10 Simple Rules for Building Wealth
Money doesn’t grow on trees. Your father or grandfather probably divulged this nugget of wisdom to you ages ago. There’s no pot of gold at the end of the rainbow, and the chance of winning the lottery is one in 175 million, at least according to the Huffington Post.
Nothing in life is free –that’s another maxim old timers like to spout from the sage comfort of their easy chairs.
So if money doesn’t grow trees and nothing in life is free, how do you create lasting wealth? That’s where smart financial planning comes into play.
In order to create wealth, you need a good roadmap –scratch that, you need a GPS. Just don’t be surprised if one day it says, “Recalculating.”
Or as philosophers like to say, “The only constant in life is change.”
That’s one thing the 2008 recession taught us.
Do you remember the word problems your Middle School math teacher had you do after recess? Say, for example, an airplane travels eight times as fast as a car. The difference in their speeds is 420 km/h. How fast is each vehicle traveling?
Saving and investing is a lot like that. The age you start determines how much wealth you build.
If Paul starts putting away $50 a month when he’s 22, but Henry doesn’t start saving $50 a month until he’s 32, when they both retire, well, Paul will have more money saved than Henry.
One rule of thumb is to save 10 percent of your income right off the top. But instead of following “rules of thumb” it’s best to find a savings plan that best suits you.
Have a Plan
John Steinbeck said, “The best laid plans of mice and men often go astray.” Steinbeck knew a thing or two about plans going astray; his novels examined the lives of migrant workers during the Dust Bowl and the Great Depression.
The 2008 recession ruined many people’s “best laid” financial plans.
However, wealth creation is the product of good planning, and you can’t effectively attain your goals without a step-by-step plan.
A study by Harvard Business School revealed that 3 percent of people with written goals produced 10 times the results when compared with 83 percent with no clearly defined goals.
According to an analysis of Federal Reserve statistics, as of December 2014, the average household owes $7,283 in credit card debt. How can you begin to build wealth if you’re already $7,000 in the red?
Debt can be used judiciously, for such things as buying a house, but amassing debt because you can’t control your spending is going to hinder any attempt at long-term wealth building. The interest you’re paying on debt can’t be saved or invested.
Live Below Your Means
Here’s another gem of wisdom your father or grandfather may have said. “Don’t let that money burn a hole in your pocket.” Now, they usually uttered this phrase after giving you an allowance for shoveling the driveway, but the same idea applies to the paycheck you get every two weeks.
If you reduce expenses and live below your means, you save money. If you do it for several years, or decades, well, you save even more money.
We’re not saying to manage money like Ebenezer Scrooge. We’re saying that with a little discipline, and less consumerism, every little bit adds up. Skipping the trip to Aruba one year isn’t the end of the world.
Nor do you really need that large Starbucks latte every day. Just think about the money you can save.
There’s no such thing as a risk free investment. However, a diversified portfolio can minimize the risk and equalize market cycles. Lets put it in layman’s terms: don’t put all your eggs in one basket.
Warren Buffet, a man who knows a thing or two about making money, said, “It’s better to be approximately right than definitely wrong.” That’s the essence of diversification.
Don’t Raid the Nest Egg
Your car breaks down, and you need a new transmission. Who are you kidding? You need a new car, ASAP. You get laid off. Your wife has a medical bill that’s not covered under insurance. Life is filled with inconveniences, set backs, hurdles, and curve balls. The best laid plans go astray, remember?
If you have an easily accessible nest egg, there’s a good chance you’re going to raid it like you raid the fridge for pizza on Saturday night.
Resist the urge. Better yet –make your money difficult to reach by putting it in a savings plan with rules and penalties. If you don’t have the discipline not to raid the nest egg, find a savings plan that disciplines you.
Have Patience with the Market
When will a bond perform or stocks get hot? How long do you hold on to an asset?
Despite all the analyzing and pattern recognition, even the best brokers and fund managers have a difficult time forecasting the market. It’s fickle and volatile, not unlike the art major you dated back in college.
There’s a saying, however: “Time in the market is more important than timing the market.” Warren Buffet put it another way: “The market has a very efficient way of transferring wealth from the impatient to the patient.”
In other words, relax and be patient.
Trends are NOT Your Friends
Don’t change your strategy every time you read The Wall Street Journal. Chasing trends is like chasing the Holy Grail.
If you see something catching fire one day, chances are a month later it’s cold as ice, or at least cool as a cucumber. Don’t jump on the bandwagon or be a fair weather fan. Wealth creation is a long haul –a marathon, not a sprint.
In the end, wealth building comes down to one rule: Ask not what your money can do for you, but what you can do for your money. Now that’s a nugget of wisdom to live by.