Strategic financial planning plays an essential role in the quest to build wealth. It serves as a blueprint for managing your current financial situation while meticulously planning for your future.
Whether you’re looking to eliminate debt, save for a dream vacation, invest in your retirement, or build a solid savings account, you must first understand how to do it.
And, we’re not just talking about crunching numbers! Financial planning is about setting realistic goals, making informed decisions, and adjusting your strategy accordingly. It's also about having patience and recognizing that building wealth is a long term process.
So, how do you get there? Maybe you want to apply for a small loan to build credit with timely repayments. Or, perhaps you want to invest in the stock market or real estate.
Whatever your goals may be, consistency is key. Financial growth typically doesn't happen overnight. It requires ongoing dedication to your financial strategies, staying committed even if personal circumstances change.
Think of it this way – building wealth is similar to growing a garden. It begins with planting the seeds of your financial goals, nurturing them with consistent planning, and patiently waiting for them to grow, even through the worst of storms.
What Does it Mean to Build Wealth?
There’s no one-size-fits-all approach to building wealth. Your definition of wealth will likely differ from your neighbour, friend, or colleague.
While one person may classify wealth as having a high net worth, another may see it as having financial freedom and security. Whatever your definition is, ensure it aligns with your personal values.
Wealth-building efforts start with understanding how you will get there. It’s about setting achievable financial goals and creating a solid plan to reach them. For example, a goal of paying off all debt within a year or building a six-month emergency fund for unexpected expenses can put you on a path toward financial stability.
Once you’ve achieved this goal, you’ll work toward a new one, such as purchasing a new car, putting money away to buy your first home, or saving for retirement. This continual process of setting and achieving these goals is what ultimately leads to long-term wealth building.
How to Build Wealth
Knowing how to build wealth starts with understanding your current financial situation. This includes calculating your net worth, examining your income and expenses, and creating a budget to track your spending.
You can quickly calculate your net worth by subtracting your liabilities (debts) from your assets (what you own). Your net worth is a snapshot of your overall financial health and can help guide you in making decisions for growing your wealth.
After gaining a clear picture of where you currently stand financially, it’s time to set realistic financial goals. These goals should be specific, measurable, achievable, relevant, and time-bound (think of the acronym SMART). This will help you stay focused and motivated to reach them.
Let’s take the above example of paying off your debt in one year. You have a total debt of $7,000 and you're aiming to clear it in 12 months. To make this goal achievable, you may need to adjust your spending habits and create a budget that allows for extra debt repayments.
Your 12-Month Debt Repayment Plan
Month | Total Debt at the Start of the Month | Monthly Income | Essential Expenses | Amount Allocated to Debt | Debt Remaining at the End of the Month |
January | $7,000 | $3,000 | $2,000 | $1,000 | $6,000 |
February | $6,000 | $3,000 | $2,000 | $1,000 | $5,000 |
March | $5,000 | $3,000 | $2,000 | $1,000 | $4,000 |
April | $4,000 | $3,000 | $2,000 | $1,000 | $3,000 |
May | $3,000 | $3,000 | $2,000 | $1,000 | $2,000 |
June | $2,000 | $3,000 | $2,000 | $1,000 | $1,000 |
July | $1,000 | $3,000 | $2,000 | $1,000 | $0 |
Smart Steps to Take When Building Wealth
There are many smart steps to take to improve your wealth-building strategy. Whether you are just starting or well on your way, incorporating these steps into your financial plan can help you reach your objectives with confidence.
1. Create a Budget
Creating a budget is the first step to managing your finances and growing your wealth. With no budget, it’s easy to lose track of your spending. The main goal of any budget is to avoid spending too much, in other words, spending more money than you earn.
Whether you earn a six-figure income or are living paycheck to paycheck, setting a budget (and sticking to it) will help you build wealth and stay on track with your financial goals.
Setting up your budget is quite easy. Two well-known strategies are the 50/30/20 and the 70/20/10 rules. Both methods dedicate a significant portion of your income to essential needs, with the remainder distributed among savings, debt repayment, and other expenses.
