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 September 27, 2009

Many of you know that I’m currently attending Arizona State University where I’m working on a Global Business/Financial Management Degree. Well I’m coming to the end of the line at ASU, as I am on track to graduate in May. I’m getting pretty excited to graduate and I’m hoping that I’ll be able to find a finance-related job once that day comes, but in the meantime I’ve been studying advice that’s been given to recent graduates. Most of the advice is money-related (although I do read as much as I can on job hunting) as you might have guessed.

I came across a particularly interesting article the other day at Investopedia which lists 5 financial mistakes that many recent college graduates make.

I’m going to list the 5 mistakes for you but I want to turn them around from mistakes to good financial tips. I know that making mistakes are the only way to learn some lessons, but sometimes it’s enough just to read some great tips and advice. I hope that by listing these 5 Must Read Tips for New Graduates that you will all be smart and dedicated enough to learn from them and apply them in your own personal life. So without further ado…

Tip #1: Don’t Just Plan to Save – Actually Save

Let’s face it, recent graduates always have big plans. Nobody goes to school for four years (or longer) to get a degree without having made plans for what they will do with their life after school. Travel the world? Check. Make a six-figure income? Check. We’re dreamers and our dreams usually involve money and often lots of it.

While there’s nothing inherently wrong with desiring money it’s important to remember that in the real world dreams don’t mean much, unless you make them mean something. If you want to have a lot of money you have to teach yourself to save money. If you never learn to save you’ll likely never be wealthy, no matter how much you make a year.

Tip #2: Money (Poorly) Spent is Money Lost

Sometimes it seems like it’s in human nature to be wasteful. We get a great job and an even better paycheck and suddenly we find ourselves wanting needing things that we couldn’t afford before we got said paycheck. While I’m all for enjoying life it’s still a good idea to think a little before spending money, especially large amounts of it. Check out what Investopedia had to say on the matter:

In the real world, assets either appreciate or depreciate. The purchase of a car is the purchase of a depreciating asset; it diminishes in value as soon as it leaves the lot. The same is true for furniture, clothing and expansive television screens.

Tip #3: If You Don’t Control Your Debt, It Will Control You

Here’s some advice to further the last tip that I’ll start off with a question: If you spend uncontrollably what is likely to end up happening? The answer? You’ll likely find that you’ve spent more than you make and your debt levels will start to increase. This is not to say that you shouldn’t take on any debt, but rather the type of debt that often comes from uncontrolled spending.

If you increase your levels of bad debt (credit cards or other unsecured) then you’ll find your net worth quickly decrease and your cash flow decrease as well. While a lower net worth is bad news in the long run a low or negative cash flow can be especially dangerous to your financial health. Eventually if you don’t control the amount of debt that you’ve taken on you’ll find that it is controlling you – and that is a situation you never want to find yourself in.

Tip #4: Build Yourself a Positive Credit Rating

In the U.S. credit is everything. Without a positive credit rating you’ll have a difficult time buying a house, your insurance rates will be higher and you’ll find yourself with exorbitant interest rates on any loans that you do qualify for. As I’ve pointed out in a previous post your credit score literally defines who you are to most financial institutions. Therefore in order to carve out a favorable image of your credit-self you’ll need to build yourself a positive credit rating.

If you’re interested in how you can increase your credit rating then don’t forget to click on the link above. You’ll find a wealth of information on how your credit score is calculated and what it can have an affect on.

Tip #5: You’re Going To Eventually Die – Make Sure You’re Prepared

They say only two things in life are certain: taxes and death. The cold hard fact is that you’re going to eventually die – we all are – and it’s best to prepare early for the inevitable, because you never know when that day is going to come. It’s important to prepare for your death, not only by getting life insurance (in order to support any of your family that depended on your income) but also by preparing a will or trust in order to pass on your assets to those closest to you (and take care of funeral expenses, etc.).

I’ll be honest with you here – I’ve not done all of the above tips. I’ve followed most of them but I’ve made mistakes as well. I really like the above advice and I completely believe that if new and recent graduates were to follow them religiously they would find themselves in a very happy place. Good luck out there.

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.

Today we’ll be featuring a guest post from Simit Patel, a contributing analyst at InformedTrades.com

As the recent economic turbulence has shown us, we live in a global economy. And thus, if you want to astutely manage your finances, you need to know about how global factors can affect your wealth.

And if you hold US dollars, there’s one factor that you should be particularly wary of: China.

The US government is currently running record levels of debt, and with government spending continuing to rise given the bailouts, entitlements, and foreign policies that have been promised, the debt will likely rise — especially when we remember that the tax base is diminishing due to rising unemployment. And right now, one of the biggest lenders to the United States is China. To put it in consumer terms, China is like the bank that gave the US a credit card to finance its expenditures.

