Whether you’re finishing up your graduate degree, entering the workforce, or simply entering a new chapter in life, your financial priorities have probably shifted significantly. Beyond pursuing your professional goals, you might be looking to buy a home, get married or start a family — or all of the above. You may have high earning potential thanks to your education — but you might also have significant student loan debt.
Beyond simply paying your student loans, it’s important to plant the seeds of your investments and cultivate a long-term strategy. Amassing some savings and creating a plan for future growth will help you achieve those goals. Be mindful of key wealth-building strategies that can help you build a strong long-term financial foundation.
Creating wealth: what does this look like?
In the basic sense, “wealth” is an abundance of any valuable asset that could translate into financial currency. This includes money, of course, but it also includes other physical items of worth, like a family estate, for example.
Being proactive about building sustainable wealth is the most vital way to develop a long-term financial wellness goal. Not only does this help set you up for a comfortable retirement, but it also gives you peace of mind in the present (knowing that your finances are being well-handled). Such a proactive strategy also helps minimize the impact of an emergency, since building significant savings is one of the best ways to shield yourself from sudden financial burdens.
Best way to build wealth?
Like most things in life, the best way to build a foundation of wealth is through strategic, long-term planning. Building wealth doesn’t happen overnight, and it doesn’t happen in the short-term. Rather, wealth is built up with a long-term, lifetime approach to focusing on overall financial goals and achievements.
Some of the steps to achieve wealth include:
- Paying down large, high-interest debts (like student loans)
- Assessing your overall spending habits
- Keeping tabs on your credit score
- Investing smartly by taking advantage of employer-sponsored 401ks and IRAs
- Establishing a relationship with a financial institution
How to build wealth?
Growing your overall wealth starts by changing your mindset, particularly when it comes to a few specific aspects of finances.
Pay down student loans and other debt.
Student debt may be a significant financial obligation at this point in your life. Consider refinancing your student loans through a personal line of credit, which can help in a number of ways.
Leaning on a personal line of credit can help you consolidate loans from multiple lenders into one, easy-to-track monthly payment, while also offering up more favorable terms like a fixed, lower interest rate and the opportunity to work with a dedicated lender who will help you throughout the life of the loan.
Plus, lowering your monthly payments can allow you to put that savings toward other goals. Keep in mind that these new loans may require you to give up special features of federal student loans, like loan forgiveness and income-based repayments. Then, once you’ve refinanced your loans to a lower interest rate, consider a few other ways to lower your debt even more quickly, including:
- Always pay more than the minimum monthly payment. This will help you pay off interest — even when you already have a considerably low interest rate — and will help you pay down your remaining balance faster.
- Make additional payments when possible. Using any additional cash reserves — like from a bonus or pay raise — to put more towards your student loans every month will also help you pay off your remaining principal balance more quickly.
- Track spending and identify where you could spend less. In an effort to pay more towards your debt every month, tracking your spending and cutting back on discretionary expenses is a great way to free up more funds to pay off debt.
Assess your spending habits.
Good financial planning includes examining the ways that you currently spend your money. Having a deep understanding of your spending habits is important when it comes to identifying areas that you could be cutting back on and saving more money. If you can make it a habit of checking in with your finances regularly — say, at least once a month — it shouldn't take up too much time, and it will be easier to track whatever changes might be necessary to stay on goal.
An easy way to assess your overall spending habits includes:
- Create a list of your planned spending. This is basically your goal budget, including the ideal amount you’d like to be spending on specific items like groceries, entertainment, debts, etc.
- Create a list of your actual spending. Tracking your actual spending habits reveals how much you really spend on priority and other items. With these two lists in hand, you can compare your actual spending to your planned spending to identify gaps.
- Assess your income in relation to your expenses. A phrase you’ve likely heard that bears repeating is to never spend more money than you make. To ensure that you aren’t doing this, identify what your non-negotiable spending items are (like rent, utilities, car payments, etc.), and calculate how much income you have left for variable expenses, like entertainment and food.
- Make financial goals. With a better understanding of how much money you have coming in and how much you actually need to spend (especially versus what you’d like to spend), you can create solid financial goals like using a savings account for an emergency fund and modifying your budget.
Keep tabs on your credit score.
If there’s one number you should always know, it’s your credit score. Lenders often pull your score before deciding whether to loan you money, and at what interest rate. If your score is not in the “excellent” range — say, below 700 — you could pay higher interest rates on everything from your mortgage to auto loans to business loans, and it could cost you thousands of extra dollars over the life of a loan. The financial impacts of a damaged credit score can follow you around for years, too, creating problems down the road for additional major expenses that you may eventually need a line of credit for.
As a caveat, every lender will be different when it comes to stipulations for setting interest rates. First Republic Bank does not offer risk-based pricing for its interest rates.
The credit score most commonly used by lenders is Fair Isaac’s “FICO” score, though several credit agencies have their own scoring systems. Some credit cards now provide customers with their scores directly on their monthly statements. You can also receive them using free online credit-monitoring tools such as Credit Karma, Credit Sesame and Credit.com.
