As a football mom, I watched my son, Tyler, and his high school teammates win games playing offense and defense strategies. Tyler mostly played defense but occasionally was put into an offense position to provide him with a different perspective. Although it is difficult to watch your kids get hammered into the ground, it was mesmerizing how the team used their extraordinary energy, determination, and drive to win every game.
If your financial goal is building wealth, this post is for you. Like in football, to attain your goals, you need to have a high level of conviction to turn your sights on making a reasonably high income, building assets, and keeping your liabilities manageable.
You will better tackle any hurdles you face to build wealth by playing offense and defense strategies. There are always sacrifices and trade-offs to make to succeed in your goals. For example, should I use my savings to pay off debt or invest more money? Your motivation should move you towards your goals.
Building wealth is achievable from a modest beginning. That is my story, and it is not as unique as you think. We believe it is possible to build wealth even if you come from modest means when you apply offensive and defensive plays early in your life to accomplish your goals. It takes hard work, perseverance, and courage with a bit of luck to succeed by turning losses into wins.
Table of Contents
How To Build Wealth With Offensive Strategies In Place
Offensive plays tend to get all the attention, but you can quickly lose the game without a strong defense. Let’s start with offensive strategies.
Offensive plays –running plays, handing the ball to another player, like allocating savings to investing or a passing play covers more ground, investing in stocks for growth.
You are a significant driver of wealth and building assets, and it begins with you. The first thing you need to do is earn and increase your income, investing your time, energy, and drive.
1. Getting An Excellent Education
Depending on your starting point, you can strengthen your path to wealth by getting a good education in a desirable career with a high-income potential. Making a reasonably high income that you manage well can provide you with a comfortable lifestyle.
Managing your money is an essential part of defensive strategies that go in tandem with offensive moves.
To build wealth, you need to grow your income and your assets. It starts with getting an education in a desirable field that can propel you in your career, becoming a significant asset.
My career on Wall Street was a significant asset for me despite going to public college and graduate school. I always grabbed whatever training I could to better myself, and eventually, I went to law school and added more skills.
Whatever you choose as your direction, be it physician, attorney, accountant, or entrepreneur as examples, your academic schools are your starting point. However, what you do with your degrees, character, experience, and picking up essential hard and soft skills matters to prospective employers.
2. Get A High Income
With a solid academic background, excellent high-income skills, you won’t have to settle for the median income of $67,521 for US households in 2020. Most importantly, find a career you will enjoy, sink your teeth in, and have advancement potential. Look for training opportunities and the ability to pick up a few high-income skills.
Boost your income by increasing your value to the firm, maximizing your income with raises, promotions, or bonuses. Alternatively, you should consider switching firms if you are not getting the compensation you feel you deserve.
3. Negotiating Skills
There are times you will wonder and ask, “Am I paid fairly?” If you are productive at work, have excellent performance reviews, and have more responsibilities, but your salary hasn’t moved, that’s a sign you may have to negotiate for yourself. You can find out more online what salaries are in your field and location.
Make sure you can substantiate what you are worth in your field and relative to your peers so you can go on the offense and negotiate for higher compensation, benefits, and perks.
4. Additional Streams of Income
Depending on your situation at your primary job, you may have the energy and interest to consider additional income streams from a side hustle, hobby, or potentially starting up your own business. The point is that multiple incomes can boost wealth. Research shows 65% of self-made millionaires had three streams of income, 45% had four, and 29% had five.
5. Investing In Assets
Investing is the best path to building wealth. You should start to invest as early as possible to benefit from the power of compounding, adding interest on interest to your returns. Compounding is an excellent way to build investment values over time. We’ll start with retirement accounts as an easy way to get going.
One of the first steps to assuring your future is making automatic contributions to your employer-sponsored 401K retirement plan. A retirement savings plan is one of the best examples to show how you are using your money saved to make investments for the long term.
An Example of Compounding
The earlier you consistently contribute monthly to your retirement plans, the more money you will have when you are ready to retire. Using a compound interest calculator with two different scenarios, ignoring the employer’s match:
Ted decides to make an initial retirement contribution of $5,000 and contribute $250 each month over 40 years, expecting a 7% return. Mary starts with an initial retirement contribution of $2,500 monthly but can contribute $500 consistently each month for 40 years with 7% returns.
Who has more retirement money at the end of 40 years? Ted got a head start putting a more significant initial contribution while contributing $250 each month, or $3,000 annually. At the time of his retirement, Ted will have $673,777.63. On the other hand, Mary put down less initially but decided to put $500 per month or $6,000 annually.
More than Ted, Mary’s retirement account has $1,235,246.82! She benefited from the higher monthly contributions. Although we didn’t factor in an employer’s match, both retirement accounts would be higher if they earned their employer’s contribution.
