Building Wealth

Wealth is not how much you make.
Wealth is how much you have accumulated. Big difference!

We have often talked about the various aspects of building wealth. Today I'll list some of those aspects so you may choose one or two for focus.

How to build wealth starting with THE MOST IMPORTANT:

!. Pay yourself first. Automatic savings, automatic 401k contributions, automatic 529 contributions all give you the advantage of not having to think about it. Build your emergency fund first; without a cushion all your wealth could dissolve with the first crisis.

2. Reduce and eliminate debt. Debt is the antithesis of wealth. It drains you emotionally and physically. Double up on your payments when you can. Or better yet, don't build up debt by using your credit cards wisely and paying them off in full each month.

3. Take full advantage of matching contributions in your 401k or 403b. Employer contributions are free money!

4. Create a plan for spending a windfall like an inheritance or tax return. This is not play money. This is not recurring money like your pay check. It happens rarely. Use it wisely. Plan to spend 10% for fun and use the balance to pay down credit cards, loans or your mortgage.

5. Know what you owe and what you own by creating a Net Worth statement at least once a year. You know your making progress when you compare the numbers year to year and see the growth: Debt (liabilities) diminishing, Assets growing.

6. Create a long-term strategy to build your wealth starting with measurable, attainable, short-term goals like building your emergency fund and paying off credit cards. Then add where you want to be in 5, 10 and 20 years.

7. Get professional help. If you are unsure about saving, investing or debt reduction take a course, read a book, hire a money coach. Your future is too precious to entrust to amateurs.

Be $ Smart - pick one, work to complete it in the next three months. Then pick another to keep you moving forward. You will be so proud of yourself!

The Tortoise and the Hare - $ Version

So many folks postpone saving for retirement "until I get on my feet". That day can be very illusive! Below is an example of how starting early gives you a head start towards a winning goal. ($5000 a year breaks down to $416.66 per month or $96.15 per week.)

Angie, age 30, decides to begin saving for retirement this year. She invests $5,000 a year and earns a constant 6% return. After ten years, she stops making contributions but lets the money remain in the investment, earning 6% annually, for her retirement at age 65. Dave, also age 30, does not begin to save for retirement until ten years later when he is 40 years old. From age 40 until age 65, he contributes $5,000 annually, earning a constant 6 percent return.

By the time Angie and Dave reach age 65, Angie will have invested a total of $50,000, while Dave will have invested $125,000. Intuitively, one might assume that Dave will have accumulated more. However, in 35 years, Angie will have a total of almost $225,000; Dave will have accumulated just less than $195,000.

Accumulated Amounts
Angie—$5,000 annual contributions for 10 years;
$50,000 total contributions
Year 1 $5,300
Year 5 29,877
Year 10 69,858
Year 11 Contributions cease
Year 15 93,486
Year 20 125,005
Year 25 167,419
Year 30 $224,045

Dave—$5,000 annual contribution beginning in year 11 for 25 years;
$125,000 total contributions
Year 1 $0
Year 5 0
Year 10 0
Year 11 Contributions begin
Year 15 29,877
Year 20 69,858
Year 25 123,363
Year 30 $194,964

The numbers in this chart assume all contributions are made at once at the beginning of each year; 6 percent interest is calculated and applied at the end of each year. Source: WebCE

The secret is compound growth over time. Dave put aside $75,000 more than Angie but had fewer years of the money building on itself - compound growth.

Be $ smart, start saving early!