In Part One of the “Principles of Wealth,” we learned that it’s important to Pay Yourself First, Pay Off Credit Debt, and Invest Money in Growth Opportunities. In Part Two, we’ll take a look at eight more Principles for Generating Wealth.
General Wealth Principle #4: Small Amounts Add Up to Big Returns
Perhaps you think you don’t have enough income to save sufficient funds to tie up any of your money in lucrative investments. This is completely untrue. Even if you have only a small amount of investment money with which to begin, you can make a start and keep adding to that initial investment.
You will be amazed at how your personal financial situation will change as you continue investing in your future on a regular basis. Even a few dollars each week can grow into a large retirement fund if you are consistent in saving.
General Wealth Principle #5: Start Immediately
Don’t put off until tomorrow what you should be saving today. Even if you only have a few dollars, that can be the start of a lucrative investment. Give up one small but unnecessary item each day or each week, and place that money aside as savings.
It will grow! Before you know it, you’ll have the funds needed to get involved with wealth-generating investments such as stocks, bonds, or real estate. The key is that you must start now — today. Waiting until next week, next month, or next year only ensures that you will have less personal wealth later than if you started right now.
General Wealth Principle #6: Don’t Allow a Setback to Get You Off Track
On your path to building personal wealth, you are certain to encounter some setbacks along the way. Perhaps a storm damages the roof on your home, and you need to spend money on repairs. Perhaps a medical emergency drains some of your savings.
Whatever the reason for a setback in your savings program, accept it as a temporary issue and jump right back on track, sticking with your defined savings plan. Before dipping into your savings and assets, however, determine if there is another way to take care of the problem without touching your principal savings.
Look for creative solutions. Can you get the problem solved with a “90-days-same-as-cash” plan? Ask questions and learn of available options before choosing how to handle the situation.
General Wealth Principle #7: Use Creative Savings Techniques
Some people think saving is very difficult. If you have problems saving any significant sum, try some creative savings techniques.
One woman who had trouble saving vowed never to spend a one-dollar bill. Instead, she placed them in a drawer until the stack reach one hundred dollars and then added them to her savings account.
When the account reached one thousand dollars, which only required a few months to accomplish, she moved the funds into a more lucrative investment plan. By continuing her practice of never spending a one-dollar bill, she built up savings of more than $15,000 within only two years.
A little technique like this can go a long way toward building your initial savings so that you feel more comfortable about your ability to gain true personal wealth.
General Wealth Principle #8: The Power of Compounding
When money is placed in an investment vehicle where it earns interest, the interest is paid to the account and becomes part of the principal on which the next interest payment is made. This is the magic of compounding interest. Money placed in interest-bearing accounts or investments will grow because of this compounding.
Here’s an example of how compounding helps you increase your personal wealth: If you have $1,000 in a savings account that pays 5 percent interest, compounded daily, and you deposit $1,000 per year for 20 years, you will end up not with $21,000 but with more than $37,000!
That’s $16,000 more than if the money simply had been placed in a box or non-interest-bearing account. Increase your yearly additions to the account to $2,000 and you’d have more than $71,000 in 20 years!
Of course, many investments pay a higher return on investment (ROI) than 5 percent, which would allow the savings to grow even more in the same period.
General Wealth Principle #9: Give Something Back — The Power of Tithing
People who have accumulated wealth often are people who also give something back. Whether you tithe to your church, give to charity, or whatever meets your personal beliefs and spiritual support system values, wealth always seems to return to those who give something back.
A good policy for giving is 10 percent, as that is the traditional “tithe” you may have been taught as a child. Give back not only of your money but also of your time to those less fortunate than yourself. Teach your children to do the same.
General Wealth Principle #10: Adjust Your Goals Upward
As you find yourself moving toward goals you have set, review those goals periodically. Sit down with your spouse and look at goals that can be adjusted upward.
Perhaps you have enjoyed getting a raise year after year. Could you place that extra money in savings rather than expanding your lifestyle? Are there more ways you can stop “keeping up with the Joneses” and remain happy as a family?
Adjust your goals upward, but never adjust them downward. Expect more, and you’ll receive more!
General Wealth Principle #11: Choose the Debts You Incur Wisely
There are certain debts that are not only necessary but actually wise to incur. There are very few people who can purchase their primary residence without taking out a mortgage. This is a wise form of debt, provided you select a mortgage you can afford to pay on a monthly basis and you live in an area where real estate values are not declining.
Some areas are experiencing declines in real estate value whether due to the economy or the neighborhood itself. Choose wisely where you select your residence on which to take out a mortgage because it takes years to pay off the loan.
The reason this is a smart debt is that you will be making payments of a set amount that build equity in your home, rather than spending money on rent. Also, you will be making payments on your mortgage in the future when the value of the dollars used for payments may be higher than the value of the money you spend today.
Real estate, whether for your own residence or investment property, are wise debts in general. They are not always the only wise debts to incur. Really big-ticket items sometimes must be paid through loans.
Major home improvements, for example, that increase the equity in your property significantly, can fall into the area of a wise debt. Just be sure you carefully consider taking on debt for any reason whatsoever.
Sometimes emergencies must be dealt with by incurring debt. If a part of your home is seriously damaged or deteriorates badly and the insurance you carry does not cover that type of situation, you simply can’t let the investment you hold in your property to decrease by allowing the property to deteriorate.
If you must obtain reliable transportation in order to commute to and from your job and your car has become so old that maintenance and repairs are extremely costly, taking out a car loan might be a wise debt for your situation. Lifesaving medical emergencies may require that you incur some debt to pay for that portion of the cost that is not paid by your insurance or health care coverage.
Low-interest student loans for education can be wiser than removing money from high-interest investments when your children need college funds.
A rule of thumb to consider in these situations is this: If incurring debt at low interest allows you to keep investments that are paying a much higher rate of return, then the debt should be considered as a possibly sound solution.
On the other hand, if the debt you are thinking of incurring carries a much higher interest rate than your investments are currently paying and the expense causing you to consider the debt is extremely important to you and your family, then you may want to seriously consider finding a lower-interest means of financing or even consider removing some funds from your investments to avoid incurring the high interest rate expense.
These situations and the possible solutions to resolve them must be studied carefully and completely and made on a case-by-case basis. They should also be discussed and determined with the assistance of your financial advisor or an unbiased financial counselor.
The general rule of thumb is to acquire as little debt as possible and, when you do acquire debt, choose the debts you incur wisely. Do not incur debt for impulse purchases or nondurable goods unless you can pay for the charges in full within 30 days.
Some people like to charge their daily and monthly necessities simply because it is easier to write a single check to pay off the total credit card balance each month or because it provides a good means of tracking expenses for business needs.
This can build your credit rating and doesn’t have to cause you to pay large amounts of interest if you pay the balance in full each month. In fact, if you have selected a credit card carefully, you should not have to pay any interest or fees at all as long as you pay off the balance in full every month and pay it on or before the date the payment is due.
This can be a smart move since it allows you to avoid carrying cash for purchases and makes keeping expense accounts and other financial records much easier. The key here is to avoid overspending by sticking to your budget even when charging to a credit card.