Once you know your score, the value of working with a personal banker can really come into play. For example, your personal banker can help you interpret it, as well as explain ways to improve it. For example, some of the ways they might suggest to help improve or sustain a good credit score include keeping the five C’s of credit in mind. These include:
- Character: This relates to whether the borrower is credible and trustworthy. Building a history of credit that you’ve paid back on time can help build your overall character. Building a relationship with your bank or credit union can also help you establish lasting relationships to help build your character.
- Capacity: This refers to whether or not a borrower is capable of paying back their loans. For example, having an income or cash flow to pay back borrowed money is important, as well as mastering capacity by spending down existing debts before applying for new lines of credit.
- Capital: This relates to how much the borrower has actually already paid for something already. For example, if the borrower is using the line of credit for a new car, capital could be how much a borrower has already invested in the car. If the car was $70,000, the borrower’s capital would be the $10,000 that they put down on the car; subsequently, the line of credit they would need to pay for the remaining amount on the car would be $60,000. You can build your capital by consistently putting down sizable down payments. This will require a focus on saving before making a purchase. This also helps show that you understand overall responsible money management.
- Collateral: This relates to what the borrower has to back up a loan in the case of default. This is also the difference between a secured and an unsecured loan. Secured loans — or loans that require collateral — give the lender reassurance that the loan will, in some way, be paid back. Unsecured loans, on the other hand, don't require collateral. In some cases, that can translate to higher interest rates for loans that are unsecured. A good example of a secured loan versus an unsecured loan are HELOCS vs. a personal line of credit. A personal line of credit typically requires no collateral upfront.
- Conditions: This often refers to how the borrower intends to actually use the line of credit.
Taking the five Cs into consideration can help you form a concise and responsible plan for increasing your own credit score.
Start seriously investing your money.
Putting money into a tax-deferred retirement plan and building up personal savings in a bank account are good ways to ensure that you’ll have the financial resources you need to meet future goals, including building a healthy nest egg for retirement.
If you're looking to start investing, First Republic's automated portfolio investment management platform can provide you with easy online access to a personalized service that will help you get closer to your financial goals. If you have access to a 401(k) or another employer-sponsored retirement plan, contribute at least enough to get the full matching contribution that your employer provides. You may need to contribute more than that, however — 10 or 15 percent of your income — to have enough saved up by retirement. To optimize your contribution strategy, ask yourself these questions when funding retirement accounts.
If you own a business, you can contribute to a tax-advantaged retirement plan for self-employed individuals, such as a solo 401(k) or a SEP-IRA.
It’s important to start saving for retirement now, even when paying student loans may be your first priority. If you are concerned about how to balance your retirement investments with your student loans, weigh the pros and cons of each.
Establish a relationship with a bank.
Creating a personal relationship with a financial institution is one of the easiest ways to prove that you’re serious about your financial standing, and to demonstrate the importance of building wealth. Working with the same bank can also help when it comes to demonstrating your understanding of the five Cs of credit, and to build a lifelong relationship that will help you reach your overall goals.
If that’s not enough, in the years after graduate school, your life can change immensely. It’s a good time to start working with a bank that provides personalized service and wealth-building strategies as you pursue specific financial goals. Form a one-on-one relationship with a banker who can guide you through key milestones, whether that’s getting approval on your first mortgage, looking at smart ways to reduce debt or finding financial solutions that meet your needs.
Before you get too far along in your professional and life goals, it’s also important to establish a relationship with a bank that will be there for you every step of the way. This may offer you an advantage when it comes to access to more favorable product terms such as better interest rates through relationship-based pricing, loan terms and lower fees. Beyond the product terms, having connections in your bank can also streamline your banking management, minimize wait times or help you streamline troubleshooting in times of emergencies.
Seek out a bank that is committed to excellent service for all of its clients, regardless of where you may be in your career; you can reference the "net promoter score," which gauges client satisfaction and loyalty. If an institution has an above-average net promoter score, above the industry benchmark of 34, you can assume that client experience is a top priority. One-on-one financial services can also help with financial planning, as you progress professionally and personally.
To start building a better relationship with your bank today, consider some of the following steps:
- Connect with your banker: Banking doesn’t have to be impersonal. A dedicated personal banker who understands you and your life goals, can help guide you towards your next financial milestone, whether it’s buying a home, starting a family or retiring early to pursue a hobby you’ve always wanted to try.
- Take advantage of personalized financial services: Banks want to help you meet your financial goals, so be sure to take advantage of any personal, one-on-one services offered, and always articulate your goals.
- Ask for help: Being open about when your goals aren’t on track and asking for help is a good way to build trust, and it’s one of the main reasons why you should continue to lean on your bank over time.
Building wealth in a smart, sustainable way requires a life-long commitment of working toward your specific budgeting and savings goals. It can be a tough road, but you’re not alone; learn more about how strategically refinancing your debt, with the support of a personal banker, can put you on the path to long-term financial success.