Building wealth isn’t just for the lucky few—it’s a goal within reach for many who make intelligent, strategic investment choices. According to a study by Ramsey Solutions, 75% of millionaires achieved their financial status through consistent investing over time.
This article explores seven critical investments that people who successfully build wealth tend to prioritize. By understanding and implementing these strategies, you can set yourself on the path to financial success.
1. The Power of Index Funds and ETFs
Index funds and Exchange-Traded Funds (ETFs) are the workhorses of many wealthy investors’ portfolios. These investment vehicles track broad market indexes, such as the S&P 500, offering a simple way to gain exposure to a wide range of stocks or bonds.
The appeal of index funds and ETFs lies in their numerous benefits:
- Low fees: With expense ratios often below 0.1%, they’re incredibly cost-effective.
- Broad diversification: A single fund can give you ownership in hundreds or thousands of companies.
- Passive management: This approach reduces costs and often outperforms actively managed funds.
- Long-term growth potential: They deliver solid returns that mirror overall market performance over time.
Consider making these investments a core part of your portfolio to harness their power. Many financial experts recommend allocating a significant portion of your assets to low-cost index funds or ETFs.
For example, you might start by investing in a total stock market index fund, which provides exposure to the entire US stock market in a single investment. The S&P 500 index fund is Warren Buffett’s favorite investing recommendation for those not interested in active investing.
2. Maximizing Retirement Accounts: 401(k)s and IRAs
Tax-advantaged retirement accounts are crucial tools for building long-term wealth. These accounts allow your investments to grow tax-free or tax-deferred, significantly boosting your long-term returns.
Often offered by employers, 401(k) plans provide an excellent opportunity to save for retirement. Many employers offer matching contributions – essentially free money that can supercharge your savings. If your employer offers a match, aim to contribute at least enough to take full advantage of it. This is the 100% return most employees are missing.
Individual Retirement Accounts (IRAs) offer another tax-advantaged option for retirement savings. Whether you choose a traditional IRA with tax-deferred growth or a Roth IRA with tax-free withdrawals in retirement, these accounts can play a vital role in your wealth-building strategy.
To maximize the benefits of these accounts:
- Contribute the maximum amount allowed by law to your 401(k) and IRA each year if possible.
- Choose a diverse mix of investments within these accounts, aligning with your risk tolerance and time horizon.
- Take advantage of catch-up contributions if you’re over 50.
- Invest enough to get the full company match available to you.
3. Building Wealth Through Real Estate
Real estate has long been a favorite investment of the wealthy, and for good reason. Property can appreciate over time while potentially providing steady rental income.
For many, the journey into real estate investing starts with purchasing a home. As you pay down your mortgage, you build equity – a form of forced savings that can contribute significantly to your net worth over time.
Beyond personal home ownership, there are several ways to invest in real estate:
- Rental properties: Buying properties to rent out can provide ongoing income and potential appreciation.
- Real Estate Investment Trusts (REITs) allow you to invest in real estate without the hassle of property management.
- Real estate crowdfunding: This newer option allows you to invest in large-scale real estate projects with relatively small amounts of money.
When considering real estate investments, it’s crucial to factor in all costs, including maintenance, property taxes, and potential vacancies. Also, be prepared for the illiquid nature of physical real estate investments.
4. Strategically Investing in Individual Stocks
While index funds provide broad market exposure, carefully selected individual stocks have the potential to outperform the market. Many wealthy investors include a mix of individual stocks in their portfolios to seek higher returns.
When considering individual stocks, focus on companies with:
- Strong financial fundamentals
- Sustainable competitive advantages
- Solid growth potential
- Capable and trustworthy management
It’s important to note that investing in individual stocks carries more risk than investing in diversified funds and limiting individual stocks to a portion of your portfolio that aligns with your risk tolerance to mitigate this risk. Many financial advisors suggest keeping individual stocks to no more than 5-10% of your total investment portfolio.
5. Balancing Your Portfolio with Bonds
While stocks often get the spotlight, bonds are crucial in building and preserving wealth. Bonds can provide steady income and help balance the volatility of stocks in your portfolio.
There are several types of bonds to consider:
- Government bonds: Generally considered the safest, but often with lower yields
- Corporate bonds: Typically offer higher yields but come with more risk
- Municipal bonds: Can provide tax-free income, especially attractive for high-income investors
The appropriate bond allocation in your portfolio typically increases as you get closer to needing the money or if you have a lower risk tolerance. A common rule of thumb is subtracting your age from 100 to determine the percentage of your portfolio that should be in stocks, with the remainder in bonds.
Consider using a bond ladder strategy – buying bonds with staggered maturity dates – to manage interest rate risk and maintain liquidity.
6. Investing in Yourself: Education and Skills
One of the most powerful investments you can make is in your human capital. Enhancing your skills and knowledge can significantly increase your earning potential over time.
This investment can take many forms:
- Formal education: Degrees or certifications that can open new career opportunities
- Professional development: Workshops, conferences, or courses that keep you at the forefront of your field
- Self-directed learning: Books, online courses, or mentorship programs that broaden your skillset
The return on investment for personal development can be substantial. For instance, an MBA from a top school can increase your earning potential by 50% or more over your career.
When considering educational investments, weigh the potential return against the costs. Look for opportunities that align with your career goals and have a clear path to increased earnings or career advancement.
7. Entrepreneurship: The Ultimate Investment
For many wealth builders, starting or investing in a business represents the ultimate investment opportunity. While it comes with significant risks, entrepreneurship also offers the potential for substantial rewards.
If you’re considering this path:
- Start with thorough market research and a solid business plan
- Consider beginning with a side hustle to test your business idea
- Be prepared for the financial and time commitments required
- Seek mentorship from successful entrepreneurs in your field
Even if your business doesn’t make you a millionaire, the skills you gain—resilience, problem-solving, and financial management—can be invaluable in your wealth-building journey.
Conclusion
Building wealth is a journey that requires patience, discipline, and intelligent decision-making. By focusing on these seven key investment areas – index funds and ETFs, retirement accounts, real estate, individual stocks, bonds, personal development, and entrepreneurship – you can create a robust strategy for long-term financial success.
The most successful wealth builders typically employ these strategies tailored to their circumstances and goals. They start early, invest consistently, diversify across asset classes, keep costs low, reinvest gains, and stay invested for the long term.
As you embark on your wealth-building journey, consider consulting with a financial professional to create a personalized investment strategy. With the right approach and commitment, you can join the ranks of those who have built lasting wealth through smart investments.