Building Wealth is a Journey
When it comes to personal finance, most of us have to learn how to manage our money through trial and error. Unfortunately, many of us were not taught the necessary money management skills that are critical to living a life of prosperity. Personal finance should be a part of every student’s curriculum as millions of Americans have proven that managing money, budgeting, or otherwise living within one’s means as an adult is a mostly unattainable aspiration or afterthought. Instead we’re taught that we can take on seemingly insurmountable piles of debt without worry. It seems everyday we fall prey to the latest marketing trick to get us spend money that we don’t have (i.e. borrowing on credit) and that we’re missing out if we don’t drive the newest luxury or sports car, browse the web on the latest smart phone or tablet, or wear the finest clothes while sporting the most trendy handbag. Sadly, it is this thinking that leaves us a nation filled with debtors who are at the mercy of our creditors. Well, it’s about time we take steps to change our behaviors and start on the path to financial independence.
There are several aspects to your financial life that you must pay attention to if you want to gain any sort of financial freedom. Financial freedom does not mean that you will be wealthy beyond your wildest dreams, as that type of thinking is too lofty and can lead to inaction when it comes to analyzing your spending habits and making necessary changes. Financial freedom means you are in control of where your money comes from and where it goes. Many expenses are unavoidable for most of us (mortgage, car payments, utility bills, etc). However, many expenses that we take for granted as a way of life (credit card interest, car loan interest, etc) are avoidable by making well-informed and strategic financial decisions.
Households should be run like a for-profit business. All else being equal, in order for a business to increase its profit it must do one of 2 things: increase revenue or decrease expenses. Similarly, to build wealth within a household, the household members must either increase revenue or decrease expenses. The ideal scenario, of course, is to do both. In order to increase revenue, one can get a raise, get a 2nd job, or otherwise generate supplemental income through some sort of side business. In order to decrease expenses, one can reduce interest paid on loans. Paying off any and all credit card balances is one of the most financially rewarding moves a household can make as these loans are generally the most expensive due to high interest rates.
Investing should be automatic even with small amounts of money. Because one’s time horizon can be the most valuable aspects to building wealth, employees that have the option of saving money on a tax-deferred basis should consider the impact of doing so. For example, a strategy that many money management professionals consider to be a no-brainer is to sign up for a company-offered 401K plan and to contribute the maximum amount of money required to the point that the employer matches to avoid losing ‘free’ money. The money contributed is not only tax-deferred (meaning you don’t have to pay taxes on it until you draw from it upon retirement) but the company match is free money that is contributed to your account on your behalf.
Another common investment strategy is to set up an IRA (Individual Retirement Account) with an online broker and to contribute the maximum allowable amount every year. If you still have money left over to invest, you can increase your 401K contributions up to the yearly maximum, start funding a ROTH IRA, or start investing in a taxable account. Remember, any account that has tax-saving features (401K, IRA, Roth IRA, etc) will have maximum allowable limits that you can contribute every year. These may change from year to year so be sure to find out what those limits are. You will typically be notified of these limits at the time you fund the account. Non-taxable accounts are generally open to however much you can afford to contribute. If you’re hesitant to put money into investment accounts because you don’t know what stock or fund to buy, you can still put your money into the account and have it sit in a money market fund or cash reserve account. These funds are typically set up to preserve the principle balance. You can at least get the tax benefit of contributing for the current tax year without having to take on the same level of risk as investing in an individual stock or mutual fund until you’ve been able to do the due diligence of determining what you should be investing in.
Saving and investing for the long-term are basic wealth-building strategies that can help prepare you for retirement. It is never too late to change learned behaviors and a small change now can lead to big rewards later. Always consult a qualified professional regarding investments and taxes and do your own research to determine what strategies are best for you and your family.