For me, building wealth was not a matter of becoming rich, because I stopped short of what I would consider "Rich." What I wanted was financial security, enough saved and invested so that I wound not HAVE to work. It is a tremendous relief knowing that if you become unemployed that you can easily survive. Or better yet, have the flexibility to pursue your dreams.
My dream, from the time I entered the Academy, was to retire by age 30, then devote my life to helping people. It actually took until age 34, due to my last relationship at the time, and family obligations.
THE STEEP CURVE OF INVESTMENT GROWTH & WEALTH
The Wealth Curve can be very steep in your favor, but it totally depends on you starting to save and invest as soon as possible, like when you are 16 years old or younger. Saving $1 a week as a child is a great start.
Let us say that all you could afford to save and invest was $12.50 a week. If you start a Saving's account and save at least $12.50 a week, at 4% interest (ie. GE Interest Plus account, etc), you would have $25,556 in 25 years.
But if you invest that $12.50 a week in a Mutual Fund (using an 8% annual return), with automatic reinvestment of dividends and capital gains, you would have $47,184 in 25 years. In reality, I have been realizing average returns ranging from 12 to 18% in most funds, averaged over a 22 year period, including past recessions, but obviously the future can not be guaranteed. Over the long run, the bad times average out with the good times.
Then, if you could save $100 a month ($25 per week), at 8%, it would be $94,246 in 25 years. $200 per month at 8% would give you $188,493 in 25 years. If you push the years until retirement date, the number are amazingly high.
It is a steep curve but it is totally driven by how early you start. Almost everything I have is from my first 5 years of employment, AT MY LOWEST WAGE EVER. I saved every penny I could and lived like a monk for 5 years. I retired at age 34, but could have been sooner if not for boyfriends with VERY expensive tastes. LOL
CHOOSE TO BE AN INVESTOR OF CAPITAL, NOT A BORROWER OF CAPITAL
Your best Savings and Invest plan is to stay out of CONSUMER DEBT. If you have $10,000 to either pay off your Consumer Debt, or Invest, the interest you pay to service your Consumer Debt will be much greater than you can earn by investing the money. Pay off all Consumer Debt, and do not incur any new Consumer Debt. Then invest from that point.
MATTHEW'S RULES FOR WEALTH BUILDING:
- PAY-OFF ALL OF YOUR CREDIT CARDS. MAKE THIS YOUR NUMBER ONE PRIORITY. This is your best Savings Plan. Be a lender not a borrower.
- NO Credit Card Debt. Always pay off your credit card in full every month. If you can't do that, don't buy it. NOTE: It is Ok to do a few big purchases (for which you already have the money) on credit to build you Line Of Credit for mortgage approval purposes, and for emergencies.
- NEVER go into debt (no car loans, etc.) except for a reasonable mortgage, with at least 25% down, and not until you have been well employed for 5 to 10 years (depending on salary & amount already invested). Save the money to buy things like a new TV. If you cannot afford to buy something now, wait until you can afford to pay cash. Pay cash for a new car, unless an extremely low interest rate is offered.
- Wait until you have a solid financial foundation before having children, fostering children, or adopting children. Otherwise you could be prevented from ever having the resources to build the foundation. The average cost for raising a child is currently (2010) around $13,000 to $14,000 per year ($1,083 to $1,167 per month), or $234,000 to $252,000 for 18 years (does NOT include college). I was a Foster Parent for two children.
- In the first five years, live like a monk, invest every penny possible. The sooner you start to seriously save and invest, the sooner you will be able to retire. Use restraint in buying your toys and cars for five years, and save every penny you can.
- Consider calculating a realistic amount of money you can afford to set aside and save each month. Invest first and live off the rest. Do this for at least the first 5 to 10 years, to establish your financial base.
- Fully utilize any Employer Benefit Plans, such as 401k, 403b, stock matching, or KEOGH plans, contributing the Maximum allowed. If none are offered, start your own IRA (very easy to do).
- Invest an additional amount of 15% of your after tax income, or higher (25% would be nice).
- Seriously consider setting up an automatic monthly investment plan, which automatically takes a fixed amount of money from your checking account each month and invests it into an investment, such as a Mutual Fund. All of the major investment firms will do this (like American Funds, Vanguard, Franklin, etc).
- Diversify your portfolio.
- NEVER EVER deal in Futures, Options, Day Trading, and Real Estate Partnerships, unless you make a living out of it.
- Don't OVER-manage your investments. Commissions will eat away at your profits. Choose your investments for the long-term.Investigate Dollar Cost Averaging1
- Calculate a solid and realistic estimate of how much you will need to have invested, to generate enough income for you to continue living in the style you have grown accustomed to, after you retire. You would be surprised at how little a million dollars will take you (depending on where you want to live). You could end up needing a minimum of two million dollars, at time of retirement.
- For a minimum of one year, keep track of every dollar you spend and what you spent it on. Know where your money is going. If you are shocked at finding out that you are spending $3,000 per year on coffee drinks, you can reduce it to something you can live with. Do this again at each major change of your life, like a new job or a major promotion, a move to a new city, after purchasing a house, etc. I have tracked every I have spent since age 13, starting in double-entry books, then going to software. By controlling the small stuff, I can afford the big stuff I want.
- Make up a Budget. Prioritize what is most important to you. CONTROL how and where you spend your money. A lot of small wasteful items can add up to big bucks, very quickly.
- Never consider your home as part of your investments. Never count on retiring off the sale of your home.
- Keep an Emergency Fund, set aside from savings and investment. I recommend setting aside a minimum of 25% of one year's worth of take home salary, which you can build-up over a number of years. If you loose your job, this could keep you off the streets. Many people are a few paycheck away from being homeless.
- Once you have established your financial base, consider investing in Tax-Free Securities or Tax-Free Mutual Funds to keep your tax burden down. They earn less but are not taxed, and may keep you out of the next higher tax bracket.
- Having a filthy rich partner does not get you off the hook. You should be responsible for your own basic savings, investments, and retirement. You will feel better about yourself and you will feel more secure. Divorce could leave you penniless otherwise.
- Educate yourself on your investments. DO NOT TRUST OTHERS TO MAKE MONEY FOR YOU. Seek advice, but make your own decisions of what to buy and what to sell. If something looks like it is too good to be true, then the probability is very high that it IS too good to be true.
- Do not Leverage your stock Investments. Do not Borrow money to invest. This is very high risk and you can loose everything.
- Do not include Social Security or Medicaid benefits in your retirement calculations. If you actually do get something, it can be a bonus.
- Some companies have retirement plans that are separate from their 401k or 403b plans. Do not rely on that plan's benefits. These retirement plans are not guaranteed, and can be reduced, raided, or discontinued. I worked for Exxon and they raided 1.1 Billion dollars from the Retirement Fund and shut it down. They gave us all a small Annuity. The same goes for company Health Care Plans for their retired workers. You cannot rely on such things. Plan for enough retirement that will at least allow you to survive, if you loose the above-mentioned benefits.
1 Dollar Cost Averaging: An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.
It's a strategy that's sometimes known as the constant-dollar plan. By investing a fixed amount at set intervals, the investor buys more shares when the security price is low and less when it is high, theoretically reducing the overall cost of the investment.</ol>
©Matthew Barry 2005, 2009, 2010, 2011, 2014