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Grow Your Wealth With Automatic Savings

January 7, 2009 | Filed in: Personal Finance | 2 comments

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While most people yearn for wealth not all will achieve any significant levels of wealth in their lifetime.

I am of the opinion that anyone can build wealth, but for most of us building wealth will take time. It doesn’t come to most of us because of our natural abilities or talents or because we were born into a wealthy family. Instead it takes time, patience and perseverance.

Wealth building is not necessarily an easy process, but it can be done. One way to attempt to ensure your future wealth is to set up an automatic savings plan.

Leverage Your Automatic Savings to Build Wealth

Does your employer offer Direct Deposit of your paycheck? If it does you might consider using Direct Deposit to automatically transfer a certain amount (or percentage) of your paycheck into a savings account (or various savings accounts). It’s important to save for various large expenses, as well as for emergency needs and then of course, retirement.

For example, if you don’t already have an emergency fund you might consider opening a high-yield savings account, such as the Orange Savings Account, or a money market account and then setting up your paycheck to automatically deposit a certain amount (or percentage) every pay period into your emergency fund account.

It would also be wise of you to set aside a certain portion for any large purchases you plan to make in the future. If you have kids you might consider setting aside a certain dollar amount every month for their future educational expenses, for example. Of course you’ll also want to consider retirement. If you’re not already taking advantage of an employer sponsored retirement account (such as a 401k) then start. If it’s not something that your employer offers then start your own retirement account: a Roth IRA or a traditional IRA.

What Might All This Automatic Saving Look Like?

For simplicities sake let’s assume that your paycheck is currently deposited into your checking account to the tune of $1,000 every week. Now let’s assume that you don’t have an emergency fund yet and that your employer does not offer a retirement account, therefore you have decided to fund your own IRA. Also let’s assume you’re saving up for a new computer that you’d like to be able to pay cash for.

Since your weekly expenses are relatively low (about $400) you’ve decided to save a substantial amount of every paycheck. You want to put at least $200 every week into your emergency fund and you’d like to put at least $200 into your IRA as well. That leaves $200 after other weekly expenses and you’ve decided to put just $100 into it, leaving the rest as petty cash for you to play with throughout the week. You could set this up several ways. You could have the money deposited directly into your different accounts by your employer or you could put it into one account (such as your checking) and have it automatically transferred from there to your different savings accounts.

The advantage of having your employer Direct Deposit the amounts is that they should be able to support percentage based deposits. If you set it up this way then as your salary increases so will your savings, automatically. Check out this calculation I did from the retirement calculator over at Dinkytown.net.

As you can see from the calculator results if you save $800 a month from age 30 to 65 in an IRA account with a 10% average rate of return then you’ll have just over $3 million dollars in your IRA by the time you’re ready to retire. That’s not a bad amount, and keep in mind that is without ever increasing the amount you’re saving every month. Not to mention that if you are able to start saving before 30 you’ll be in an even better position.

Start Your Automatic Savings Plan Today

Don’t wait to get started. Set up whatever you need to and make your savings automatic. You’ll thank me for it. Trust me.

Tags: 401(k), Automatic Savings, Emergency Fund, retirement, saving

The Secret to Building Wealth

September 11, 2008 | Filed in: Finance 101 | 6 comments

I’ve had many people ask me over the past several weeks what the secret is to building wealth.  Today I am going to share the answer with you.  Before I do though, I want to tell you what it’s not.  It’s not a great investing tip.  It’s not a can’t-lose business idea.  It’s not even related to how much money you bring in or how you can bring in more.  It’s simply the idea that wealth building is a state of mind and cannot coexist with poor financial choices, especially those related to debt.

Let me explain.

Many of you may be aware that I currently work in banking.  I help anywhere from 10 - 50 people in any given day and quite often they are in some sort of financial distress.  Whether their situation is as extreme as the inability to make their loan payments or as simple as not having enough cash to pay for gas for their car, they all have one thing in common.  They don’t have any cash set aside for emergencies. The fact that they haven’t put any cash into an emergency fund tells me something else about them.  They aren’t building wealth. Quite the opposite in fact.  They’re living paycheck to paycheck always saying that next time they’ll save a little, but next time never comes.

