Key takeaways
Building wealth through investments is a long-term process driven by compounding, diversification, tax efficiency, and consistent contributions.
The strongest wealth-building plans start with a financial foundation (emergency fund, manageable debt, protected income) before money goes into the market.
Tax-advantaged accounts like 401(k)s and IRAs typically belong at the center of a wealth-building strategy because they let earnings grow with reduced tax drag.
Vehicles outside a brokerage account, including annuities and permanent life insurance with cash value, can play a supporting role in long-term wealth and income planning.
Protecting your income with disability coverage can be as important to long-term wealth as choosing the right investments, because lost earnings interrupt compounding.
What it means to build wealth through investing
Investing is a way to set aside money for your future. But unlike saving, which aims to preserve your capital, investing is when you attempt to grow it.
To invest means you purchase an asset (or a share of an asset) with the hope that it will grow in value over the long term — ideally outpacing inflation. That entails some risk, because not all assets grow in value. However, there’s also a risk to putting money in a savings account: because of inflation, it can actually lose purchasing power with every passing year.
Importantly, investing leverages the power of compounding. While it’s not the quickest way to build wealth, it can be one of the most powerful. The math of compounding means earning returns on both your principal and the gains you’ve already collected. Compounding can turn a modest sum into a solid lifestyle down the road, but it requires time for the math to work. That means measuring your wealth-building journey not in months but in decades.
Consistency and planning are necessary ingredients for successfully building wealth through investing — but there’s no minimum age requirement. And while people at the start of their working years should start with savings, they actually have an advantage compared to others when it comes to investing: younger investors have more time to use the power of compounding to grow wealth.
The keys to building wealth through investments
No matter how much you start out with, there are six core principles that can work reliably to build long-term wealth.
Invest early to give compounding time to work.
Invest consistently, regardless of market conditions.
Diversify your portfolio across asset classes to help mitigate risk.
Keep your costs and taxes low.
Help to protect the income that funds your investing.
Match the investment vehicle to the goal.
Keep these principles in mind as you explore the aspects of wealth-building below.
Build the financial foundation first
Before you place any money into the market, ensure you’re operating from a sound financial footing. Have the following in place first before you invest:
Reserves for emergencies.
Debt payoff plan.
Monthly budget.
Income protection.
You should have an emergency fund that is liquid and accessible, with enough to cover three to six months of essential expenses (i.e., rent/mortgage, groceries, utilities, insurance, transportation) in the event of unforeseen job loss or major expense. The FDIC recommends keeping those funds in a federally insured account, such as a savings account or CD; FDIC-insured products provide stability for up to $250,000 per depositor, per account.1
It’s recommended to pay down high-interest debt, such as credit card debt, before investing in the market. High-interest debt can compound, and the accelerating interest could eat into your gains more rapidly than you can earn them. To better understand why, look at Experian’s “avalanche” illustration, which demonstrates how (for example) investing in assets that historically earn a 7% return, while also carrying a balance with a 20% APR, results in a net loss.2
Establish — or fine-tune — your working budget. Know what’s coming in and going out so that you can allocate a sustainable level of resources to investments. Consistent monthly contributions require planning to ensure the ability to meet your other obligations simultaneously.
Protect your paycheck. If an unforeseen event prevents you from earning income, it could also stop your contributions, stall your progress, and reduce your overall returns. Disability insurance provides a portion of your income after a disability prevents you from working, helping you maintain your lifestyle and continue investing for your future. And to protect against unexpected medical costs, consider two other types of insurance — critical illness insurance and accident insurance — which can help you to preserve more of your savings and continue investing if you or someone in your family has a medical issue.
How compounding turns time into wealth
Compound growth is where you earn interest on prior returns, not just the original contribution. It creates a pattern of growth that starts slowly but steadily accelerates over time — similar to the way a snowball grows as it rolls downhill. In fact, time is a critical component of compound growth, which is why it’s the first key to building wealth by investing.
Here’s an illustration of how compounding works for two hypothetical investors. Both contribute the same amount every month: $500. Their average rate of return — 7% — is also the same. But as the table below shows, their savings by age and over time are vastly different because of one difference:
Investor A begins contributing at age 25.
Investor B begins contributing at age 35.