It is easy to set up automation to transfer a set amount from each paycheck directly. When you first start your job, find out how your plan works regarding your investment options and how to earn your employer’s contribution match. You will want to get this money which is part of your contribution and should not be left behind.
Besides contributing to your 401K plan, you want to have a Roth IRA plan typically outside of work. A traditional 401K plan and a Roth IRA are part of retirement accounts, assets designed to provide for your retirement, but their tax advantages work a little differently.
With the Roth IRA, you pay taxes upfront and not when you withdraw the money for retirement. On the other hand, the 401K plan takes pretax income from your paycheck, but you pay taxes upon withdrawal.
Beyond retirement accounts, it is a good idea to start investing your money as early as possible into stocks, bonds, real estate, and other areas. Given its higher risk and return profile, a substantial portion of your investment portfolio should be in stocks. When investing, buy for the long term rather than trading actively. Don’t panic at the first sign of volatility which could be short.
You will want to maintain portfolio diversification, and especially in stocks. You can either invest in individual stocks (actively) or buy passive low-index mutual funds and ETFs. The benefit of buying funds that track the market is that they provide instant diversification that balances risk.
Stock-picking is rewarding but time-consuming. Indeed, five stocks (i.e., Apple, Google, Microsoft, Nvidia, Tesla) accounted for one-third of the S&P 500’s 2021 gain of 26.9%, or 28.7%, including dividends. That doesn’t happen every year. For decades, the long-term average stock market return of 10% has been consistent.
In recent years, it has been challenging to buy bonds in a low-interest-rate environment, but that will likely change as the Fed moves to raise rates to combat higher inflation. To protect against inflation, you can invest in Series I Savings Bonds with a 7.12% return or consider TIPS (Treasury Inflation Products) or variable municipal bonds.
Real Estate Investing
Real estate investing provides an excellent path to building wealth while diversifying your investment portfolio. There are a lot of different ways to invest in real estate actively and passively:
- Invest in REITs or real estate stocks
- Buy Investment properties
- Buy Rental properties
- Fix and flip houses
- Buy Vacation rental/timeshare
- Invest online investment platforms
Don’t Buy Speculative Investments
You need to understand that trading, short-selling, buying on margin, or buying speculative stocks is not investing for your financial future. Taking on enormous risk so that you can potentially make higher returns is a fool’s errand. Last year, GameStop’s market frenzy caused their shares to skyrocket, resulting in margin squeezes for frantic short-sellers.
There is nothing wrong with investing in a speculative biotech stock that you have researching their early-stage clinical trials and reading FDA proceedings. You should know that only about one-third of start-ups last a decade. A CB Insights reported in 2019 that 70% of technology companies fail within 20 months.
6. Consult A Financial Advisor
As you grow your assets, you may consult a financial advisor. There are many choices to choose from, including traditional wealth management firms, Robo-advisors, or a combination. Most importantly, you must select a fiduciary who serves in your best interests and is not guiding you to buy their firm’s products and services. You also want to understand their fee structure which varies substantially.
I have been very impressed with Personal Capital and their free state-of-the-art financial management tools provided to you by one dashboard in recent years. Access to these tools is free, and it doesn’t tie to any obligation to invest with them though it is worth looking at their wealth management capabilities.
Personal Capital has a fast-rising wealth management business worthy of praise for its platform offerings, including portfolio construction, retirement planning, and tax optimization strategies. They are in the sweet spot of combining technology-enhanced portfolios with a personal touch. You will get dedicated financial advisors based on your investable assets within a reasonable fee structure.
Note: Personal Capital is offering clients who open an account and fund above $250,000 within 30 days of account opening six months of free advisory services valid through March 31, 2022.
Defensive Strategies To Protect Your Wealth
Defensive schemes are put in place to defend against a suspected offensive play which differs by the situation. On the field, Tyler, a defensive player, kept his eye and body (yes, he has a football injury requiring surgery) on his patch of dirt and the circumstances on the field around him. His defensive objective is to slow or eliminate his opponent carrying the ball from getting an inch closer to the goal.
Like football, you can determine your defensive moves based on your financial circumstances. When managing your money to build wealth, you want to protect your assets as best you can. The last thing you want to do is blow through your income without putting that money to work for you.
Making money and building assets are offensive strategies. The focus of defensive strategy should be saving money to allocate funds to higher growth opportunities, protection of assets and loved ones.
7. Create A Budget
Plan a reasonable budget and understand your finances, especially your living and discretionary expenses. Keep your spending to moderate levels.
You don’t want high living costs from lifestyle creep or overspending just because you have a high income. Not every millionaire looks like one and drives a Ferrari. Many know how to budget their money, find deals on a used car, and invest for their long-term future.
There are several budget methods and apps, including Personal Capital’s excellent budget tool, to choose that can work for you.