What is the 50/30/20 rule?
The 50/30/20 budget rule suggests allocating 50% of your income to necessities i.e. rent and groceries, 30% to wants like dining out or hobbies, and the final 20% to savings or paying off debt. This approach helps maintain a balanced budget while still allowing for financial growth and personal enjoyment.
What is the 70/20/10 rule?
The 70/20/10 rule recommends spending 70% of your income on all monthly expenses, including both needs and wants, saving 20%, and using 10% for debt repayment. This method can be effective for those looking to build savings while managing debts more gradually.
2. Manage Your Debt
You can manage your debt effectively by paying it off while also avoiding high interest rates. Of course, not all debt is created equal; there are good debts and bad debts. Use good debt to invest in assets that appreciate over time, such as a mortgage or student loan debt. Bad debt refers to high interest credit card debt for depreciating assets like cars.
It’s essential to pay off high interest debt as quickly as possible - and prioritize the highest interest rates first. This will save you money on high interest in the long term and free up your cash flow for more wealth-growing opportunities.
3. Start Investing
Entering the investment world can be intimidating, especially if you have no real understanding of how to start investing. Begin by educating yourself about different types of investments and how they fit into your long term financial goals. Consider starting small with low-risk options, like savings accounts or bonds, to build your confidence.
Then, as you gain more knowledge, look into higher-return investments such as stocks, mutual funds, and exchange-traded funds (ETFs) to build wealth faster. Work with financial advisors or use online investment platforms that offer educational tools and resources to guide your decisions.
For clear reference, we've broken down the various types of investments in an easy-to-read table:
Investment Type | Description | Risk Level | Example |
Stocks | Buying stocks essentially means owning a part of a company and building wealth from its growth. | Varies by company. Generally higher risk with the potential for higher returns. | Think of buying a small piece of a big company like Apple or Walmart. If the company does well, the value of your piece grows. |
Bonds | Much like an “IOU” from a company or government. It’s a promise to pay back your money with interest after a certain period. | Generally lower risk than stocks, but varies; safer bonds are rated higher. | Similar to lending money to a friend and getting back more money after a year. |
Mutual Funds | Buying mutual fund shares means investing in a mix of stocks, bonds, or other asset classes. | Varies depending on the assets included. Designed for low to high risk. | Much like joining a group to collectively invest in a diverse portfolio. |
ETFs (Exchange-Traded Funds) | Similar to mutual funds, but trades on stock exchanges like individual stocks. Can track an index, sector, or range of assets. | Varies widely. Often designed to mirror the risk and return of the underlying index or sector. | Buying shares in an ETF that tracks the S&P 500 lets you invest in large companies as easily as buying a single stock. |
4. Diversify Your Investments
Diversifying your investments is crucial for wealth building. This means having a diversified portfolio. In other words, spreading your money across various investment avenues, such as stocks, bonds, mutual funds, real estate, and business ventures.
When you diversify your investment account, you reduce the risk of losing all of your money in a single investment. If one doesn’t perform well, you have other assets that can balance out any potential losses.
Additionally, this strategy can increase your returns. For example, while stocks may provide higher returns in the long run, bonds offer stability and low risk. By having both in your portfolio, you can benefit from market growth and stability.
5. Save for Retirement
Retirement savings may seem overwhelming, but it’s never too early or too late to start. In Canada, there are various options for retirement savings and building wealth, such as the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). These accounts have specific contribution limits and different tax implications.
To max out your retirement savings, consider contributing to both your RRSP and TFSA. It’s also essential to review your investments regularly and make adjustments as needed. Both accounts allow you to invest in a variety of assets, including ETFs, and mutual funds — both offer diversification and potential growth for your portfolio.
Not sure where to start? That’s okay! Consult a personal finance advisor to determine the best strategy for your retirement planning. If you’re young, for example, you may have more time to take on riskier investments. As you get closer to retirement, it’s important to re-evaluate your investment strategy and potentially shift to more conservative options.