Investor A | Investor B | |
|---|---|---|
Initial Contribution | $500 | $500 |
Age 25 | $500 | $0 |
Age 35 | $83,882 | $500 |
Age 45 | $247,908 | $83,882 |
Age 55 | $570,571 | $247,908 |
Age 65 | $1,205,298 | $570,571 |
Figures calculated using Investor.gov Compound Interest Calculator
Investor B has a shorter timeline — 30 years to invest, instead of 40, as Investor A has. As a result of starting later — but changing nothing else — Investor B winds up with less than half the wealth of Investor A. That’s the power of compounding returns.
One more point to consider: the flattening effect of inflation. The S&P 500, which tracks the performance of the top publicly traded companies in the US, has historically delivered an average annual return of 10.51%. But when adjusted for inflation, the real return drops to 6.64%.3 That’s an additional reason to use time to your advantage when building wealth.
The main vehicles for building wealth
Some of the more common vehicles for wealth-building include stocks, bonds, CDs, real estate, retirement accounts, annuities, and permanent life insurance. Here’s a brief overview of each and how they can contribute to your overall portfolio.
Stocks
When you invest in equities such as stocks, you purchase shares of an individual company (typically through a brokerage account), with the expectation that the company will perform well and your share of it will gain value. Related instruments such as ETFs (exchange traded funds), mutual funds, and index funds can also be traded like stocks.
Advantages: Historically high returns; can be bought and sold in the market.
Trade-offs: Price volatility; returns not guaranteed; tax implications after sale.
Bonds
Bonds are debt instruments sold by companies, institutions, and governments. They provide fixed income by promising the purchaser, or investor, a fixed interest rate and the return of their principal at maturity.
Advantages: Typically less volatile than stocks; predictable income; some government bond gains can be tax-free.
Trade-offs: Typically lower returns than stocks; not as liquid; risk that the bond issuer could default; risk that inflation could offset returns.
CDs
Certificates of deposit (CDs) are a savings product that provides a fixed annual percentage yield (APY) over a set term, with APYs that tend to be much higher than traditional savings accounts (3.5% compared to 0.38%, for example). In exchange for yield, the depositor agrees to leave the money in place for the duration of the CD (often between six months and five years), paying a penalty for early withdrawals. Market experts predict CD rates will remain below 4% (3.50%–3.75%) through 2026.4
Advantages: Fixed, guaranteed returns; FDIC insurance.
Trade-offs: Lower returns than the stock market average; lower liquidity; risk that inflation could outpace returns.
Real estate
Investing in real estate beyond your primary residence can help build long-term wealth through appreciation and rental income. You could purchase properties to rent, flip fixer-uppers, or invest passively through real estate investment trusts (REITs).
Advantages: Potential tax benefits; property values often rise with inflation; potential cash flow.
Trade-offs: Extremely illiquid; may require significant upfront contributions; risk of a localized downturn that could affect value.
Retirement accounts
Tax-advantaged retirement accounts include 401(k)s and Roth IRAs. These are special investment accounts that let you invest in many or all of the vehicles found in a standard brokerage account, but with tax benefits, such as deferred taxation or tax-free contributions, that can enhance your wealth-building strategy.
Advantages: Tax treatment differs from typical brokerage accounts; deferred taxation aids compounding growth; potential for employer matching; often creditor protected.
Trade-offs: Penalties for early withdrawals; contribution limits; your investment options may be limited.
Annuities
Annuities are essentially an insurance product that can turn lump sum contributions into guaranteed lifetime income in retirement, but many annuities can also be used as tax-advantaged savings vehicles for accumulating assets during one’s working years. There are a variety of annuity options available, varying in how contributions are invested and when and how payments are distributed.
Advantages: Guaranteed income; protection from outliving savings; no contribution limits (for non-qualified annuities); tax deferral can enhance compounding.
Trade-offs: Can carry fees; early withdrawal could result in surrender charges; lump sum contributions are illiquid.
Permanent life insurance
This is a life insurance product that offers permanent protection over your lifetime. It includes a cash value component that can grow over time, with taxes deferred.
Advantages: Does not expire; premiums are often fixed; accumulates cash value; may offer living benefits, such as liquidity and loan options; wealth protection; may be passed on to heirs tax-free.
Trade-offs: Policy lapses can jeopardize the cash value; may carry high fees; returns may underperform compared to other investment vehicles.
How much do I need to invest to reach my retirement income goals?
A rule of thumb for retirement savings is that if you withdraw 4% of your portfolio’s value in the first year, the remainder should last you another 30 years. Using that assumption, work backward from your retirement income goals to see how much you should invest.
