
Let’s go through each one of these components of how to build wealth:
Increasing your income is the starting point for building wealth. This, of course, starts with having a full-time occupation.
It’s not easy to increase the wages or salary of your current job. One way to do so is to look for an internal promotion. Another way is to look for a job with another employer. The latter can often lead to bigger gains.
But income doesn’t begin and end with your primary job. You have other options as well:
- Get a Side Hustle – It’s easier than ever to have a side hustle in addition to your primary job. The gig economy allows you to work as a ride-sharing driver or a food delivery person. You can find marketing jobs on the internet. You can perform services like dog walking or house sitting. There are truly endless possibilities these days.
- Collect Passive Income – Passive income is another great way to boost your pay. There is overlap here with investing. But instead of active stock trading, you are collecting money from things like stock dividends, bond interest payments and real estate mortgage payments.
- Work From Home – Many side hustles can be done right from home. You also do not have to leave home to collect passive income. There are many different methods you can use to make money from home. Some of these include offering home day care services, filling out online surveys or selling your arts, crafts and prints.
As you can see, there are many moneymaking opportunities out there. But making money is only the first step of the equation. You also have to keep your money. And you can do this through a combination of saving and spending.
Debt can be a major stumbling block to building wealth. The overall household debt for the United States stands at more than $13.67 trillion. The typical American household carries an average debt of $137,063.
There are many different forms of debt that people carry, including…
- Student loans
- Auto loans
- Personal loans
- Credit card debt…
And more. Some debt can be considered “good” debt – such as mortgages. And some is considered “bad” debt, like credit cards (when you don’t pay them off each month). But dismissing all credit card debt as “bad” is simplistic. We weigh the pros and cons of credit card debt here.
But whether your debt is considered good or bad, increasing your net worth is largely dependent on decreasing or eliminating these liabilities.
Paying off debt can be a slow process. But it doesn’t have to be. In this article, we lay out the steps for how you can pay off your debt fast.
Which debt should you start paying off first? That depends on your mindset and the kinds of outstanding debt you have.
For example, you could use the snowball method to pay off your smallest balances first. The snowball method works because you will pay off small balances faster. This leads to psychological wins that help motivate you to keep going. Eventually you will pay off your larger balances as well.
There’s a secret you should know. If you want to build wealth, boosting your income helps. Paying off your debt is necessary. But do you want to know the real key to building wealth?
You can’t build real wealth without investing. Because investing your money is the only component of this equation that results in significant compound returns.
When you make an investment, you earn a certain return on your money. It could be 3%. It could be 13%. Or it could be even more.
Let’s say you earned 10% per year on $1,000 you invested and your interest was compounded annually. You’d have a return on your investment of $100 that year. That would put your new total at $1,100.
Now, the fact that your investment is compounding means you earn a return not just on the principal you originally invested, but on the return you earned, too.
Due to this compounding effect, after 10 years, you’d have $2,593. And after 30 years, you’d have $17,449.
Now, if you invested $100,000 instead of just $1,000, the difference would be even more significant. After 10 years at 10%, you’d have $259,374. After 30 years? $1,744,940.
In other words, you’d be a millionaire without having added a dime of income to the pot aside from the actual returns on your investment. See the power of compounding?
That’s why investing becomes such a key to building wealth throughout your life.
Concluding Thoughts on Building Wealth
Building wealth is a lifelong process, and it is not easy. But everyone can do it. If you’re looking for more information, check out these additional articles on the best ways to build wealth by each decade of your life:
If you’re interested in seriously building wealth so that you can truly achieve financial freedom, I strongly suggest signing up to our free Investment U eletter by entering your email address in the subscription box below.
Read Next: How to Build Wealth at Any Stage of Life
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.