6. Automate Your Finances
The great thing about technology is that it allows us to automate certain tasks, including our finances. Setting up automatic payments for bills and savings helps ensure that you don’t miss any payments and consistently contribute towards your financial goals.
Once you’ve finalized your budget, you can set up automatic transfers for almost anything. For example, if you want to automate your retirement savings, you can set up a direct deposit from your paycheck into your retirement accounts. This way, you won’t even have to think about it – and the money will go directly towards helping you build wealth.
Additionally, if you want to stay on top of your debt repayments, you can set up automatic money transfers from your bank account. This will help you avoid late fees and keep your credit score in good standing.
7. Maintain a Good Credit Score
Your credit score plays a significant role in your financial health. It affects your ability to secure loans and favourable interest rates. To maintain a good credit score, make sure to pay all of your bills on time, keep your credit card balances low, and avoid opening too many new accounts at once.
If you’re a renter in Canada, rent payments and credit scores are directly related, as per the Renter’s Bill of Rights. This means that consistently paying your rent on time can help you maintain a positive credit rating. It’s also great news if you’re trying to build or repair your credit.
You can also check your credit report for any errors or discrepancies that could be negatively affecting your score. Taking steps to maintain a good credit score can save you money in the long run and help you reach your wealth-growing goals faster.
8. Earn More Money
Earning more money may seem challenging, but there are so many avenues to explore. This could mean asking for a raise at your annual employment review, seeking side hustles or freelancing gigs, finding passive income opportunities, or even starting your own small business. The more income streams you have, the more money you can put towards building your wealth.
If you’re unsure what additional income stream is best for you, educate yourself on ways to increase your income potential. Attend workshops or webinars related to your field or your field that interests you.
If you’re unable to make more money or earn passive income due to a personal circumstance or physical disability, you can still find ways to get extra cash. Government programs and disability benefits can provide some financial support. You can also consider loans for people on government benefits for additional monetary assistance.
9. Build an Emergency Fund
No matter how much you budget and save, unexpected expenses can still arise. This is where an emergency fund comes in handy. This is a separate savings account specifically designed for unplanned expenses, including medical bills, car repairs, etc.
Experts recommend having at least three to six months’ worth of living expenses in your emergency fund. This may seem like a lot of money, but start small by setting aside a portion of your income each month until you reach this goal. Plus, saving this money will keep your strategies for growing wealth stable, even in the face of unexpected expenses.
Of course, you can never predict when unplanned costs will arise. If your emergency savings aren’t enough to cover them, rapid financial assistance is always available. You can seek help from friends and family, apply for an emergency loan, or look into government resources that you may qualify for.
10. Seek Professional Financial Advice
Not everyone is a financial expert, so it can be helpful to seek advice from a financial professional. A financial advisor can provide you with personalized guidance and help you create a plan tailored to your goals and objectives.
Financial advisors can also help with budgeting, investing, and creating a retirement savings plan. While there may be some costs associated with hiring a financial planner, the long-term benefits you’ll receive from the advice far outweigh the initial expense.
Think about it - what may be holding you back from building your wealth is not having the right knowledge and understanding of personal finance. But, with the help of a professional, you can gain the necessary knowledge and confidence to make informed decisions about your money situation.
Learn Essential Steps to Build Wealth with iCash
Learn the essential steps to build wealth and achieve financial security with iCash. We're more than a leading loan provider in Canada; we also offer a personal finance learning platform that offers insights on the latest financial trends, money management tips, credit counseling tools, and strategies to increase your income for more wealth-building opportunities.
By utilizing our available resources, you can learn how to save money efficiently, invest wisely, and build wealth over time. It's our goal to empower you with the right knowledge and skills needed to achieve financial independence.
The above steps can teach you how to build wealth the right way. While these are just a starting point, they will help you establish a strong foundation, so that you have enough money to live comfortably and reach your long-term financial goals.
And, if you need monetary support in the meantime, our fast and easy loans provide the necessary funds to take care of any immediate expenses that come your way. Apply online or by installing the mobile loans app on your smartphone.