Of course, how much longer China, as well as other buyers of US Treasury bonds, continue to buy US debt is increasingly becoming an issue — particularly as the global economy is contracting, thus making lenders more wary of lending. Accordingly, China and the rest of the world may not be buying US debt — just at the time when the US government is looking to increase its expenditures.

So the question: is the US on the verge of maxing out its credit card?

Well, one way the US government can attract more lenders is to raise its interest rates. Currently rates are moving in the opposite direction; the Federal Reserve, the organization that establishes the monetary policy of the US dollar, is moving interest rates to near zero in an attempt to encourage borrowing and spending as a means of stimulating the economy. However, if the US has trouble securing more debt, it may need to raise rates — i.e. the amount it is willing to pay for the privilege of borrowing — to attract the debt. This does, however, introduce greater problems down the road, as it will increase the overall debt burden on the
US government and its taxpayers.

Alternatively, if the US government is not able to secure more debt — if, to put it in consumer terms, it’s credit card is maxed out — it will need to print more money to pay off its debts. This will result in currency devaluation. Personally, this is the scenario I am more concerned about.

If more money is printed and the currency is devalued — meaning it will cost more to buy the same goods and services — how can you protect yourself? Well, just as we now need to monitor the global economy for signs of problems, we can look to the global economy for solutions as well. Foreign currencies and precious metals — particularly gold and silver — have historically served as ways to protect against currency devaluation. For individuals looking to preserve and grow their wealth, diversifying globally may be a path worth embarking upon.

Simit Patel is a currency trader and contributing analyst at InformedTrades.com, a site that offers free courses on trading the world’s financial markets.

As a personal finance blogger I find it interesting to read other personal finance blogs not only to learn from these individuals but also to see how they perceive money and the world around them. You can always find links to some of my favorite finance blogs in my blogroll, but today I want to talk a little bit about a fantastic personal finance blog that has been around for a while now: MoneyNing.

I bring up MoneyNing for two reasons. The first reason is that David knows his stuff and he is committed to sharing with his readers what he’s learned from his own financial life. The second reason is that I’m actually being featured on his blog today with a guest post that I wrote about my journey to prosperity.

A Journey To Prosperity

For today’s post I’d like to expound a little bit more on the goals that I’ve set for myself on my journey to prosperity. Before you continue reading here you definitely ought to check out Debit and Credits Plan to Prosperity over at MoneyNing (clicking the link will open in a new window) and then come on back for some further clarification.

Ok. Did you read it? What did you think? Please if you have any comments related specifically to that article leave them over at MoneyNing. Otherwise let me help you understand a little bit more about my financial goals.

Being Rich Requires Thinking Rich

Like I mentioned over at MoneyNing I think that being prosperous is so much more than just being lucky. It requires hard work and dedication to achieve wealth. As an example let’s take a look at the worlds richest man, Warren Buffett. This is a man who has worked hard and smart every single day of his life. His wealth didn’t come easy to him, but because he was willing to learn and willing to work hard he’s been able to achieve extraordinary things. Being extraordinary doesn’t just come from hard work though, it requires some level of goal setting and follow-through. Think of it this way: If you want to be rich then you need to learn how to be rich.

I’ve set several goals for myself. Let me share them with you now, along with how I plan to achieve them:

• Be in a position to retire by the age of 55

I will contribute as much as possible to my 401k retirement plan. Currently this number is 10% of my income.
I will make smart financial decisions such as only buying a house that I can easily afford.

• Build my personal net worth to $1 million plus dollars

I will keep my liabilities (debt) to a minimum by buying only what I can afford.
I will make smart investment decisions to grow my net worth at a minimum of 10% a year.
I will continue to save money out of my paychecks beyond what I’m saving for retirement.

• Avoid debt as much as possible

I will not use my credit cards for everyday purchases unless I have the cash set aside to pay them off immediately.
I will not make foolish decisions and purchase things that I can’t afford with cash and that I don’t really need.
When I make large purchases (such as a house or car) I will compare my options and borrow as little as possible.

Those are the goals that I’ve set for myself; my roadmap to prosperity, if you will. Do you have a plan to achieve prosperity? I want you all to sit down and think about what you really want out of life and how you can achieve it. It might require some cutting back at first but in the long-run you’ll thank me, but more importantly you’ll thank yourself.

($10,112.01)

That’s a large number.  A much larger number than I thought it would be.  That number right there is how much we have paid on our primary Visa credit card this year.  I should explain something.  We don’t carry credit card balances on a month to month basis.  When I get a credit card bill I do everything I can to pay it off.  So far I have been successful.  Right now my success is just about to run out of steam.  In order to pay off this card we have to use a sizable chunk of our “short-term” savings.  Granted the bill this time around is not so bad.  Only about $1,700 dollars.  It’s all basically my Mexico trip right there.  Studying abroad does not come cheaply and it especially does not come free.  It was all worth it though.

