Many people emphasize the investing side of wealth building over the
saving side. They analyze years' worth of mutual fund data. They
statistically break down market history. They allocate their assets down
to two decimal points. They search for the highest yield. While all of
this has value, it can't make up for not setting money aside to begin
with.
Your financial wealth consists of two components; the money you save and the earnings on that money. To build sustainable wealth you need to manage both. And both are supported by four key fundamentals.
1. Use debt strategically - don't spend more than you earn. Some times debt can be useful most of the times it creates problems. If you borrow money to get control over an asset, like buying a home, debt can be a useful wealth building tool. If it is used for consumer goods, it tends to create problems. Using it for consumer goods happens when you spend more than you earn.
Wealth can disappear in many ways. Let's say you are going to buy that $1,000 HD TV. You have to buy it with after tax dollars. You may need to earn $1,200 -1,300 to net the $1,000 to purchase the TV. Once you bring home the TV and plug it in, it's value drops because now it is considered used. You now need to use $1,300 of your earnings to own something that is now worth, maybe $600. You exacerbate the problem when you buy this on credit.
Smarter consumer spending and use of debt can save a lot of money over time. Saving money by not spending it is just as important as setting money aside.
2. Budget - know what you spend. You can't manage what you don't measure. A lot of people are clueless about where the money goes that they take out of the ATM or the impulse buying on their debit card. Many times they simply wait until the end of the month to see if they have any money left. If they do they may save some of it.
Instead, set money aside at the beginning of the month into your savings. Learn how to live on the rest. If you estimate the money you will likely spend by category, like rent, car, and entertainment and so on, you now have a point of reference to compare should your spending exceed this amount.
This is good information to have. If at the end of the month you discover you spent $800 on entertainment when you budgeted $600 you need to adjust some other spending if you are to spend less than you earn and continue to save. Otherwise, you may be heading for debt.
3. Power of compounding - money makes money. Compounding wealth is where you get interest paid on previously earned interest and growth on previously earned growth. This is where your money set aside makes its own money. The benefits of compounding take a bit of time to show up but when then they do they do so exponentially.
For example if you save $5,000 a year and earn 3% this will grow to $237,875 over thirty years. If instead you earned 5% it would grow to $332,190. These earnings come from setting aside only $150,000 (30 times 5,000).
If we take the same example above but just save money for twenty years then the value at 3% would only grow to $134,350 and at 5% to $165,330. The big gains happen in the later years. This is the exponential affect.
The lessons here are to start saving early, don't wait until you get into your fifties and every little bit of extra earnings helps. As an aside, you can see slow and steady can still win the race. Reaching for high risk with the likelihood of big losses can ruin your wealth building plans.
4. Taxes and expenses hurt - defer and economize. Take advantage of IRAs and 401(k) s. They help to reduce your current taxes and allow you to defer taxes on your investment earnings. Both of these, when compounded, add a lot to future wealth building.
When you defer income taxes it's like the US Treasury is giving you an interest free loan. Instead of mailing tax money to them, you get to keep the money and invest it. You get the extra earnings and avoid paying taxes until you are ready to take the money out and spend it.
This usually is when you are in a lower income tax bracket. Also, all of the interest, dividends and capital gains you earn avoid income taxes until you take the money out. This super charges wealth building.
Investment expenses can eat a way a lot of your hard earn savings. Mutual funds and other packaged financial products have a cost. You should know what these costs are and shop as diligently for the right products as you would anything else you buy.
If you can lower your investment expenses by one percent per year, than in our example of setting aside $5,000 for thirty years you would have 34% more money. Although the expense seems small, the power of compounding makes it large. Check out the costs of the investments in your 401(k) and other investment accounts then comparison shop.
You still need to learn about investing. Making smart investment moves certainly does add to wealth. But, if you haven't set aside enough money to begin with and don't use the 4 key fundamentals to your advantage, you may not have much to show for it when you retire
Source: EzineArticles.
You May Also Like:
Your financial wealth consists of two components; the money you save and the earnings on that money. To build sustainable wealth you need to manage both. And both are supported by four key fundamentals.
1. Use debt strategically - don't spend more than you earn. Some times debt can be useful most of the times it creates problems. If you borrow money to get control over an asset, like buying a home, debt can be a useful wealth building tool. If it is used for consumer goods, it tends to create problems. Using it for consumer goods happens when you spend more than you earn.
Wealth can disappear in many ways. Let's say you are going to buy that $1,000 HD TV. You have to buy it with after tax dollars. You may need to earn $1,200 -1,300 to net the $1,000 to purchase the TV. Once you bring home the TV and plug it in, it's value drops because now it is considered used. You now need to use $1,300 of your earnings to own something that is now worth, maybe $600. You exacerbate the problem when you buy this on credit.
Smarter consumer spending and use of debt can save a lot of money over time. Saving money by not spending it is just as important as setting money aside.
2. Budget - know what you spend. You can't manage what you don't measure. A lot of people are clueless about where the money goes that they take out of the ATM or the impulse buying on their debit card. Many times they simply wait until the end of the month to see if they have any money left. If they do they may save some of it.
Instead, set money aside at the beginning of the month into your savings. Learn how to live on the rest. If you estimate the money you will likely spend by category, like rent, car, and entertainment and so on, you now have a point of reference to compare should your spending exceed this amount.
This is good information to have. If at the end of the month you discover you spent $800 on entertainment when you budgeted $600 you need to adjust some other spending if you are to spend less than you earn and continue to save. Otherwise, you may be heading for debt.
3. Power of compounding - money makes money. Compounding wealth is where you get interest paid on previously earned interest and growth on previously earned growth. This is where your money set aside makes its own money. The benefits of compounding take a bit of time to show up but when then they do they do so exponentially.
For example if you save $5,000 a year and earn 3% this will grow to $237,875 over thirty years. If instead you earned 5% it would grow to $332,190. These earnings come from setting aside only $150,000 (30 times 5,000).
If we take the same example above but just save money for twenty years then the value at 3% would only grow to $134,350 and at 5% to $165,330. The big gains happen in the later years. This is the exponential affect.
The lessons here are to start saving early, don't wait until you get into your fifties and every little bit of extra earnings helps. As an aside, you can see slow and steady can still win the race. Reaching for high risk with the likelihood of big losses can ruin your wealth building plans.
4. Taxes and expenses hurt - defer and economize. Take advantage of IRAs and 401(k) s. They help to reduce your current taxes and allow you to defer taxes on your investment earnings. Both of these, when compounded, add a lot to future wealth building.
When you defer income taxes it's like the US Treasury is giving you an interest free loan. Instead of mailing tax money to them, you get to keep the money and invest it. You get the extra earnings and avoid paying taxes until you are ready to take the money out and spend it.
This usually is when you are in a lower income tax bracket. Also, all of the interest, dividends and capital gains you earn avoid income taxes until you take the money out. This super charges wealth building.
Investment expenses can eat a way a lot of your hard earn savings. Mutual funds and other packaged financial products have a cost. You should know what these costs are and shop as diligently for the right products as you would anything else you buy.
If you can lower your investment expenses by one percent per year, than in our example of setting aside $5,000 for thirty years you would have 34% more money. Although the expense seems small, the power of compounding makes it large. Check out the costs of the investments in your 401(k) and other investment accounts then comparison shop.
You still need to learn about investing. Making smart investment moves certainly does add to wealth. But, if you haven't set aside enough money to begin with and don't use the 4 key fundamentals to your advantage, you may not have much to show for it when you retire
Source: EzineArticles.
You May Also Like:
