Last month I addressed Part 2 of a multi-series article. In review, every day, thousands of Americans are in need of financial help with absolutely no one to turn to. People do not know what they don’t know.
Many Americans work a regular job, live paycheck to paycheck, have no emergency savings, have huge credit card debt, do not have enough retirement savings and are afraid of outliving their money. They often find they have more months at the end of their money. They are trading their time for income – i.e. if they do not go to work to put in the time, they don’t get paid the money. They do not have a strategy for their future, do not make enough money and are not sure what to do. The likelihood of wealth is minimal.
Then there is the wealthy group that own their own businesses and their business work for them. They do not have to be at their business to make money. Have you ever seen the owner of a McDonalds at the business? The reason you have not, there is a system in place that runs the business. This group also knows how to make their money work for them vs. always working for their money. This group is able to pass on generational wealth. The question is: why does this group achieve financial well being? The answer lies in understanding five basic wealth principles and consistently putting those principles to use.
PRINCIPLE #1: The value of time
Time can be your greatest ally or your worst enemy. If you haven’t started saving for your future, start now. The key is to start the “habit” of saving and start as young as possible. A person that starts a savings plan at age 30 has a far better chance of having adequate money in retirement than someone who starts at age 40 or 45. The later you start saving the more money you have to set aside per month or per year to save what you need for retirement or other important goals.
PRINCIPLE #2: Compound interest
Albert Einstein promoted the basis of compound interest which is called “The Rule of 72.” Einstein was so impressed with “The Rule of 72” that he called it the 8th Wonder of the World. Einstein said that one who understands compound interest earns it. One who does not, pays it. We can see this every day as compound interest causes credit card balances to climb. It is the reason so many people find it difficult to get out of credit card debt. We can also see the reverse when compound interest causes savings to grow dramatically. Simply put, the “Rule of 72” tells you how long it will take your money to double based on the interest you are being paid on your savings or investment. The higher the interest rate, the faster your money will double.
PRINCIPLE #3: How money grows
Money can grow in three basic ways. It can grow with the same interest rate and low risk of loss from month to month or year to year. It can grow in the stock market with big gains and big losses and lots of risk. It can grow in something called” index funds” which provide protection for your money when the market drops but growth in your money when the market goes up.
PRINCIPLE #4: How money is taxed
When saving, you want to be sure to consider the effect that taxes can have on your income. Money is taxed in three basic ways: taxed now, taxed later, and taxed never. Examples of taxed now would be things such as sales tax, taxes on your paycheck, taxes on the growth of your money in the stock market or savings account, or taxes on your estate after you pass away. Tax deferred means your money is set aside, allowed to grow tax-free for a set period of time. It would then be taxed at a later time. Examples of this would be things such as your 401(k) or other retirement plans. Finally, there is tax advantage or tax never. This is when money that has already been taxed is put into a plan that allows it to grow tax free.
PRINCIPLE #5: Work with a planner
This is an essential step! The above principles are the very basic easiest to understand format. Understanding the details of the above principles and how to put them to use with respect to your particular life, your particular goals, and your particular budget is best achieved by working with a professional. A professional can explain each of the above principles in greater detail, answer all your questions and build a reasonably achievable roadmap to help put you on the path to a financial future that you control.