Wealth Building: Step by Step to Healthy Finances

Most people live without significant inheritance and thus need to build wealth from scratch. Here, wealth is considered to be possessions that are not needed for daily use. This guide describes the best ways to build wealth, even with lower incomes.

What you Should Know

  • Building wealth is very important for retirement planning.
  • Wealth building concerns everyone: Even people with low incomes can build a substantial wealth over time with regular saving and investing. Starting early can accumulate significant sums even with just 50€ a month.
  • Those starting to build wealth should first clear any existing debts and financial burdens. Then, it’s crucial to establish a reserve fund (also known as an emergency fund) for financial emergencies.
  • The core of wealth building is regular investment through a savings plan. Index funds (ETFs) are recommended due to their transparent structure and low costs.

How to Proceed

  • To find out how much wealth you need to achieve a certain income in retirement, our Financial Freedom Calculator can help.
  • On our recommendation page, we’ve listed the best savings account offers for you. You can also compare different offers using our savings account comparison tool.
  • With our ETF savings plan comparison, you can find the best broker for setting up a portfolio. Here, you can set up your securities portfolio for wealth building.

The Phases of Wealth Building

Wealth building is understood as the gradual accumulation of money, usually with the help of securities investments. To build wealth, a portion of income that is not immediately required for living expenses should be saved and possibly invested.
Wealth building can broadly be divided into three main phases, which we will introduce in more detail below along with practical tips for implementation. The first phase could be described as creating a financial foundation. It includes consolidating debts and basic financial planning, which is also important for the next two phases. The second phase involves creating a financial reserve, also known as an emergency fund. The third and central phase of wealth building consists of long-term investment. This is where you actually build your wealth.

Starting to Build Capital

Many people find it stressful and complicated to deal with their finances. However, creating order is one of the best ways to avoid financial worries and stress in the future and to reduce costs. The first phase of wealth building, therefore, involves meticulously recording one's finances, i.e., income and expenses, to understand where money is going. Keeping a household budget can be helpful here. It also includes checking if there are any outstanding debts or loans and under what terms they are managed. Naturally, there's a big difference between a long-term mortgage and often expensive and unnecessary consumer debts. Having an overview of one's debt situation can, for example, reduce costs through refinancing. Often, installment loans are cheaper than overdraft fees from checking accounts. Before building wealth, short-term debts should ideally be paid off.

The Next Step

is to build up a financial reserve, also known as an emergency fund. It should cover 3-6 months' net salaries and is there to avoid having to rely on expensive loans in case of financial emergencies. Such an emergency could be anything from needing a new washing machine to unexpected unemployment. In our guide to emergency funds, we go into different models in more detail. The emergency fund should ideally be kept in a separate checking account or even better in a savings account, so it is separated from everyday money transactions but is still readily accessible. With our savings account comparison, you can check various savings options. On our recommendation page, you'll find our favorite savings accounts. Make sure to consider the creditworthiness of the country where you open the savings account.

The Goal: How Much Wealth is Enough

Theoretically, wealth building can be approached in two ways: The first is to save long-term towards an unspecified goal using a fixed savings rate (about 20% of monthly net income). However, the second approach is recommended, which involves saving towards a fixed, long-term goal and adjusting the savings rates accordingly. This approach has the advantage of being concrete and verifiable, making it better suited for long-term tracking. How much wealth you should have largely depends on your own needs (the blog post "How much should one have saved?" provides further orientation). If your wealth is meant to fund your retirement, you should first determine how much income you'll need later. Using our Financial Freedom Calculator, you can find out how much wealth and what savings rate you need for this goal.

The Saving Phase: The Core of Wealth Building

Those without substantial initial capital must spread their investments over a long period of time, i.e., save up. Building the emergency fund and saving for investment can essentially be done at the same time using a three-account model. However, we recommend first saving for the emergency fund and then focusing on wealth building. In the three-account model, a checking account is used for regular, everyday transactions, from which fixed transfers are made at the beginning of the month to a separate account for the emergency fund and a securities account for investment. This way, saving and everyday spending are separated, and saving can be automated (more on this in our guide to starting with financial independence). 

We have already explained the basics of investing in detail in a guide. The fundamental steps are:

Assess risk tolerance

First, you need to create a personal risk profile that considers the temporary losses you are willing to accept.

Find a strategy

Based on this, you can then create your securities strategy and appropriately weight the investment classes (such as stocks, bonds, or ETFs).

Build a portfolio

Building” a securities portfolio involves setting up a brokerage account (see our brokerage comparison) and setting up regular savings plans to buy securities. This gradually creates a portfolio and builds wealth.

Overall, long-term, passive investing in index funds (ETFs) is recommended for wealth building. Such funds are baskets of company stocks that allow you to invest money globally diversified. Diversification reduces the risk of individual companies but allows for the achievement of the overall market’s return, which has historically been between 6-8% with a minimum investment period of 15 years. Our ETF handbook provides everything about the strategy and construction of ETF portfolios.

