Wealth Creation, Slow and Steady!
Out of all the financial lessons, Wealth Creation is definitely my favorite. Don’t get me wrong, eliminating debt is exciting when you see your debt slowly being eliminated. It’s even more exciting to finally hit that point when you are finally debt free. All that hard work that you did was to get to this point, when you can start building wealth.
I’m going to start this off by answering one simple question, why build wealth? One reason is for you to save money for your retirement. You might be paying into social security, but are you going to be able to depend on living off social security alone, even if it is still around when it is time to retire. Consider the expenses you are paying right now and take a look at the money you expect receive from social security when you retire. I think that you will find out that you might be able to cover the basic expenses, but that’s about it. Have you considered what happens if you ever run into a major medical problem? Reason number one for saving and building wealth, is so you will be able to have a comfortable retirement.
The second reason for building wealth is to help others. I don’t know if you’ve ever been in the situation where you needed help and someone was there for you. This is usually a family member such as parent or close relative that is able to loan or even give you money, or a car when need help. How would you like to be the person that is able to help out your relatives in their time of need? How about being able to put your grand children through collage? Trust me, it is a great feeling to be able to help others.
I found that the best way to build wealth is by building wealth slowly. If someone offers you an investment opportunity that sounds to good to be true, it probably is. Don’t fall for the get rich quick scams that are all over the internet these days. Build your wealth the old fashioned way, honest work for an honest pay.
I’m going to let you in on a little secret that a lot of people apparently don’t know about. There is a proven method to build wealth that virtually anyone can do but requires some effort on your part. Are you sitting down and ready for me to tell you the secret to wealth creation? Here it is, the three step process:
- Work
- Save
- Invest
So you got me, this really isn’t that hard, but you would think that it was a closely guarded secret, because most people don’t understand and follow this simple process. If they did, there would be very few people in debt these days and I’ll explain why as we take a look at each of these items. As a matter of fact, I believe the reason that most people don’t know how to build wealth is because they was never taught how. From my research, I found out that most people have never truly been taught about planning for their future. I blame this on our society. Growing up, we have always expected to work for a company until you turn 65 or 70 and then live off your pension plan. Times have changed, we need to teach our children how to plan for retirement.
WORK
You don’t have to make a six figure income to be able to build wealth. All you need is a steady income. According to census, the average household income in the United States is around $60,000. The household income for a family of 4 in the US to be considered poverty is $23,000. If you have a yearly income of $24,000 and follow this basic plan and starting at the age of 25, you can have over 2 million dollars in the bank by the time you reach the age of 65. The interest along at retirement can be in excess of $200,000 per year. Does that grab your attention?
How would you like to retire at the age of 65 with over 2 million dollars in the bank? Can you imagine what you will be able to do for your family? You can fully pay for your grand children’s collage; or maybe you want to take the entire family on vacation to France. You will have the ability to change your family’s life, all on a small income that is properly managed. Imagine the possibilities!
Maybe you prefer to retire even earlier around the age of 55. This could be possible, however you won’t have that 2 million dollars in the bank. The interest alone you can receive at age 55 can be over $70,000 per year. If you look at it that way, you can retire at age 55 living off the interest along which is higher than US household income. Maybe early retirement is not a bad idea.
Keep in mind that all the information here is based on averages
and your actual numbers will vary. There is no guarantee
that you will meet these numbers!
Now for even better news. If you plan out your career, you should expect to make much more than $24,000. Can you imagine what you can do with if you made $60,000 or more? Keep in mind, it’s not how much you make, but what you do with what you make. The more you make, the more you should save, and the earlier you start the better.
One of my favorite stories was is about Ted Johnson who worked at UPS for the majority of his life. He never made more that $35,000 a year, but he followed these three basic rules and paid himself first. When he finally passed away he had 70 million dollars, and Ted left 36 million to various charities. All of this was accomplished on the income of a UPS worker.
SAVE
Now that we talked about income, it’s time to talk about how to save money. One key factor in wealth creation is saving some of that hard earned income. Depending on where you are in life, you should save 10% to 20% of your income towards your retirement. If you’re still young and don’t have much of an income, a 10% investment might be fine for you fight now. However, if you’re getting a late start and you’re already in your 40’s, you might want to consider investing 20% of your income.
The younger you are when you start saving and the better. There are two magical words that really make a difference with your savings. Those two words are ‘compound interest’. Compound interest is basically when the interest you make from your money is put back into your investment to make additional money for you. If you’re not familiar how compound interest works, this might be a little confusing so I will try and explain it a little better without going into great detail here.
Let’s say that you invest $2,000 this year and average 10% interest on that investment for the year. Including your $200 from interest, you now have $2,200 in the bank after the first year. The following year you make another 10% on your new balance which 10% of $2,200 is $220, which will give you a balance of $2,420. Hopefully you see how that works. Not only is your investment making money for you, but so is the interest. I know this doesn’t look like much, but a steady investment each year and compounded interested, really adds up over the years. I’ll cover this in more detail later.
Another thing to consider in wealth creation is how to save your money. Some employer’s offer what is known as a matching fund. The way this works is you allow them to take money directly out of your paycheck for retirement before you ever see it, and they will match that money up to a certain amount. This is a great way to save, because you double your money and there’s nothing like free money. If you put back $100 from each paycheck and your employer matches that money, you now have $200 to invest for retirement. You really can’t go wrong with free money.
