Many
people think that getting rich must be a complex, fancy process
that’s out of their reach. Though there are many paths to financial
freedom, the reality is that building
wealth can
be a series of simple, small steps that you accomplish over time.
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| Click the Image! 10.000$ are yours! |
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In
this episode I’m going to give you 5 principles of building wealth.
If you’re already following them, you’re on the right path to
achieving financial success. If not, you’ll know exactly what to
do.
Principle #1: Start Saving Early and Automate It
One of
the most important factors in how much wealth you accumulate depends
on when you start saving. Starting early allows your money to
compound and grow exponentially over time—even if you don’t have
much to invest.
Never
make the mistake of thinking that you’ll start saving in the
future. If you wait until you have more money, get a raise, earn a
bonus, or get a tax refund, you’re burning precious time. That’s
because waiting to invest even small amounts today will really cost
you in the long run.
For
instance, let’s say you invest $200 a month starting in your
mid-20s and get a 7% average return. If you do that for 4 decades,
you’ll have close to $525,000 when you’re in your mid-60's.
But if you wait to start investing until your mid-30s and invest twice as much each month, or $400, you’d only have about $485,000 to spend during retirement, assuming the same return.
In
other words, waiting 10 years to get started means you had to pay
more out-of-pocket for decades—and left you $40,000 short!
Because
it’s so easy to procrastinate saving, the best strategy is to
automate it. Have money automatically transferred from your paycheck
or bank account into a savings or investment account every single
month.
Putting
your financial future on autopilot simplifies your life and insures
you’ll slowly get rich. I’ll tell you more about where to put
your money in next principles.
Principle #2: Save Money for the Short-Term
Though
we tend to use the terms saving and investing interchangeably,
they’re really not the same thing. Savings is the cash you keep on
hand for short-term planned purchases and unexpected emergencies.
For
instance, if you’re saving money for a down payment on a house that
you plan to buy within the next year or two, keep it 100% safe in a
high-yield
bank account that’s FDIC-insured.
Your
savings should never be invested because the value could drop at the
exact moment you really need all the money.
If
you don’t have an emergency
fund that’s
equal to at least 3 to 6 months’ worth of your living expenses,
make accumulating one a top financial priority. Set aside 10% of your
gross pay until you have a healthy cash cushion to land on if you
lose your job or can’t work for an extended period of time.
Principle #3: Invest for the Long-Term
Investments
are the opposite of savings because they’re for your distant
future, like retirement.
If you’re relying on being healthy enough to work until the day you
die, or on living off of Social Security as a sole source of income,
that’s extremely risky.
Over
time, a diversified stock portfolio has historically earned an
average of 10%. But even if you only get a 7% return on your
investments, you’ll have over $1 million to spend during retirement
if you put aside $400 a month for 40 years.
So
start investing a minimum of 10% of your gross income for retirement.
Yes, that’s 10% in addition to the 10% for savings that I
previously mentioned. Consider these amounts monthly obligations to
yourself—no different than any bill with a due date.
If
you think that’s more saving and investing than you can afford,
start tracking your spending carefully and categorizing it. I promise
that when you see exactly how you’re spending money, you’ll find
opportunities to save it. Then divert those amounts to savings or
investments instead.
Principle #4: Use Tax-Advantaged Retirement Accounts
If
your employer offers a retirement plan, like a 401(k)
or
a 403(b), start participating as soon as possible—especially if
they match some amount of your contributions. Here’s why matching
is such a big deal:
Let’s
say you get a full match on the first 3% of your salary that you
contribute to a 401(k). If you earn $40,000 a year and contribute 10%
of your salary, that comes out to $4,000 (10% of $40,000) a year or
$333 a month. If that’s all you invested over 40 years with a 7%
average return, you’d have a nest egg in excess of $875,000.
But
now consider what happens when your matching funds kick in: If your
employer matches contributions up to 3% of your salary, they’ll add
an additional $1,200 (3% of $40,000) a year or $100 a month into your
account.
Now
you’re socking away $5,200 ($4,000 plus $1,200) a year instead of
$4,000, which means you’ll have over $1.1 million after 40 years.
That’s about $260,000 more thanks to those additional matching
funds!
Even if your employer doesn’t match contributions, I’m still a big fan of using workplace retirement accounts because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans also save you money on taxes each year. And you can take all your money with you—including your vested matching funds—if you leave the company.
If
your job doesn’t offer a retirement plan or you’re self-employed,
it’s easy to create your own with an Individual Retirement
Arrangement or IRA.
Principle #5: Don’t Pay High Interest
Every
dollar of interest you pay to a lender or a credit card company is a
dollar that won’t be making you rich.
Get
rid of high-interest debt as
soon as possible so you can put your money to better use. Make a list
of your debts and the interest rates you’re paying. Reducing the
highest-interest accounts first will save you the most money so you
can use it to pay off the debt even faster.
Click the Image! 10.000$ are yours!
But if you want the satisfaction of eliminating a smaller debt first, even if it isn’t your most expensive debt, that’s fine too. The idea is to be conscious of what you’re really paying on your debt and to create a plan to cut your interest payments. Remember that if you’re only making minimum payments on your credit cards, you’re making the card company rich, instead of building wealth for yourself.
Financial Advice To Get Rich
The
key to building wealth is to start saving and investing right away.
Don’t get discouraged if you have to start small; putting away just
$25 a month is better than nothing. And if you didn’t start
investing in your 20s, don’t stress out about it—simply take
action and get started right now.
Setting
up your accounts and automating contributions is a powerful step in
the right direction. Years from now when you’ve got savings and
investments to fall back on or to fund the lifestyle of your dreams,
you’ll be really glad that you took control of your financial
future.
