You can create a solid financial foundation for yourself with some very simple steps.
Spend less than you earn. Direct the net cash flow to savings. Keep some cash on hand for emergencies and get the rest invested for long-term growth.
Repeat that process over years, and then decades, and you are very likely to become a millionaire (if not a multimillionaire).
There’s nothing wrong with keeping it simple and sticking to these basics.
But if you want to build even more wealth, then you need to take advantage of the other opportunities that are also available to you… and that most people overlook.
Here are 5 great places to start.
1. Harness The Power Of Compounding (Right Now!)
Compounding is a simple yet powerful force that can work for you or against you. It can turn even the most modest of savers into big-time asset accumulators.
The “magic” ingredient? There are two, really:
The first is time.
When you invest, you do so for the potential of earning a return on your principal. If you earn a return and reinvest it, that return can then earn its own returns. Over time, this snowballs into exponential growth.
This does not happen overnight. It takes a lot of time.
Consider that Warren Buffett started investing at just 11 years old… but he earned majority of his billion-dollar-plus net worth after he turned 65 years old.
That is the exponential power of compounding, and you can’t harness it if you don’t give it time to work to your advantage.
As for that second magic ingredient to make compounding work for you? It’s inherent in the first: Your commitment to acting as a long-term investor.
In part, that means that once you invest money in the market, you let it stay invested (for decades). The longer your money has to compound, the bigger the impact.
So don’t miss the opportunity that compounding offers to you. Start investing today.
Don’t wait for the “perfect” moment; it doesn’t exist. Start now, then iterate and refine your process over time.
2. Using Your HSA As An Investment Account (Not Just A Savings Vehicle)
Health savings accounts (HSAs) offer huge tax advantages, but often go underutilized.
If you have a high-deductible health plan (HDHP), you’re eligible to contribute to an HSA. That stops many people right off the bat; you might avoid an HDHP because the high deductible feels scary.
But a higher deductible also means lower monthly premiums that equate to overall cost savings if you’re not a heavy user of your health insurance.
If you have an emergency fund that could theoretically cover the out-of-pocket costs you could incur, you protect yourself from the risk of the higher deductible while giving yourself access to a health savings account.
The main purpose of an HSA is right in the name; it’s designed to serve as a savings account for healthcare expenses.
Contributions are tax-deductible, reducing your taxable income. And withdrawals are tax-free too if used on qualified medical expenses.
But here’s the thing: You can also invest within an HSA. The earnings on your investments within the account are, you guessed, also tax-free.
You already know from above that keeping money invested over time creates the opportunity for compounding returns to do a lot of the heavy lifting when it comes to building wealth.
Combine that with the fact that HSAs offer a triple-tax advantage, and after age 65, you can withdraw the money for any purpose (just like a traditional IRA, with taxes owed but no penalty)…
…and you have a handy way to grow tax-free wealth for your future self.
Instead of using your HSA for small medical expenses now, contribute to the account. Make sure the cash gets invested. Then let it stay invested, growing tax-free.
If you can treat this as long-term money, then you essentially have a “medical IRA” that you can use once you turn 65 and beyond to help fund your healthcare costs in retirement (where, presumably, they’ll be higher than they are now as you’re more likely to need care as you age).
All this being said, “keeping the money in the HSA” is exactly why this is not always the best tactic for everyone to use.
As a financial planner, I tend to recommend this only to people who are healthy with a track record of little to no medical expenses.
An HDHP might not be the best insurance plan for you, and depending on your situation, there are times when using your HSA dollars rather than your cash flow makes more sense.
This is why it’s critical to do your own personal financial planning to vet any strategies you come across as you try to educate yourself online.
3. Maximize The Value Of Your Equity Compensation
If your employer offers an employee stock purchase plan (ESPP) or some form of stock options, you have a valuable opportunity—but only if you understand not just how to leverage it, but also create a rules-based system to manage that equity over time.
ESPPs typically offer discounts on stock purchases. These can range from 5 to 15%.
That discount can easily become a loss if you buy the stock, hang on to it (because you don’t have a plan of action to do anything else with it, or you’re hoping it will jump in value in the future), and the stock moves downward after you purchase shares.
Here’s where the opportunity lies: The only way to lock in the benefit of the discounted price the ESPP plan offers is to sell shares immediately after you purchase them.
I discourage my financial planning clients from playing guessing games with any particular stock, even (or especially!) with the stock of the company they work for.
The amount you save into a diversified portfolio for the long term is going to be the driving factor behind your financial success, not getting lucky with a single stock.
If you hold onto the shares, you will likely take on more investment risk than you need to take—and if your employer has restrictions on selling, you might be forced to hold during downturns.
The advice we give at our firm is similar for RSUs. We recommend clients sell shares upon vest, then reinvest the net proceeds into low-cost, globally-diversified investment portfolios.
This approach does come with an important caveat: Know that it optimizes for the most predictable results with least risk over time.
There are other strategies that may create larger more tax savings, and those can be appropriate too. Much like the HSA, it all depends on your specific situation, preferences, goals, and needs.
If you earn equity compensation, you need to:
- Ensure you understand what you have. ISOs, NQSOs, ESPPs, RSUs, are all different forms of equity!
- Know the tax consequences and risk exposure of your specific equity compensation.
- Read the plan document for your ESPP or grant agreement for shares your company gives you. Understand when you can buy, sell, and how your company handles blackout periods.
- Set up the correct ongoing equity compensation management strategy that aligns with your needs, risk tolerance, and goals.
- Keep an eye on your concentration risk and stay diversified. Don’t let your financial future depend too heavily on your employer.
These Opportunities Are Yours For The Taking
These three opportunities to better manage and grow your money are not complicated. But they do require proactivity and action.
You don’t need to win the lottery, pick the one stock that returns 10x, or take massive risks to increase your net worth.
The real secret is knowing which decisions actually move the needle and taking the small but smart actions to continually hone in on optimal money management over time.