1. Seek wise counsel
Asking for advice can be daunting and for good reason. Finances are a personal matter and a host of emotions can come forth when you think about your money. From shame or embarrassment to guilt, fear, anger or pride. The frustrations, concerns and challenges you may have when it comes to building your wealth are best addressed by a third party professional.
CERTIFIED FINANCIAL PLANNER™ professionals will work with you to help you get clear on what is important to you and what is holding you back. Once you have clarity on what you do and don’t want, a pro will work with you to develop a strategy so that you can begin to pursue your goals. They’ll also help you make adjustments to your plan over time.
When you feel like you know what to do yet don’t know HOW to do it, call on an expert. Another time to seek wise counsel is if you think you’re pretty well set, but want a second opinion. You’ll learn how to avoid mistakes, find out what’s missing and discover if you’re on the right track.
2. Understand your money
- Calculate your net worth. It’s a fast exercise and very valuable. Wealthy people know their net worth. Net Worth is what you own minus what you owe.
- What do you own?
- How much is in your bank accounts and investments?
- How much are your cars and home worth?
- Do you have other valuable items?
- Jewelry, collections, antiques, tools, guns?
- What about what you owe?
- What are the balances on your mortgage, cars, student loans, and other debt?
- What do you own?
- Calculate your income.
- How much do you have coming in every month?
- Take a peek at your paycheck stub.
- How much do you net after deductions?
- What about other income sources?
- Are you receiving income from rent or investments?
- Do you have income from a business(es)?
- Analyze your spending
- Review your bank and credit card statements
- What are your essential expenses?
- How much are you spending on fun?
- Are there categories in which you could cut or reduce spending?
- Are there categories in which you should be spending more?
- Emergency fund
- Investments
- Insurance
- Debt pay down
- Does your spending history accurately reflect your values and priorities?
3. STOP using credit
If you’re challenged to get ahead or are living paycheck to paycheck may I suggest you adopt this philosophy: “Credit isn’t your friend if it is hurting you.”
Avoid the places that are temptations for you to use credit. That means brick and mortar stores as well as online. Remove the apps, close the cards, pay with cash not credit.
4. Pay off debt
You can pay off debt. It takes focus and effort. While it may be a challenge or feel uncomfortable it will be one of the best things you can do to build wealth.
- Pay extra on the smallest balance and work your way from smallest balance to largest balance, paying only minimums on all debt as you work your way up from smallest to largest.
- Decide which expenses you can cut or reduce and apply the savings to the debt balance you’re focused on paying off. Typically these expenses are lifestyle expenses like restaurants, clothes and entertainment. You’ll also likely find some savings opportunities in your internet, cable and phone expenses.
- Sell things you have that you’ve financed. If you have extra left over after paying off the debt, apply it the debt balance that you’re focused on paying off.
- Make more money. Do you have a hobby that could produce income? What about knowledge or experience? Directing income from a second job is a great way to get debt paid off fast. Plus, the bonus is that when you’re working, you don’t have time to spend money that you don’t have.
5. Preserve your wealth
You may be your own worst enemy when it comes to you wealth. Investors can easily self-sabotage by doing the opposite of what they should be doing with their investments. Work with a professional to make sure your investments are allocated in a way that let’s you invest for the long term in a consistent manner so that you avoid “panic selling.” Selling out just because an investment went down in value isn’t necessarily the best thing for you and your long term goals. The right type of accounts and mix of equities and fixed income can help you stay the course through the good and the bad market cycles.
Preserving your wealth goes beyond having stable investments. It means making sure you have sufficient cash reserves for emergencies and near term purchases. Insurance is another way to protect your wealth. What would happen to your wealth if you became disabled or suffered a health crisis? What about when you become frail…do you have a plan that is designed to reflect your wishes?
6. Pay extra on your mortgage
Unless you’ve covered the basics, wait to pay extra on your mortgage.
- Is your emergency fund at a level you’re comfortable with?
- Have you taken the steps to protect yourself in the event of a loss?
- Death
- Disability
- Health event
- Are you properly insured?
- Business
- Home
- Auto
- Toys
If you answered “yes” to the questions above and you’re on track for your other goals, then you can start paying extra on your mortgage balance. REMEMBER to specify that the extra amount you’re paying is to go toward principal. If you don’t specify what will happen is that you end up paying ahead which means you’re prepaying interest instead of reducing the amount you owe.
7. Use tax free strategies
Before asking, “How can I pay less in taxes?” and “How can I grow my money tax free?” consider your end goal with that particular bucket of money. It that account or “bucket” money that you’ll LIVE ON or that you’ll LEAVE ON?
Ask a CFP® for the appropriate strategy for your situation. Incorporating one or more of these strategies into your plan may help you achieve your goals:
- Roth IRA
- Contributions
- Conversions
- Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
- Roth 401k
- Contributions
- If your employer makes a matching contribution, the match will go in the traditional 401k portion of the account.
- Contributions
- Tax free bonds
- It could be advantageous to you to own taxable bonds based on your tax bracket. Tax free doesn’t always mean better.
- Life Insurance
8. Put your money into things that make you money
Avoiding debt, paying cash, and living on less than you make are simple wealth building strategies. So is the discipline of investing in assets that make you money. In general a vehicle is a depreciating asset. Over time cars go down in value as do most things with motors: boats, snowmobiles, ATVs, RVs, etc.
Property usually appreciates over time. The stock market has shown upward growth over time. Businesses can make money over time if you know what you’re doing. Look for track records of growth and avoid fads and trends when it comes to investing. Invest in what you understand. That’s what billionaire investor Warren Buffett does. Take your time, ask questions and avoid hasty decisions.
9. Set up Sunny Day Funds! Systematic investments and savings transfers
Setting up systematic transfers will save you time. It will also save you emotional stress about writing a big check. Would you rather transfer a few hundred bucks a month to an investment or several thousand once a year?
I’m a big fan of “electronic envelopes.” For shorter term purchases and expenses you can have several checking or savings accounts at your bank or credit union. They won’t care. Just make sure you comply with the minimums at your particular institution. Once you’ve opened these accounts, have the banker set up a systematic transfer from your main checking to your designated account. You can set it up yourself if you use online banking. I’ve found this strategy particularly helpful with the following:
- Saving for a new vehicle
- Saving for vacation
- Replenishing the emergency fund
- Gifts
- His and Her spending accounts
- Professional legal, tax and financial planning
For longer term goals you can invest the money in investments suitable for your growth and risk expectations and your time frame. Some longer term goals can include:
- Milestone anniversaries
- College costs
- Weddings
- Retirement
- A second home
- Buying a business or rental property
- Early retirement
- Work optional lifestyles
- Future fun that you want to have before you’re 59 1/2
10. Commit to a higher standard
Your friends and family may have good intentions, but may not be able to hold you to a high standard when it comes to building wealth. They will want to keep you safe and may not understand you and your reasons for wanting to accomplish the goals you’ve set for yourself.
When you pay for things, you tend to value them right? When you pay for advice, you’re more likely to take action because you paid for the advice AND you’ll be accountable. You want to take the steps you said you’d take.
Accountability. Honesty. Celebration. If you’re serious. It’s time. Hire a pro.
Melissa Myers, CFP® is ready to meet with you if you’re ready for a second opinion regarding your wealth.
Schedule your Complimentary Welcome Call Today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss.