5 principles of building wealth and achieving financial success.
Money Girl
271 MG Financial Advice That Will Make You Rich
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Many people think that getting rich must be a complex, fancy process that's out of their reach. Though there are many paths to financial freedom, the reality is that building wealth can be a series of simple, small steps that you accomplish over time. In this episode, I'm going to give you five principles of building wealth. If you're already following them, well, you're on the right path to achieving financial success. And if not, you'll know exactly what to do. Principle number one, start saving early and automate it. One of the most important factors in how much wealth you accumulate depends on when you start saving. Starting early allows your money to compound and grow exponentially over time, even if you don't have much to invest. Never make the mistake of thinking that you'll start saving in the future. If you wait until you have more money, get a raise, earn a bonus, or get a tax refund, you're burning precious time. That's because waiting to invest even small amounts today will really cost you in the long run. Here's an example. Let's say you invest $200 a month, starting in your mid-20s, and you get an average return of 7%. If you do that for four decades, you'll have close to $525,000 when you're in your mid-60s. But if you wait to start investing until you're in your mid-30s and even invest twice as much each month or $400, you'd only have about $485,000 to spend during retirement, assuming the same return. In other words, waiting 10 years to get started means you had to pay more out of pocket for decades and you came up $40,000 short. Because it's so easy to procrastinate saving, the best strategy is to automate it. Have money automatically transferred from your paycheck or bank account into a savings or investment account every single month. Putting your financial future on autopilot simplifies your life and ensures you'll slowly get rich. I'll tell you more about where to put your money in the next principles. Principle number two, save money for the short term. Though we tend to use the terms "saving" and "investing" interchangeably, they're really not the same thing. Savings is the cash you keep on hand for short-term planned purchases and unexpected emergencies. For instance, if you're saving money for a down payment on a house that you plan to buy within the next year or two, keep it 100% safe in a high-yield bank account that's FDIC insured. Your savings should never be invested because the value could drop at the exact moment you really need all the money. If you don't have an emergency fund that's equal to at least three to six months worth of your living expenses, make accumulating one a top financial priority. Set aside 10% of your gross pay until you have a healthy cash cushion to land on if you lose your job or you can't work for an extended period of time. 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That's policygenius.com. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science, and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems, and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning, get Ixcel now, and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. Principle number three, invest for the long term. Investments are the opposite of savings because, therefore, your distant future, like retirement. If you're relying on being healthy enough to work until the day you die, or on living off of social security as a sole source of income, that's extremely risky. Over time, a diversified stock portfolio has historically earned an average of 10%, but even if you only get a 7% return on your investments, you'll have over a million dollars to spend during retirement if you put aside $400 a month for 40 years. So start saving a minimum of 10% of your gross income for retirement. Yes, that's 10% in addition to the 10% for savings that I previously mentioned. Consider these amounts monthly obligations to yourself, no different than any bill you have with a due date. Now, if you think that's more saving and investing, then you can afford. Start tracking your spending carefully and categorizing it. I promise that when you see exactly how you're spending money, you'll find opportunities to save it. Then divert those amounts to savings or investments instead. After you build up enough total emergency savings, continue putting aside 20% of your income. You could invest the full amount or invest 15% and save 5% for something else, like a new car or a vacation. Principal number four, use tax-advantaged retirement accounts. If your employer offers a retirement plan, like a 401(k) or a 403(b), start participating as soon as possible, especially if they match some amount of your contributions. Here's why matching is such a big deal. Let's say you get a full match on the first 3% of your salary that you contribute to a 401(k). If you earn $40,000 a year and contribute 10% of your salary, that comes out to $4,000 a year or $333 a month. If that's all you ever invested over 40 years with a 7% average return, you'd have a nest egg close to $875,000. That's pretty great, but now consider what happens when your matching funds kick in. If your employer matches contributions up to 3% of your salary and you're earning 40 grand, they'll add an additional $1,200 a year or $100 a month to your account. Now you're socking away $5,200 a year instead of $4,000, which means you'll have over $1.1 million after 40 years. That's about $260,000 more that you get to spend during retirement thanks to those additional matching funds. Even if you don't plan to work for the same company for decades or your employer doesn't match contributions, I'm still a big fan of using workplace retirement accounts because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans also save you money on taxes each year, and you can take all your money with you, including your vested matching funds if you leave the company. If your job doesn't offer a retirement plan or you're self-employed, it's easy to create your own with an individual retirement arrangement or IRA. Principle number five, don't pay high interest. Every dollar of interest you pay to a lender or a credit card company is a dollar that won't be making you rich. If you have high interest debt, get rid of it as soon as possible so you can put your money to better use. Start by making a list of your debts and the interest rates you're paying on each one. Reducing the highest interest accounts first will save you the most money so you can use it to pay off the debt even faster. But if you want the satisfaction of eliminating a smaller debt first, even if it isn't your most expensive debt, that's fine too. The idea is to be conscious of what you're really paying on your debt and to create a plan to cut your interest payments. Remember that if you're only making minimum payments on your credit cards, you're making the card company rich instead of building wealth for yourself. The key to building wealth is to start saving and investing right away. Don't get discouraged if you have to start small. Putting away just $25 a month is better than nothing. And if you didn't start investing in your 20s, don't stress out about it. Simply take action and get started right now. Setting up your accounts and automating contributions is a powerful step in the right direction. Years from now, when you've got savings and investments to fall back on or to fund the lifestyle of your dreams, you'll be really glad that you took control of your financial future. For more money tips and advice, be sure to visit the MoneyGirl page at quickanddirtytips.com. We always include links to everything mentioned in the show plus give you additional resources. This is podcast number 271. So there's a huge archive of past podcasts, plus even more articles on just about every personal finance topic under the sun. Just use the search bar at the top of the page. While you're there, be sure to sign up for the free MoneyGirl newsletter, join the MoneyGirl Facebook page, and follow on Twitter, where my username is @LaraAdams, L-A-U-R-A-A-D-A-M-S, with no space. I'm glad you're listening to Ching. That's all for now. Courtesy of MoneyGirl, your guide to our richer life. Get your holidays started with the perfect tree and your perfect style from the Home Depot. Whether you want something that you can assemble in a few clicks, steal the show with over 2,000 color-changing bulbs, or a tree with lights that can be controlled by remote or foot pedal. The Home Depot has it all in our huge assortment of premium trees. Plus, get free delivery on over 2 million items this holiday from the Home Depot. Subject to availability, see Home Depot.com/delivery for details.