8. Saving Money is Like Saving Yards
It is challenging to get rich solely by saving money, but it is a means to allocate your money to earn higher returns through investing.
Start saving money by paying yourself first. Use 20% of your paycheck towards debt payoffs and saving in your bank, emergency fund, retirement, and investment accounts.
You can put your savings towards goals like vacations, appliances, buying a home, or car down payments. You can organize your allocations using sinking funds.
Establishing an emergency fund helps protect you from unexpected financial surprises like losing your job, pet surgery, or car damage. It is a good idea to maintain at least six months of funding to pay your essential living costs, so you don’t need to pay by credit card or get late fees.
9. Automate Your Finances – A Defensive Move
One of the best ways to have discipline when controlling your finances is automating your finances with available technology. You automatically direct your money where you want it to go, so it takes out the guesswork all the time. The regularity of saving money directed to specific accounts and paying bills on time will relieve any stress that you’re doing enough.
Your employer can take out a percentage of your monthly paycheck contribution to your 401K retirement account. If it’s your first job, you may want to start with a small amount, say 1% or 2% of typically your pretax income, but consider increasing the amount as you earn more money so you can take advantage of the 401 employer match.
Set up direct deposit at your bank to funnel money from your checking account to:
- Saving accounts, including your emergency fund.
- Pay your bills on a set date.
- Make loan payments.
- Transfer money into your 529 Savings, retirement, and investment accounts.
10. Get Rid of Your Opponent, Your Debt
Stop borrowing money outside of a mortgage to buy your house. Pay off your student loans to get rid of this monkey on your back so you can focus on your financial future. Even then, try to opt for a short-term time frame (15-year mortgage rather than a 30-year mortgage) so you are not adding unnecessary interest costs to the price of your home.
To achieve wealth, you have to make sacrifices by spending less on dining out every night or ordering from DoorDash. Young teens and adults love ordering food from delivery services and are often unaware of these convenience companies’ exorbitant charges.
Avoid piling up debt unnecessarily on your credit cards that you can’t pay off each month. The card issuers charge high-interest rates that compound to their benefit, not yours.
Don’t use your cards for items you can’t pay off right away. If you carry a large credit card balance every month, stop your spending and plan to pay off your debt. The convenience of credit cards becomes a deficit to many, so manage or reduce unnecessary spending.
11. Avoid Lifestyle Inflation
Your chosen lifestyle can enhance or hurt your finances. Make smart choices by avoiding lifestyle inflation and thinking about the long term. When people make a higher income, they often feel they have to spend unreasonably more, treat people out of expectations, show off, or guilt at their livelihood.
The people I worked with on Wall Street threw money around obscenely. I recall a story before Christmas when my firm gave everyone a $50 gift card at a retail store like Saks Fifth Ave, Lord & Taylor’s, Bergdorf’s, B. Altman’s, and many others that have since closed.
The $50 gift was very generous for the secretaries, clerks, trainees, and assistants. However, the traders who made bonuses of six-seven figures decided to play a game with these measly gifts. They began bidding up the more desirable gift cards and discounting the $5o gift value of the retail stores that were out of favor. Some traders ended up with gift cards valued in the thousands. However, the firm’s practice ended, disappointing those who needed the money the most.
12. Buy Insurance And Protect the Field
Certain types of insurance are essential to protect you and your family, especially life insurance, health, and disability insurance for you and your household, especially if you have young children. You will also need to protect your car and property with insurance.
13. Adopt An Abundance Mindset
“The mind is everything, what you think, you become.” – Buddha
When setting your goals, recognize that there are few linear achievements. Challenging goals are achievable but there may be setbacks.
Fostering an abundance mindset allows one to see the possibilities, options, be creative and optimistic. You can handle defeat like football players who played well but lost the game. When circumstances change against your plan, you design an alternative and go for it energetically.
When building wealth, know that it is not easy or quick, despite the title of our post. It takes significant effort, perseverance, and sacrifices. And you can achieve wealth it is your primary goal.
14. Optimizing Your Taxes
No one should pay more in taxes than you are legally required to do. When constructing your portfolio, tax optimization strategies help you reduce your income tax liabilities by reducing, eliminating, or deferring your tax bill.
15. Estate Planning
Estate planning is a way to make specific arrangements you make during your lifetime to distribute your assets to your loved ones. Your assets will be distributed to loved ones by wills, trusts, or through designated beneficiaries.
You probably have already started that process. A substantial portion of your assets is non-probate property, meaning they get transferred by contract to your beneficiaries based on your designations.
Part of the responsibility of building assets is the generational wealth that you pass down from one generation to the next.
Building wealth is achievable and I don’t say that lightly. I recognize that many people struggle with paying their bills. However, I sincerely believe the path to wealth is attainable for those with such goals. Money is not everything but as my grandmother said, “Poor or rich, money is good to have.”
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.