The point to this whole post is that the wife and I are worried about draining our savings account.  We are hoping to buy a house in about a year and that savings account is going to be our down payment.  Naturally we’d like to keep a sizeable chunk of money in there due to this being the case.  With that being said we have decided to put ourselves on a strict no-spend diet.  In order to keep ourselves sane this will not apply to the small amount of mad money we get on a monthly basis, but other than that cash we will not be spending any money on any unnecessary items.

Enter the Wealth Tracking Tools

I’d like to make sure that I’m actually building wealth over time.  As I already mentioned we’re looking to purchase a home in about a year and we’d like to be prepared for such.  With that being said I’ve decided that after months of procrastination it’s about time that I start using some tools to track our progress (or lack thereof) with our financial goals.  Starting later this week I’ll be posting on a regular (monthly) basis updates to our net worth and other relevant financial tracking numbers.  Of course I’ll be using Excel to create these spreadsheet tools.  Hopefully with our increased vigilance of following our budget we will be able to accelerate the wealth building process.  One can only hope.

I have a confession to make. It wasn’t very long ago that I experienced the worst few years of my life, financially speaking. In the latter-half of 2004 I began my adult life full-force, and I hate to admit, but I began it quite poorly. In not very much time at all I managed to get myself in thousands of dollars of credit card debt, which I discovered was a debt that would not easily go away. In my defense I was a full-time college student working part-time jobs to try and pay the bills, but playing the devils advocate it is obvious that I could have done more with the little money I made. I managed my money poorly for a time, but thankfully I’ve been able to learn from those mistakes. I’d like to share just a little bit with you on what I did wrong and, as cliché as it sounds, what I would do differently if I could do it all over again.

It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

It all actually started out pretty ironically. I told one of my friends in early 2004 that I wanted to save $30,000 by the end of the year 2005. In fact I almost did quite the opposite; I do believe by the end of 2005 I had around $15,000 – $20,000 worth of student loans and credit card debt. It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

Let the reckless spending begin

I started my freshman year of college in August of 2004 and due to certain circumstances I had no money to pay for my tuition. Doing what I figured was absolutely normal I borrowed some money from my brother to pay for my tuition. I started looking for a job at about that time also, realizing the need to repay my brother, but didn’t find anything steady for a few months. At that point I had applied for and received a credit card which I used to pay for my basic living expenses: gas, food and the like. I expected to pay off my credit card and my brother within a few months from the time I got my job, but instead I kept using my credit card and accumulating debt. I hadn’t done any budgeting and figured out how much I could afford to spend a month, and so I did what so many Americans do; I spent more than I made every single month. Within no time at all I had accumulated around $5,000 dollars worth of credit card debt, and I was beginning to feel as if I were drowning in debt. It was at this point that I began looking for a solution, but the solution I found was not a permanent one.

I wanted to cut down my credit card debt and figured I could take out some student loans to pay it off and then I could start fresh. This worked for a few months, but I still had not disciplined myself to live within my means, and when my lack of discipline was combined with the cost of tuition and books my credit card debt quickly climbed back up to its previous levels. This is when I decided to take on more student loans to pay down my credit card debt again, only this time unsubsidized loans with a higher interest rate. After I had racked up credit card debt and taken out student loans to pay it down a few times I finally realized the error of my ways and decided it was time for me get serious about my finances. To my credit I did fairly well with this at first, but eventually I managed to slip up again… and this time for even more than all of my student-loan debts combined.

New cars are great… if you want to throw your money away

I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

Yeah I did it, I bought a new car. Not just any new car though… I bought myself a 2006 Mitsubishi Eclipse back in March of the same year. Even though I had managed to accumulate a significant amount of student-loan debt at this point I had not yet made such a large financial mistake as I did when I purchased this car. Once all was said and done I had a loan in the mid to high 20′s and a car worth barely 20 thousand dollars. Viola! Instant 36% depreciation. I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

After this mistake I had had enough of my idiocy. I realized how poorly I had been managing my finances for the two prior years and I resolved to shape up. I concentrated on spending less so I could pay down my debts and save a little each month. I paid just a little extra on my car each month to try to get the principal balance down. I married a woman who knew how to save. I am proud to say that other than my student loans and my auto loan I am debt free. My wife and I have also managed to save between our 401(k)’s, a brokerage account and an emergency fund enough to almost completely pay off either my auto loan or my student loans.

If I could do it all over again I would have made myself a budget and stuck to it. I still would have had some student loan debts, but looking back I realize I could have avoided most, if not all, of my credit card debt and I could have my original auto loan almost completely payed off by now, had I not traded it in for a car two and a half times more expensive. I believe I would have been able to save a decent amount during that time. I would not have accomplished my goal of $30,000 in savings, due to my small income, but I would have accumulated some wealth if I had done these things. Mistakes are meant to be learned from, and I do believe that I have learned my lesson from these mistakes in my past.

What about you?

What financial mistakes have you made that you are not proud of, and what have you done to learn from them and/or correct them? I’d love to hear what you have to say!