The Playbook to Build Wealth With An Average Income

Building wealth is achievable for everyone, even those with average incomes. The median household income in the United States is around $84,000, and while challenging, it is possible to build meaningful wealth with a clear plan. The first step is to define what "winning" looks like for you—what financial number will allow you to live the life you desire. The FIRE (Financial Independence, Retire Early) community excels at this, setting clear objectives and staying focused. For those with limited resources, the initial focus should be on "defense" in your personal finances. This means establishing an emergency fund, ideally three to six months of expenses, to prevent desperate decisions that lead to debt. Next, secure adequate health insurance. While it might be tempting to opt for the cheapest plan with a high deductible, this can be detrimental if you can't meet the deductible during a medical emergency. Choose a plan that truly provides a safety net. Reliable transportation is another key defensive measure. Avoid expensive cars that act as "financial napalm"; follow rules like the 23.8 rule (no more than 20% of your gross income on all car payments, the loan term should not exceed three years, and you should put at least 8% down). Finally, budgeting is crucial. Track where your money goes to identify areas for cuts and savings, allowing you to create the margin needed to move to the "offensive" side of wealth building. Once defense is mastered, you can shift to offense. The easiest time to increase your skill set is now, leveraging technology, blogs, podcasts, and online resources to become more valuable as an employee or entrepreneur. Continuously seek an "edge" to stand out and monetize your expertise. Be opportunistic by exploring new job opportunities, companies, or even geographies that offer more growth potential. Starting early and staying consistent, even with a low income, can lead to significant wealth accumulation over time due to the power of compounding. For example, $1 saved by a 20-year-old could grow to $88 by retirement. A common question is whether to use retirement accounts to buy a home. Generally, this is discouraged. Retirement accounts are specifically for retirement, and withdrawing early can incur significant friction costs, including income taxes and a 10% penalty for most of the funds. While a small portion might be accessible without the penalty, it still faces income taxes. Raiding retirement accounts for a home, car, or other expenses is a trap many Americans fall into, jeopardizing future financial independence. Instead, evaluate if you can truly afford the house or if you're trying to force it. Consider adjusting your savings rate to build a down payment, perhaps by temporarily re-prioritizing your financial order of operations to save for a down payment. When buying a first home, it's not always necessary to put 20% down; 3-5% can be sufficient if you plan to stay in the home for at least five years and total housing costs don't exceed 25% of your income. Using a home-buying calculator can help determine affordability and necessary down payment savings without touching retirement funds. Regarding job benefits, while health savings accounts (HSAs) are valuable, they should be considered "toppings" rather than the "main course" when evaluating job opportunities. Focus on cultural fit, career trajectory, and opportunities for vertical movement first. Only then should you compare benefits. Don't assume a company without a high-deductible HSA option has bad health insurance, nor should you automatically choose the HSA option if available. Other plans might offer better subsidies, lower deductibles, or superior benefits that are a better fit for your family's needs. When advising someone on personal finances, start by having them prepare a net worth statement (assets minus liabilities) to understand their starting point. Next, review their spending habits by analyzing credit card statements or bank transactions from the last month, or encourage them to track expenses using a budgeting app. This will reveal where their money is going, allowing them to identify areas for cuts and savings. Once a margin is established, guide them through the financial order of operations: securing employer match, eliminating high-interest debt, funding an emergency reserve, and contributing to Roth accounts. This structured approach provides a solid foundation for financial progress. For couples where one spouse is risk-averse, it's important to explain that what feels safe in the short term (e.g., keeping large cash reserves) can be risky in the long term due to inflation. Conversely, what feels risky in the moment (investing in the stock market) can be an incredible wealth-building opportunity over time. If you have no high-interest debt and a substantial emergency fund (like two years of expenses in cash), it's time to make your money work harder. Use math to illustrate how long it would take to reach financial goals by solely saving cash versus investing in low-cost index funds, showing how investing can significantly accelerate goal achievement. Highlight the long-term consistency of market returns over periods of five to seven years or more, demonstrating that short-term volatility often smooths out. Employee Stock Purchase Plans (ESPPs) can be highly beneficial if structured to offer a discount or a lower purchase price than the market. This is essentially "free money" and should be aggressively utilized. However, it's crucial to diversify. While ESPPs allow you to be an owner in your company, having both your human capital (your job) and investment capital tied to the same company is risky. Implement a system to regularly sell ESPP shares and reinvest the proceeds into diversified holdings outside of your employer's stock to build a resilient financial plan.