Another option is if your employer has a savings plan known as a 401K. You can have money taken out of your check every pay period and put into a retirement account for you. This money is taken out before any taxes are paid so the money you put back is tax free. The thing to remember here is that you will have to pay taxes on the money when you take it out of the retirement account. The idea behind this is that you don’t pay taxes now, but the money will be taxed later.
You will also need to look at the investment options that your employer provides. If you only making a small interest rate on your investment, you might be better off to invest in a different retirement plan. Don’t make any quick decisions when it comes to your retirement investing, and consider seeking profession advice.
One of my favorite investment options is a Roth IRA. A Roth IRA is different because the money is taxed before your investment. The good thing about this is that when you take the money out, it is tax free income, and I like tax free money. There is a limit on how much you can invest each year in a Roth IRA so make sure you do a little research.
Next to the employer matching fund, the Roth IRA is my second favorite type of investment, and here is why. Lets say for example that you invest $2,400 each year starting at the age of 25. By the time you reach age 65 you will have invested $96,000 of your own money. With an average 12% rate of return and compound interest, you should have around 2 million dollars of tax free money sitting in the bank. I think everyone could use $2,000,000 in tax free retirement money.
INVEST
All this sounds good so far, but the tricky parts knowing how to properly invest your money. I suggest that you do your own research and learn what to invest your money in. There are investment counselors out there that can help you out for a fee of course. Make sure that you know how all this works because this could make you wealthy or broke.
If seeking an investment counselor, look for someone that is willing to teach you so you can understand how everything works. There are people out there that will tell you they can make you unbelievable returns and tell you to just trust them. Well don’t, quickly run away from these types of people. Only invest with someone that will work with you and that you trust.
I remember when I first started investing; I made over 300% returns in my first year. My second year, I received a call from an investor offering to help me invest my money. I let him know that I was doing fine and really I really wasn’t interested in his help. He then asked me how I did last year so I went on to explain that I made a 300% return. He then said that he could make me that much and more each year. I quickly asked him if he could guarantee that kind of a return and he said yes. At that point, I quickly told him that I would never invest with him because nobody could guarantee that type of a return and if they did they was lying, and I would never trust him with my investing.
When seeking an investment counselor, make sure you find someone you can trust and work with. Stay away from anyone that promises anything that sounds too good to be true. They are usually just trying to get your hard earned money.
With that said, everyone wants to know the best way to invest their money. At one time, I invested in technical stocks, and usually the low priced ones made me a nice return in a short amount of time. This was a time when internet stocks were over priced, but people were willing to pay a premium for investments in technology. I did a decent job at investing at during this time. When the market crash and I lost almost everything I invested. Even the large technology companies that I invested a lot into went down to where their stocks were almost worthless. I took my losses, and sat on the little money that I still had waiting for the right time to start investing again. With the economy on the upward turn, there’s no time like the present!
I no longer invest in individual stocks; instead I now invest in mutual funds. The reason I like mutual funds is because they have fund managers working for you. The job of a fund manager is to properly invest everyone’s combined investments to make investors a good return on their money.
Mutual funds have averaged a 12% rate of return. Depending on which funds you invest in, some might make less and some might make more. I actually have some funds that averaged between 20% – 30%. I also have a few funds that have a lower risk that might make less than 10% each year. Keep in mind that the higher the possible rate of return, the higher the risk, so you want to spread your investments around.
Don’t put all your eggs in one basket. Spread your investments around so if one investment doesn’t do well, hopefully others will make up for it. Let’s say for example that you invest all your money in stock X and all of the sudden something happens and that stock takes a major drop or the company even goes out of business. If this is your only investment, then there goes your life savings and retirement. Spread your investments around into several types of funds to help reduce your risk.
I know it doesn’t sound like this is something that could happen, but it actually did a several years ago. People invested all their retirement money into company stock, when suddenly the world’s economy changed. This drove many companies out of business and eliminated retirement funds for a lot of people. Spread your investments around; don’t put all your eggs in one basket.
Have your investment money taken directly out of your pay check, and deposited into your investment account. This way you’re not going to have the money in your hand and won’t be tempted to spend it. Most people fail at transferring money each pay check into the investment account, so do your self a favor and have your employer do the work for you. This way you won’t spend it.
When it comes to investment accounts, I personally use Etrade for most of my investments. I have three types of accounts setup with them. A regular account for saving and investing, a retirement account for pre-taxed money investing, and a Roth IRA for after tax investments. Etrade has a good section to researching Mutual Funds and provides good risk analyst. Use which ever broker you prefer.
Another thing to keep in mind that prior to retirement investing, you need to make sure you are debt free, and you have a fully funded emergency fund. These are key items before you should start investing into your retirement. If your not debt free yet, go back and check out my other articles. Introduction to Financial Freedom.
I cannot stress enough to do your research before you invest. The information I presented here is no guarantee that what worked for me will work for you. I am only presenting you with a summery of what I have learned and what has been working for me. I can’t predict the future, and won’t give you individual investment advice. So do your research, and happy investing.
I would love to hear your success stories. Please feel free to contact me with your progress, and I will attempt to reply to each email I receive.