Decumulating Wealth

Those who have successfully built wealth can either leave it invested, perhaps bequeathing it to the next generation, or begin decumulating. This process, also known as “disinvesting,” involves gradually withdrawing wealth from investments into more liquid asset classes.
A securities portfolio can be decumulated either through partial sales, through distributions, or with fixed withdrawal plans. The first two options are the most common. Our withdrawal plan calculator can help you calculate decumulation.

Partial sales

involve regular sales of portfolio shares, such as annually at a set time.

Decumulating through distributions from investments

is equivalent, although it has a better reputation. Unlike partial sales, here the control over the amount of withdrawals is less.

Fixed withdrawal plans

at banks or through immediate annuities offer certain guarantees but less flexibility and usually much higher costs.

Building Wealth with Little Money?

The prevailing notion that wealth building is only for the already wealthy is fortunately not true. Wealth should be built especially by those who earn little money. The steps we have fundamentally introduced for wealth building also apply just as much to people with low incomes or many financial obligations (such as a family).

Logically, wealth building in these cases is slower because income or the savings rate is a crucial lever for building wealth. Therefore, it’s even more important to use time as the second important lever and proceed with high savings discipline over the long term. The compound interest effect helps here to multiply the capital invested. An example: Someone who invests just 50€ per month over a period of 40 years and achieves an average return of 7% p.a. would have built a wealth of well over 100,000€ at the end of this period (to be exact: 131,241€).

Important Mindset Tips for Building Wealth

Besides the important practical tips for the phases of wealth building, it is just as crucial to psychologically prepare for the process of wealth building. Both savings discipline and perseverance are essential for all investors to achieve their financial goals. To simplify this, here are some important mindset tips for building wealth:

Start ASAP

“As soon as possible” – you should start investing as soon as possible, as time in the market, alongside the amount of savings and the return, is your most important lever for building wealth. The longer you let your money work for you through securities, the more the compound interest effect can work for you, and the higher the chance that even bad market phases overall balance out to a good average return. Comparatively low savings rates invested at a young age can have a significant financial effect in the long term.

Proceed Strategically

When you start investing, there’s nothing wrong with trying different things or even approaching different asset classes with some “play money” (perhaps in a secondary portfolio). However, for actual investing, it’s sensible to engage with different strategies, build your portfolio accordingly, and remain true to your strategy even in times of short-term difficulties. This doesn’t mean that you must follow a strategy that turns out to be bad no matter what, but that you design your strategy for the long term and don’t completely redo it with every market crash – as that costs returns.

Invest, Don’t Gamble

The previous tip hints at this: You shouldn’t gamble in the stock market with the money you intend to use for wealth building. The difference lies in the long-term and strategic perspective of investing, while gambling attempts to achieve high returns in the short term through speculative bets (possibly using derivatives). In particular, CFD brokers must display in Germany the percentage of customers who have lost money with them – often around 80%. That should be deterrent enough. But even reputable neo-brokers can, through their visual presentation, invite speculation rather than long-term action. If you have set up a savings plan with regular transfers, you can uninstall (or hide) the mobile app to reduce the temptation to gamble.

Diversify, Diversify, Diversify

Fortunately, on the global stock market, it’s possible to reduce the risk of individual companies. This is done by setting up a market-neutral portfolio that invests globally in stocks – for instance, using an ETF. This approach of global diversification is called diversification. Even if a single company falters, you are still invested in many others that can offset this loss if the overall market is stable. The good thing about diversification is that, unlike other hedging options, it doesn’t cost any return.

Crashes are Part of the Game

Whether it’s the bursting of the Dotcom bubble, the financial crisis, or the Covid crash: Those who have been in the stock market for a while know from personal experience that major and minor crises occur regularly. Investors are also rewarded with returns for this risk. If the red numbers in the portfolio during a crisis make you nervous, you should recall the long-term nature of wealth building. Even the toughest crashes in the history of the stock markets were balanced out after a sufficient length of time, rewarding investors with a good return. The worst thing to do in times of crisis is to give up your long-term strategy, such as by making panic sales.

Frequently Asked Questions

Wealth building refers to the accumulation of capital over an extended period. An important tool for wealth building is investing in securities. Those who invest regularly in stocks over the long term can benefit from the compound interest effect and receive many times their deposited amounts.

The best way to build wealth is through long-term, regular contributions to index funds, known as ETFs. These funds invest the money in a variety of stocks, thereby lowering the risk of investing in stocks. Those who operate with a long investment period (at least 15 years) have a good chance of achieving a decent annual return.
Wealth building is as individual as the savers who engage in it. Those with high incomes who can save a lot of money need less time than someone with a low savings rate. However, time is a vital resource that allows even those with lower incomes to build wealth over a long period.
ETFs are an important tool for wealth building. Many brokers offer so-called savings plans, which allow investors to regularly contribute to a specific ETF starting from 10€ per month without any fees. This makes it possible to build capital without substantial initial capital, for example, for retirement.

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