In Part 1 we covered the first three rules:
1. Have a Plan
2. Live Below Your Means and
3. Control Debt.
Here is Part 2 of my 10 Simple Rules For Building Wealth.
4. Don’t Procrastinate. Many people procrastinate because they feel uncomfortable and out-of-place making financial decisions. Everyone has to start somewhere, and this is where a financial advisor can be an asset.
The power of compounding is an invaluable wealth building tool because money grows exponentially, but only when you give it time to work. Every day you wait puts you at a greater disadvantage. It is wealth suicide on an installment plan.
For example, invest $10,000 at an 8% annual return inside a tax-deferred account, like an IRA, and you end up with $21,589 in ten years. Keep the money in for 20 years and it grows to $46,610. Keep it in for 30 years, and the same $10,000 balloons to $100,627.
That’s a huge change in wealth for a little procrastination.
5. Save Aggressively. It is really simple. To create wealth you have to save your money. If the 2008 economic crisis taught us anything its save money aggressively.
First, it’s absolutely critical that you save 3-6 months worth of income in a savings account or money market for emergencies. This will keep you from invading other savings sources, such as retirement, for temporary cash flow shortages.
It’s important that you try to maximize your savings at every opportunity. There is a delicate balance between optimizing current lifestyle and future financial security. Try to save at least 10% of your income.
6. Cover Your Assets. 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 the life, 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 discover 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.
7. Make Your Money Hard To Reach. It doesn’t matter if you have a pile of savings if you raid it for every one of life’s inconveniences. Your car breaks down and you use your savings to buy a new one. You get laid off and use your savings to get you through until you find a new job. Life throws you a curve ball and you have no barriers for your savings it will be an easy target for a solution.
That is why I love tax-deferred savings plans. You must overcome various rules and penalties that make it difficult to access your money prior to retirement. These obstacles provide a measure of discipline for those that lack this life skill.
The rule is simple: when you built a nest egg, don’t raid it. Never borrow money from it for current lifestyle and don’t spend a dime of it until you retire.
Next week I’ll share the final 3 rules.