For example, suppose you want to invest enough to generate $1,000 per month ($12,000 per year) to supplement your retirement income. Assuming a 7% rate of return and a 4% withdrawal rate in retirement, you should target a nest egg of $300,000:
300,000 × 0.04 = 12,000
Likewise, if you want to invest enough to generate $3,000 per month, or $36,000 per year, you would target a nest egg of $900,000:
900,000 × 0.04 = 36,000
Next, consider the approximate monthly savings required based on your current age and expected retirement age — we’ll use age 65. The closer you are to 65, the larger your monthly contributions must be to meet your target. For instance, at age 45, you might need to contribute north of $600 per month to reach $300,000 compared to just $160 per month at age 25. You can use a retirement savings calculator to help you find the approximate monthly savings required to meet your target.
Assumptions: 7% returns, 4% withdrawal rate
Goal: $1,000/month income starting at 65
Target: $300,000 saved by 65
Monthly savings needed by start age
Start age | Years to 65 | Approximate monthly savings |
|---|---|---|
25 | 40 years | $160/month |
30 | 35 years | $215/month |
40 | 25 years | $420/month |
45 | 20 years | $620/month |
Pro tip: No matter how much (or little) you’ve saved in your younger years, it still pays to increase your savings in later years. For one thing, you may have fewer obligations because, for example, the mortgage is paid off or you’re an empty nester; also, you may be able to make extra catch-up contributions to tax-advantaged retirement accounts. Note that your individual outcome depends on numerous factors, including market conditions, sequence of returns, fees and commissions, and taxes. Returns are not guaranteed, and investments in the stock market may lose money.
Protect the wealth you're building
Once your portfolio begins to grow, take care to protect it. There are two main threats: the first is the risk that inflation, market conditions, or other factors could drain the wealth you’ve built so far. While there’s no way to eliminate these risks, history has shown that the best way to minimize risk is by diversifying your portfolio across a mix of asset classes, including stocks and bonds, to balance upside potential (that keeps you ahead of inflation) and downside risk (loss of principal in down markets). If you’re not confident about how to do that, consider talking with a financial advisor.
The second major risk is income interruption, which often means being unable to earn a paycheck due to temporary job loss or disability from illness or injury. Such an interruption could force you to stop contributing, or even require you to withdraw early, jeopardizing the income available to you in retirement.
Disability insurance helps protect your income, reducing the likelihood of drawing down your portfolio and even allowing you to continue making contributions. If an accident or illness prevents you from working, disability insurance is designed to replace a portion of your income and help protect your current lifestyle and savings for the future.
Life insurance is also an essential form of wealth protection for your dependents. As you get coverage, be sure to designate beneficiaries to ensure the policy death benefit is paid out properly. Choosing permanent life insurance with cash value (whole life or universal life) can further help protect family wealth: it provides financial protection for your dependents during your working years plus a long-term tax-advantaged asset that can be accessed for various needs or even help fund retirement. Plus, it is an important part of your estate planning strategy.
Common mistakes that derail wealth-building
Building wealth through investments may seem straightforward, but that doesn’t mean it’s easy. Many investors stumble end route to their goals due to one or more of the following pitfalls:
Chasing performance: Switching up your holdings to chase the latest trend or follow a hot stock could cost you. Investors who chase returns often wind up buying high and selling low, and end up paying more in fees and taxes.
Panic-selling in a downturn: It’s the nature of the market to ebb and flow; trading on emotion instead of data could lock in losses rather than protect against them.
Giving in to lifestyle creep: As your income rises, so should your contributions. Make a conscious effort to redirect additional income to your future, not your present.
Under-diversification: Concentrating too heavily in a single stock or industry leaves you vulnerable. Rebalance periodically and allocate your holdings across a diversified portfolio.
Ignoring fees: Make sure you understand all your brokerage and asset management fees, because they can make a big impact over time.
Skipping income protection: Your monthly contributions are the engine driving wealth accumulation. Without income protection, you risk the engine stalling to a halt.
Searching out the next “fast money” method, whether it’s concentrating on a single stock, speculative assets, or leverage (such as options), is more likely to magnify your losses than it is to magnify your gains. It’s natural to look for the faster path to wealth, but remember the math: compounding works incredibly well — but only if you provide the time required. Investing to build wealth isn’t a get-rich-quick plan, but it is a reliable one.
