April 15, 2009 | Filed Under Investing | 6 comments
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I’ve heard it said that wealth is a state of mind. There may indeed be some truth behind that saying, but when you go by the book being wealthy means having money or other monetarily valuable possessions. I’m going to discount something from this equation because I want to emphasize that wealth isn’t about having stuff; it’s about being well-off and financially secure. Take the Joneses, your neighbors who seem to have everything. They may have a lot of material possessions… but do they have any real assets? In other words do they own anything that they, in reality, own? You may be surprised. It’s easy to have a lot of nice stuff. All you really need is a credit card with a high spending limit.
Building real wealth is not an entirely difficult thing to do. It will require some sacrifices to be made, but almost anything that’s worth having requires sacrifice in some form or another. What kind of sacrifices? Well that really depends on you. If you spend your money before you make it then you’ll have to change some of your buying habits. If you save your money for a month or two to buy something nice, well you have a head start, but you might have to start saving some of it for yourself, rather than for that new HDTV.
I’ve come up with a short list of things that I feel are important to starting out on the road to wealth. It’s all about habit building. Once you’re in the habit of saving and investing it’ll be hard to not do it.
Here’s what I’ve come up with:
- Establish and maintain a positive credit rating
- Learn to budget, and then to LIVE ON that budget
- Learn to save (and not to immediately spend your savings)
- Establish a 401(k) account, or if not offered establish an IRA or a Roth IRA
Sound difficult? It’s really not. I promise. Keep reading for some more insight.
Establish a positive credit rating
Establishing (and maintaining of course) a positive credit rating will more than likely be one of the most important things that you will ever do when it comes to your finances. Truthfully it’s not difficult to establish and keep your credit rating (e.g. credit score) at an above-average level. The average FICO score is in the mid 600’s, something which can be achieved with just a little dedication. What sort of dedication? Not much. Truly. Pay your bills on time (this can be easily achieved with recurring online bill pay). Don’t max out your credit cards. Get credit cards if you don’t have any; use them monthly and then pay off the bill every month (on time of course). Be smart about your credit. Don’t open up a charge account at every store you shop at just because they are offering you 10% off today’s purchase. Don’t use your credit card to pay for something unless you have the cash to pay it off (or if you insist on using it still, make sure you’ll have the cash within a month to pay it off). Doing these simple things will help you to establish a squeaky clean credit rating, which will lead to lower loan rates and a much easier time qualifying for loans… not to mention potential auto insurance savings, etc.
For a little more detail on how a FICO credit score is calculated, and how it can be used, check out How Your Credit Score Defines You.
Learn to budget
Budgeting is an important part of your financial health. Budgeting means, in a nutshell, living within your means. It doesn’t necessarily mean tracking every single purchase you ever make and not allowing yourself to spend more than “x” amount of dollars on entertainment in a given month. Instead I have learned that it means to know how much you earn in a month and to not let your expenses exceed your income. Sure it sounds like a silly thing to say, but many people have yet to grasp this concept. Another thing I’ve learned that must be a part of ones budget is to budget a portion of your money away into some form of a savings or investing account. Go ahead, enjoy your life and spend your money while you still can, but make sure that you save just enough to cover emergency expenses and larger more expensive purchases, such as a down payment on a house or that new 52″ HDTV you have been lusting after. For a detailed look at a budgeting method I use, check out My 33% Savings Plan.
Learn to save
This one is pretty self-explanatory. Save a bit of every single paycheck and you’ll find yourself living much more comfortably than those around you. This principle is important for a few reasons. First it’s a good idea to have an emergency fund of about 3 to 6 months worth of your income saved up… for emergencies of course. Having this fund will erase untold amounts of stress from your life. Finally learning to save will eventually lead you to financial independence, and isn’t that what we’re all really after? Chances are you won’t be winning the lottery in this lifetime, so you’ve got to provide riches to yourself rather than expecting others to provide them to you.
Establish a 401(k)
For those who might not be informed on what a 401(k) is, please check out Are You Ignoring Free Money. I believe most of you probably have a pretty good idea of what a 401(k) is and what they can mean to your financial health at retirement. Contributing regularly to your 401(k) starting at a young age can mean all the difference in the world to the lifestyle you will be able to enjoy at retirement. If a 401(k) is not something that is offered by your employer (if you don’t know if it’s offered ask your manager - there’s a pretty decent chance that it is) then you will want to spring for an IRA or a Roth IRA. These are retirement accounts similar to the 401(k) in that they are tax-advantaged, but instead of being managed by your employer they are managed either by yourself or by a financial services company such as Vanguard. If you are in a low income tax bracket then a Roth IRA might be a better choice for you, because they are only taxable before the money is deposited into them. In other words when you go to withdraw from your Roth IRA at retirement you will not owe taxes on ANY of the monies that you pull out of your Roth IRA. Fantastic eh?
I defininitely believe that the above listed principles are very important to maintaining a strong financial health, and I also believe that only by being prepared and informed will you be able to become financially independent and probably even rich.
Do any of you have any other suggestions on things that you have found to be important when starting out your financial life? Or maybe something you wish you would have known - or done - when you were younger? Please leave your comments, and if you like this post feel free to share it with others.
Updated April 15, 2009
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