By Steven Wightman, CFP, NAPFA Registered Financial Advisor.
This article is about how to build personal wealth in the 21st century. However, if you’re expecting hot stock tips or a nifty new way to use the Internet to invest your money, you’ve come to the wrong place. In fact, I confess to being somewhat deceptive with the title. There are no “new” secrets for building wealth in the new millennium. They’re really the same old secrets smart people used in the last century to become wealthy. Like a good marriage, wealth can’t be achieved without passion and commitment. The question to ask yourself is’ why do I want it? What’s important about money to me right now? Once you know this, you can move to the next step.
1. Have a goal. “I wanna build wealth” and “I wanna retire rich” aren’t goals. They’re dreams, and vague ones at that. To build wealth, you first need to determine what you want that wealth for. Do you need the money to buy your own business or retire in a certain place by a certain time? Then you can decide how much money you actually need to accomplish those goals.
Instead of thinking about becoming “wealthy,” a better concept might be to become “financially independent.” That suggests enough money to allow you to make the choices you want to make. Perhaps you want to have enough money to quit the job you’re in so you can pursue another career that you love more but that doesn’t pay as well. You may not need a lot of “wealth” to accomplish that goal.
2. Spend 10-20% less than you earn. There isn’t a millionaire on the planet that got that way by spending all the money he or she made. That means living below your means. It doesn’t have to be far below your means, say Certified Financial Planner practitioners, but it does mean not spending every penny you earn. Take housing, for example. People often buy the maximum amount of home they can afford. Yet for every dollar they don’t spend on a house, they save approximately $2 – $3 over the life of a 30-year mortgage. [Jenkins MSN article on 7 biggest financial decisions you’ll make—FP file]] That same dollar invested in a diversified portfolio earning an average of 10% over 30 years would earn you around $17.42. That’s a leverage of 17 – 1. So for each dollar you don’t spend, earns you seventeen more for your future security.
Design and follow a spending strategy, so your money goes exactly where you want it and then spend wisely. Research has found that Americans “waste” 20 to 30 percent of their money by not getting the most for their dollars through such simple steps as using coupons, comparative shopping for the best buys from food to auto insurance, and a zillion other money-saving strategies. Invest that 10-20% in a diversified retirement fund to build your financial security. Nearly half of all Americans have saved less than $10,000 for their retirements. Don’t be one of them. Save 10-20% of your gross earnings every month of every year.
3. Minimize your debt. It’s difficult—and not always wise—to avoid debt entirely. Yet too many Americans saddle themselves with needless debt. The average U.S. household pays $950 in interest payments annually. It’s little wonder consumer debt is at all-time high in 2008 of $917 billion USD despite rising wages. Too many consumers can’t wait to spend their next paycheck. 40% of Americans spend more than they earn. Avoid carrying consumer debt. It pays nothing in return (unlike mortgage or college debt), provides no tax breaks and is exorbitantly priced. This particularly applies to credit cards that charge interest as much as 25% above the prime rate. Ask yourself; would you let a burglar take 15% of your annual income each year and not complain?
4. Invest early, wisely, often and as much as you can afford. “Early” is especially the key. Nothing consistently makes money like farther time. Investments that return even modestly over the years will usually make far more money than investments made hurriedly at the last minute. Other “old fashioned” 20th century secrets to investing include maximizing investments in tax-deferred accounts and investing regularly every month. Avoid day trading and market timing. A 2003 study of mutual fund investors by the Boston-based financial services research firm of DALBAR found that investors who bought and held their stock mutual funds over the prior 15 years earned 17.9 percent a year. The average investors, who switched in and out of funds every three years, earned just 7.25 percent a year. Invest for the long-term and make minor annual adjustments.
5. Protect your wealth. As you build wealth, the last thing you want to do is lose it to an unexpected financial catastrophe. Most of us get the basic insurances—life, auto, home. But some of us skimp on medical coverage because it’s expensive and tough to get sometimes, even though a serious medical illness can wipe you out financially. Many of us overlook disability coverage—insurance that replaces income lost because of sickness or disability. Only a tiny percentage of people buy long-term care insurance, and many overlook liability insurance and the use of asset protection trusts to protect us from someone suing us for all we’re worth. Don’t risk losing precious money you worked so hard to save by being penny wise and pound-foolish.
Stick with these keys and a whole new tomorrow may open for you – one of financial independence – and wisdom.
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