How Guardian can help
As a mutual company, an income protection leader, a retirement plan provider, and a wealth management provider, Guardian covers parts of the wealth equation that a brokerage alone cannot. And our A++ (Superior) financial strength rating from A.M. Best reflects our commitment to meeting long-term commitments. If you’re ready to talk about your wealth-building goals, a Guardian financial advisor can help. Here's how to find someone near you:
Frequently asked questions about building wealth
The answer depends on multiple factors, including your time horizon, risk tolerance, tax situation, and retirement goals. For most long-term investors, a diversified portfolio consisting of equities and bonds in one or more tax-advantaged retirement accounts can help sustainably build wealth. Rounding out this core with real estate investments, annuities, and permanent life insurance can address many investment risks and suit specific situations. Talk to a financial advisor for options that fit your goals.
While many may point to real estate as a surefire path to wealth, citing self-made millionaires who invested this way, the true picture is more nuanced. A high net worth also requires consistent saving, strategic investing (including equities and other asset classes), diligent protection, and time.
It depends on how you define savings. If you mean retirement account savings, the figure is likely below 5%, according to an analysis of the Fed’s Survey of Consumer Finances.5 If you’re talking about total net worth, it could be roughly 10%, according to a report from the US Census Bureau.6
Within a retirement account, the real estate investment universe commonly includes REITs, real estate mutual funds or ETFs, and online platforms that pool capital from multiple investors to finance diversified real estate projects. These vehicles can offer broad exposure to residential and commercial properties while letting professionals manage acquisitions, financing, and capital gains tax reporting inside the fund structure, with pricing usually based on a daily net asset value. Many listed REITs or real estate index funds are relatively low-cost, have a modest minimum investment, and can help reduce risk through diversification, although some private deals, development funds, and single‑asset investment property offerings can be higher-risk and less liquid.
Bonds can provide relatively stable benefit distributions because most pay fixed interest payments on a set schedule, which can be attractive if you are building a steady income stream to complement other investments. If you hold an individual bond to maturity and the issuer does not default, you should receive both your periodic interest income and the full par value back, which can help preserve capital as part of an overall investment strategy.
High‑quality municipal bonds may offer tax-advantaged income, and high‑grade corporate bonds and agency bonds can offer higher yields than cash savings while still having lower volatility than stocks, especially when held inside diversified bond funds. Adding bonds or bond funds to a portfolio can reduce reliance on equities, along with exposure to market volatility, which is useful for clients approaching retirement or with shorter time horizons than those appropriate for long-term bonds alone.
The main risk unique to fixed income is interest rate risk: when interest rates rise, the prices or market values of existing bonds tend to fall, because new bonds are issued with higher coupons and investors demand a discount to hold older, lower‑yielding issues. This dynamic is especially pronounced for long-term bonds, which are more sensitive to rising interest rates and can experience larger price swings even though their income stream appears stable on paper.
Bonds also carry credit risk, the possibility that an issuer cannot make scheduled interest payments or repay principal, which can lead to losses if a corporate bond, municipal bond, or agency bond defaults or is downgraded. In addition, bond returns may lag inflation and equities over long horizons, so relying too heavily on fixed income can limit growth, even while it provides interest income and perceived safety.
You can invest in the bond market either by owning individual bonds directly or by using pooled vehicles like bond funds. Both are commonly used to provide passive income in retirement.
When you buy bonds directly, you are agreeing to lend money to a government, municipality, or company in exchange for principal back at maturity and periodic interest payments. You can buy individual corporate bonds, municipal bonds, US Treasuries, and agency bonds issued by government-related entities, each with different tax treatment and levels of credit risk.
You can also use bond mutual funds and ETFs, which are bond funds that pool many issues together and hold a diversified mix of short-, intermediate-, and long-term bonds across different issuers and sectors. Bond funds simplify your investment strategy because you do not have to select or trade individual issues, and you can get broad exposure to the bond market in a single position that is professionally managed. However, if you choose to invest in these vehicles, it’s a good idea to look for a low expense ratio and try to minimize fees that can eat away at returns.
Regardless of the vehicle, the core economic idea is that you lend money to issuers who pay interest over time, so bonds are often used when an investor wants a relatively predictable interest income or a steady income stream. Many retirees, for example, rely on the defined benefit distributions from bond interest payments to help cover expenses while allowing equities to drive long‑term growth.