It’s a sad situation really.  It’s a never ending cycle of all talk and no action.  Just as I said earlier, it’s a state of mind.

Let me throw out a blanket statement here (which as anything might have some rare exceptions).  If you can not manage your money well enough to save six months worth of expenses in an emergency fund and keep it there, you will never be wealthy.  The emergency fund is critical in any wealth building program because it accomplishes two important goals.

1. Building an emergency fund will help keep you out of debt.
2. Building an emergency fund will get you into the habit of saving.

A Credit Card Is Not An Emergency Fund

Many people use credit cards as an extension of their paycheck.  Do not do this.  If you can not afford to live with only your paycheck then you need to cut back on expenses.  Likewise do not think of a credit card as an emergency fund.  This type of thinking will get you into debt and take away from your financial well-being every single time.  Start building an emergency fund now so you don’t have to resort to using your credit card if something goes wrong.

Start Saving Now So You Can Save Your Future

The sooner you begin on building an emergency fund the sooner you will become financially independent.  All it takes are a few good habits and some emergency reserves to avoid unnecessary debt and you will be well on your way to riches.  Don’t talk yourself out of it with excuse after excuse.  Start small if you have to, but start saving right now.  If you don’t you’ll never reach your goals and you’ll never get to go on those vacations or buy those toys that you’ve always wanted.  By setting aside money today you’ll get yourself into the habit of saving and once you’ve built up your emergency funds then the real wealth building can begin.

For some further reading on wealth building check out My 33% Savings Plan and Starting On The Road To Wealth.

Tags: building wealth, Emergency Fund

Time For A Financial Checkup

July 8, 2008 | Filed in: Personal Finance | No comment

It’s midway through the year.  How have you done with the financial goals you set for yourself in January?  If you never set any that’s ok.  It’s never too late to start.  It’s a good time to check your finances and make any necessary adjustments to keep yourself on the right track to financial independence.  For a great starting point check out the following list.

Emergency Funds: Here’s a pop quiz for you.  How many months worth of expenses have I managed to save up so far in my emergency fund?  If you answered “3 months” then pat yourself on the back.  You deserve a cookie.  Enough with the cliches.  A well prepared personal finance portfolio should have AT LEAST three months worth of expenses.  Most financial advisers recommend six months worth, as do I.

Net Worth: A net worth that’s holding steady or rising is a good sign and you’re doing well.  To calculate your net worth add up your assets and subtract your debts.  Pretty simple right?  You should calculate this number on at least a semi-annual basis to make sure that your Net Worth is increasing.  If it’s not you need to change your financial habits.

Insurance Policies: In this day and age insurance is as much a necessity to a healthy financial policy as is a 401(k) or emergency savings.  You don’t want to pay for more coverage than you need, but even more so you don’t want to be underinsured in case of a catastrophe.  Another thing you want to review is your deductibles.  If you have a substantial amount of cash on hand to cover a high deductible you might consider increasing your deductibles in order to lower your annual insurance premiums.  Assuming nothing goes wrong this should pay for itself within a few years (or less).

Retirement Planning: Are you ignoring free money?  Does your employer offer a 401(k) or similar retirement plan?  If the answer is yes then are you contributing to it?  If you answered no, then start now.  Most employers that offer a 401(k) retirement plan also offer matching contributions up to certain amount.  These can range anywhere from 1-10% of your contributions.  If you’re lucky enough to get a matching contribution on the upper range then it’s even more reason why you need to be contributing to such a plan.  For more information check out a previous post of mine: Are You Ignoring Free Money?

Investment Portfolio: It’s always a good idea to review your investment portfolio on at least a quarterly basis.  If you are not comfortable with self-managing your portfolio then call your financial advisor to review it for you.  If a large portion of your investments are in bonds or other fixed-income investments you might consider putting more into stocks, especially considering they are down sharply this year.  This should lead to a higher return over the long run.  On a side note, if you are in your twenties or even thirties and you have more than 5-10% of your investment portfolio in bonds then get them out.  Bonds - as my friend Ramit from iwillteachyoutoberich says - are not for young people.

Tags: Emergency Fund, Financial Checkup, Insurance, Investing, Net Worth, Personal Finance, Retirement Planning

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