4 Basic Steps to Growing Rich

This is one of the first articles I’ve written on personal finance. The basic steps to growing rich are the same no matter what your background, career, or experiences. Spend less than you make and make your money work for you. This article is the basis of what you need to do to make this happen.

Make a plan

If you’re like most people, you need a plan or structure to be efficient. Some people have that magic ability to shoot from the hip and everything goes swimmingly, but most people will just spin their wheels in a million different directions and never reach their destination. You know yourself better than anyone, so you know your abilities, wants, needs, capabilities, etc. You can tailor your own plan to best suit those characteristics. Read this article then take the time to make out a plan of attack. Start small with steps you know you can achieve. Then work up from there. Once you see that you are making progress, it’s easier to step up your game. Everyone who reads this will be at different points in their path to wealth, but we are all on that path and can all do things to improve our chances. Maybe your first step is cutting back a couple of Premium coffees a week, maybe it’s not buying the newest sports car at sticker price, maybe it’s opening that first investment account. As you become more and more educated, you’ll see what decisions you need to make that best suit you.

Spend less than you earn

The American Median Income is approximately $45,000. I know some of you are wishing they had that much income and others are well above this number. The bottom line is we can all manage our spending a little better than we are doing currently. This is the first step for growing rich. Americans are notorious for “living on credit” i.e. spending more money on stuff than they can afford based on their income. If you want to become financially independent you need to learn to enforce your own spending barriers. No one ever got rich by buying the newest coolest thing they couldn’t afford every time someone would offer them a line of credit. The bottom line from this is that if you can’t save the money and pay cash for something, you should attempt to do without it. If you are one of those people who love high end things, but doesn’t have the budget to afford it, try buying used items.

Now that we’ve addressed the issue of living within our means, let’s look at the things we can afford but don’t necessarily need. Everyone has their little guilty pleasures, but have you taken a look at what those guilty pleasures are costing you? Look at the things you buy every day, breakfast on the run, a coffee, a newspaper, lunch out, etc. These things may seem small, but even $3 a day is approximately $100 a month. If you were to invest that at a measly 5%, in 20 years you’d have nearly $50,000! That’s just a small example of what we’ll discuss later in this article.

Get out of debt

There are all sorts of opinions out there and different trains of thought. Good debt vs. bad debt, investing at a higher interest rate than your debts, etc. However, I like clear cut, simple ideas that work. A mortgage isn’t extremely relevant to this portion of the article because it’s a large expense that most people reading this wouldn’t be able to pay off, and it’s comparable to rent which is generally a necessity. If you are one of the lucky ones who have neither a rent or a mortgage, good for you! That’s a large chunk of money that you can apply elsewhere in your path to growing rich!

For the rest of us, once you’ve freed up a bit of money from your income, the first thing you should do is build an emergency fund. A good starting point is one month’s budget needs.  Then make a list of all your debts and the payments from lowest to highest. Start with the smallest one and focus any excess cash on eliminating it. Establish a consistent payment higher than the minimum allowed. Once it’s paid off completely, roll that full amount of payment over to the next smallest loan. And so on and so on. As you roll the extra money over to each new loan or credit card, they will go down faster and faster. For more information on this, reference the Dave Ramsey Snowball System. One note to make here is once you get your credit card paid off, DO NOT cancel it. Credit card history and available credit are very helpful in building your credit score. A good credit score can save you TENS OF THOUSANDS of dollars over the life of a mortgage.

Make your money work for you

Investing

Investing is the single most important step for growing rich. Don’t get me wrong, I’m not saying investing in the stock market is the only way to get rich, I’m saying the overlying concept of investing. You can invest in yourself, in small business, in real estate, in the stock market, in all sorts of things, but if you can’t make your money work for you most people will never be able to save enough to be wealthy.

Compound interest is a beautiful thing. I want you to take a look at a compound interest calculator here. Play around with it. Put in some realistic numbers for you at this point in your life. Can you afford to invest $50 a month? Can you do $500 a month? Look at the difference between the 20 years I mentioned at the beginning of this article and 30 years! The thing about compound interest is that it increases exponentially. For most people who aren’t finance oriented, investing is a scary concept. And it can go wrong, especially if you don’t diversify. However, in recent years there has been the emergence of an investment vehicle for the not so savvy investor…. the “life cycle fund”

 

Life Cycle Funds

Where to invest? How to invest? Bonds? Stocks? CDs? Mutual funds? All these questions are overpowering for the person trying to get their toes wet. So overpowering in fact, most people never make the plunge. In the past decade though Life Cycle Funds have pushed their way into the market. These are funds designed to offer investors higher risk, higher returns when they have time to recover, then closer to retirement they become lower risk and more solid. They came into play after the recent collapse of the market where some people approaching retirement lost over half their savings right before retirement. That’s a tough recovery to make when you think you’re going to retire with a million to live on and then almost overnight it’s less than half of that.

Life Cycle Funds are gaining more and more popularity and are offered by most large investment brokers. There are different ways to invest in these funds. Retirement accounts(IRAs, ROTH IRAs, TSP, etc) or just a regular brokerage account. Retirement accounts offer tax advantages, where regular brokerage accounts are taxed on any realized gains(so your profits are taxed if you sell the fund). Life Cycle Funds start off with a larger portion in stocks(more risky, higher potential returns) and smaller portion of bonds(more stable, less risky, smaller potential returns) and that ratio begins to flip flop as the stock reaches the year of retirement. They are meant to be a no brainer, management free fund for the investor. Take a look at them and get your feet wet. Start small and as you learn more and develop more confidence, you can step up your game. LET’S GROW RICH TOGETHER!

This article was written by Val Dufour and is able to be distributed by any means requested as long as this signature block is in place. www.vetinvest.com 

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