Smart Moves for Building Wealth
One principle remains true when building wealth, no matter where you are in your financial journey: it's always a good time to expand your portfolio. Whether you're just starting or have been investing for years, diversifying your assets is a key strategy for long-term financial success.
In this post, we'll explore the essential steps you can take to build a robust portfolio that will better withstand economic changes and set you up for the future.
1. Start with Homeownership: A Strong Foundation
One of the first steps many people take to build wealth is purchasing a home. While buying property is not the "get rich quick" solution some might hope for, it is an essential long-term asset that can appreciate over time and offer stability.
Owning your home allows you to build equity as property values increase. Additionally, it provides a sense of security-you're no longer subject to rising rents or the uncertainty of a landlord deciding to sell. Plus, when you make mortgage payments, you invest in your future rather than funding someone else's.
2. Invest in Income-Producing Properties
If you're already a homeowner, investing in rental properties is the next logical step to expand your portfolio. Whether it's a single-family home, a multi-family property, or even commercial real estate, owning rental properties allows you to generate passive income. The rent you receive can cover the mortgage, taxes, insurance, and expenses, as well as generate cash flow.
Real estate offers more than just rental income; it also provides the potential for long-term property appreciation. If you're looking for a more hands-off approach, you could consider hiring a property manager to handle the day-to-day tasks. Then, as your portfolio grows, consider reinvesting your rental income into additional properties.
3. Stock Market Investments: Growth and Liquidity
The stock market offers an entirely different investment method, with the potential for higher returns and more risk, depending on your investment goals. By purchasing company shares, you're essentially becoming a part-owner and can benefit from the company's growth through dividends and capital appreciation.
If you're new to investing, consider starting with index funds or ETFs (exchange-traded funds), which allow you to invest in various companies across various sectors. This diversification reduces your risk and offers steady growth over time.
4. Maximize Retirement Accounts
Investing in retirement accounts is one of the smartest ways to expand your portfolio. Whether it is 401(k), IRA, or Roth IRA, these accounts offer tax advantages that can help you grow your wealth with minimal tax impact.
- 401(k): If your employer offers a 401(k) with a match, be sure to contribute enough to take full advantage of that "free" money. Even if your employer doesn't offer a match, contributing to your 401(k) still allows for tax-deferred growth.
- IRA (Individual Retirement Account): An IRA can greatly supplement your 401(k) and provide additional tax advantages. Traditional IRAs offer tax-deductible contributions, while Roth IRAs provide tax-free withdrawals in retirement.
By contributing regularly to retirement accounts, you prepare for your future and take advantage of compound growth, one of the most powerful wealth-building tools. Aim to maximize contributions whenever possible, which can significantly enhance your retirement savings.
5. Save a Bit Out of Every Paycheck
You don't have to wait to make a fortune to build your portfolio. One of the most important habits to develop is saving a portion of your paycheck each month. The key is consistency, whether 10%, 20%, or a smaller amount.
Setting up automatic contributions to your investment accounts can make this process painless. By "paying yourself first," you ensure that you consistently put money toward your future rather than just spending it all. Over time, these savings will compound and contribute to the growth of your portfolio.
6. Understand How to Shelter Your Money: Talk to Professionals
One aspect of expanding your portfolio that many people overlook is tax efficiency. While saving and investing are essential, it's just as crucial to shelter your money from unnecessary taxes. Various strategies can help you minimize your tax burden, which means more money working for you in the long run.
Here are a few ways to shelter your money:
- Max out retirement accounts: Contributing to retirement accounts like a 401(k) or IRA can help lower your taxable income now, allowing your investments to grow tax-deferred until retirement.
- Tax-advantaged accounts: Besides retirement accounts, you might consider opening a Health Savings Account (HSA), which offers triple tax advantages (tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses).
- Capital gains strategies: If you hold investments for at least a year before selling, you'll pay a lower capital gains tax rate on any profits. This simple strategy can make a significant difference in how much you owe the IRS.
It's also worth talking to your accountant or financial advisor about tax strategies specific to your situation. They can help you structure your investments to minimize taxes while maximizing returns.
Next Steps: Hire a Financial Advisor
No matter where you are in your financial journey, getting an expert on your side is worth it. I highly recommend Adam Mohr, Managing Partner of River Prairie Wealth Partners, who won the Forbes Best-in-State Wealth Advisors Award in 2024.