By Brenda W Hargroves
When I taught a financial literacy class, I often included Michelle Singletary’s videos or quotes. Ms. Singletary writes The Color Of Money, a long-standing Washington Post column. In my opinion, she is a foremost expert on managing your personal finances. Today, I would like to elaborate on her “Five Steps To Building Financial Wealth.”
1. Save Automatically
I often hear people say they never have enough left over to save anything. My two responses are 1) the easiest way to begin saving is by socking away your change and 2) consistently practicing anything invariably leads to success.
Start small. Gather all the change you have laying around in the ashtray of your car or in the dish on your dresser and place those coins in a jar. Make a habit of not spending your change and tossing it into the jar. You’ll be pleasantly surprised at how fast the jar fills up. Look at you! You’ve reached milestone number one! Empty the filled jar into a piggy bank and continue the process. Fill the piggy bank and move onto a larger container. Or maybe, it’s time to open a savings account. Humm…
For a few years, my sister and her husband saved change in a five-gallon Hinckley & Schmitt water bottle. She only threw in her coins, while her husband occasionally pitched in a few bills. They filled the jar and spent the money on a week’s vacation in Puerto Rico. The amount they saved covered airfare, hotel and all other expenses, without having to add additional funds.
This happened several years ago, so I cannot guarantee exactly the same results, but you get the point. By consistently saving change, you can build up a surprisingly large amount of capital. Imagine what you can do when saving larger amounts!
Setting up an automatic savings vehicle is one of the smartest things you can do. Employer- administered 401ks, annuities and other investment tools are excellent ways to automate your savings. Payroll deductions make the process much easier since the funds are invested prior to issuing your paycheck. You don’t miss what you don’t see. The key is to choose a method that allows you to save automatically.
Note: I suggest conferring with a financial advisor to determine the savings vehicles that best meet your personal financial goals.
2. Take Advantage Of Time
As I’ve stated before, when it comes to accumulating wealth, time and compound interest are your best friends. In case you don’t know, compound interest accounts pay interest on the principal amount invested and all interest previously earned. Again, you do not have to start with a large amount.
Obviously, the longer you save and invest, the more you will accrue. My advice to anyone is to begin saving for retirement when you start your first job. And, again, you do not have to start with a large amount.
For example, let’s say you start your first job at age 20 and consistently save $100 a month for retirement at age 65. Although compound interest rates are low now (.025 or lower), let’s assume times will get better and you can secure a 1% compound interest rate. At this rate you will save over $68,000 by retirement. Even with a .025 compound interest rate you will accumulate a little less than $54,000 during the same period.
Put saving for both long- and short-term goals on your to-do list today!
3. Eliminate Debt
Life is so much easier when you don’t have debt. I am again reminded of my friend who compares debt to rocks. He always points out that life is an uphill climb. The more rocks you have to carry the heavier your load, which makes climbing the hill that much more difficult.
Having debt also hinders your ability to take advantage of opportunities that come along which requires a financial investment. Many times, such opportunities have a limited lifespan. You always want to be in the position to take advantage of these types of situations when they come along, not just wish you could.
Debt free is the way to be!
4. Put Your Money In Different Baskets
Diversify, diversify, diversify! Save change in a jar. Open various savings accounts. Do your research and then invest in 401ks, IRAs, CDs, annuities, stocks, bonds – whatever meets your risk tolerance level. Keep emergency cash available, but do not leave all of your money under the mattress. Let your savings grow!
5. Spend Less Than You Earn
This is the last and most important piece of advice. Will Rogers said, “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people that they don’t like.”
A friend of mine once told me his goal was to accumulate six figures in savings. He never budgeted. He simply kept his monthly expenses lower than his monthly income and saved the difference. His six figures eventually increased to seven figures.
Well, there you are. Follow Michelle’s advice and you will be on your way to building the amount of financial wealth that works for you!
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