4 Secrets to Creating Lasting Wealth

net-worthYou can create lasting personal wealth.  It’s possible to meet all of your financial goals.  By choosing to live below your means, save and invest, you’ll be able to pay off debt, educate your children, start a business, save for retirement and put money away for a rainy day.  By living below your means, saving and investing, and by limiting your personal debt you incur, all of these goals will be within your reach.

Wealth means different things to different people.  Some people consider themselves wealthy because they live in an expensive house or drive a luxury car.  Others believe they are wealthy simply because they are able to pay their bills on time.

You have to take the time to decide what personal wealth means to you.  Take some time right now and think about what wealth means to you.  Will it be a million dollar portfolio?  Worry free retirement?

Now that you have defined what wealth means to you, how do your acquire lasting wealth?

Building lasting wealth requires having the right information, planning and making good choices.  Sounds easy right?  I will provide you the basic information and a systematic approach to building lasting wealth.  It is based on time-tested principles you have heard over and over-live below your means; save and invest; control debt; and protect the wealth you accumulate.

1. Live Below Your Means
Easier said than done, right?  Most people that have build lasting wealth didn’t do it overnight.  They got wealthy by setting goals and striving to reach them.  One of those goals was to live below their means.  No matter how much money they made they continued to reduce expenses, sometimes living at below 50% of their income!  It is a discipline that many of us never master, but I believe it may be the most important of the four.  You can not afford to save, or have the funds to reduce your debt, or protect your wealth if you are living paycheck to paycheck.

When it comes to finances, people generally fall into the following groups. Where do you fit in?

Planners control their financial affairs. They budget to save.

Strugglers have trouble keeping their heads above rough financial waters. They find it difficult to budget to save at any stage of life.

Deniers refuse to see that they’re in financial trouble. So they don’t see a need to budget to save.

Impulsives seek immediate gratification. They spend today and let tomorrow take care of itself. They couldn’t care less about saving and investing.

Knowing what kind of financial manager you are is the key to determine what changes you need to make.  To create lasting wealth, you want to be a planner.  Planners live well below their means.

Tips for Living Below Your Means

  • Use cash and Limit your use of credit cards
  • Make your car last as long as you can
  • Limit eating out
  • Avoid frequent impulse purchases
  • Set a budget and stick to it

2. Save and Invest
When you are living below your means, there will be money available for saving and investing.   Where are you going to put your savings?  Investments allow you to put your money to work making more money and increasing your wealth.  First, get some guidance.  There is an art to choosing investments.  Let me rephrase that.  There is an art to choosing appropriate investments.  Good investments will make money, and bad ones will lose money.

When you are saving and investing, your return is dependent on the amount of risk you take with your money.  Usually the higher risk of losing principle, the higher the expected return.  For taking less risk, your returns will be much smaller.  Most of the confusion that I see with investments comes from someone not completely understanding the level of risk they are taking.  Risk is also relative to your time horizon.  An investor with a short time horizon, such as a year or two, should not expose their money to any risk.  If you have ten years until you retire, then you have the luxury of taking on more risk because you have adequate time to recover should you experience a loss.

Your initial extra funds should be placed in a savings account for emergencies, or what I like to call a cash reserve.  Typically consisting of 3-6 months of current expenses.  Once you have your cash reserves in place, only then can you move on to investing in other vehicles.

Tips for Saving and Investing

  • Take the least amount of risk possible to achieve the goal
  • Diversify among various asset classes like stocks, bonds, cash and alternatives
  • Keep an eye on investments expenses, which can reduce returns, all things equal choose the investment with lower expenses
  • Save regularly and systematically
  • Strive to save at least 10% of your income
  • Keep a long-term perspective of the markets and your investments
  • Maximize your use of tax advantaged investments like your employers retirement plan or an IRA

3. Take Control of Debt
I can’t even begin to tell you how much I hate the crushing misery of debt.  The interest you are paying on debt, is money that cannot be saved or invested-it’s just gone.  Debt can be used wisely, for such things as buying a house.  If not used wisely, it can quickly get out of hand.  Your ability to create lasting wealth is dependent on your commitment to using debt judiciously.

Lots of people are mired in debt.  Often, they could not control the causes of their debt. Many people get into serious debt from unemployment, medical bills or divorce.  Unfortunately, many people get into debt from not controlling spending or not planning for the future.

Tips for Controlling Debt

  • Don’t overspend-stay disciplined
  • Save money for a rainy day.  You should have a minimum of three to six months of living expenses in a savings account to cover unforeseen expenses instead of pulling out the plastic.
  • When faced with financing a purchase, it may be better to choose a less expensive option and pay cash.  You could open a separate dedicated savings account for the purchase and save up until you have the money to pay for it.  What a concept!
  • Pay off your credit card balances monthly
  • If you have to borrow, make sure you know all the facts.  That includes the interest rates, fees and penalties as well as the length of the loan.

As you can see, a big part of building lasting wealth is making wise choices about debt.  Debt is a temptation throughout our lives.  To manage debt, you need to know how much you have and develop strategies to control it.

4. Protect Your Wealth
After working your butt off to create personal wealth, you need to protect it.  I can hear the mental groans now.  “Not another insurance speech!”  Without insurance we cannot possibly protect ourselves from major financial loss.  You can buy insurance to cover all kinds of risks, but basic need can be met with life, health and property insurance.

In addition to health and property insurance, you may want to consider life insurance and long-term care insurance.

The need for life insurance depends on your circumstances.  Life insurance serves the purpose of replacing income lost due to the death of the insured.  Life insurance helps give financial protection to your children, spouse or even your business.  A comprehensive financial plan can help you assess your current and future life insurance needs.

Long-term care insurance is not medical insurance, but it pays for such health-related items as nursing home, assisted living or in-home care.  If you or a family member became very ill and needed a nursing home, who would pay for it?  You would, until all your assets, and those of your spouses are exhausted.  Only then could you count on government assistance to cover your needs.  I have seen first hand, the financial devastation that a long-term care illness can inflict.

Tips for Protecting Your Wealth

  • Take advantage of group insurance through your employer or associations you belong to
  • Analyze your family’s needs and decide how much you can afford to pay
  • Shop around, it pays
  • Consider higher deductibles to lower your premium
  • Ask about other discounts that may be available (for good driving record, good grades for students, safety equipment, multiple policies, etc.) to reduce your costs
  • Review all your coverage annually with your planner
  • Do your homework before the purchase

These principles are not easy, but they are deceptively simple.   They are a lifelong challenge for many investors.  Many people spend a lifetime creating wealth only to see it disappear through overspending, abusing credit, or a catastrophic event.  Start living below your means, saving and investing, reducing debt and protecting your wealth today.

Save your money and it will return the favor some day.