18 Simple Pointers to Lasting Wealth

by Guest Contributor · 11 comments

Achieving lasting wealth is easier than most people think. It doesn’t require a big income, and it doesn’t require tremendous financial sophistication. All you need to do is a number of simple things right. Someone who follows this simple, Point #by Point #plan can set themselves on the path to lasting wealth.

Point #1: If you are spending more than you are earning, you must either start earning more or spending less. This is the starting point for good money management. Ignoring it can lead only to debt and disaster.

Point #2: Begin saving 10% of your net income every year. Ten percent savings is enough for most people to achieve all of their financial goals. Develop a budget that keeps your spending 10% below your earnings and make sure you stick to it.

Point #3: If you have credit card or consumer debt, use your savings to pay off debt before investing in anything else. Eliminating high interest debt is essential if you hope to accumulate wealth over time. Don’t start saving for your long-term goals until you’ve dug yourself out of debt.

Point #4: Once you have paid off your credit card and consumer debt, begin saving to achieve your short-term goals. Begin your savings plan by focusing on the items you’ll need to buy in the next ten years. This enables you to avoid falling back into debt.

Point #5: Focus your annual 10% savings on accumulating money to buy your next car for cash. Once you buy your first car for cash, you’ll never need to take out an auto loan again. This simple Point #can add hundreds of thousands of dollars to your pocket during your lifetime.

Point #6: Buy a home only when you are prepared to live in it for ten years. A home can be a great investment IF you stay in it long enough. Rent, don’t buy, if you think you might have to move in less than ten years. Otherwise, the transaction costs of selling and buying wipe out too much of your equity.

Point #7: Think effectively about risk when you invest your savings. Your risk is not the chance that your investment goes up or down. It is the chance you won’t be able to buy whatever you intend to buy with your savings.

Point #8: Invest your short-term funds in fixed income securities. When saving for something you intend to buy in ten years or less, sacrifice the growth potential of equity investments for the stability of fixed income.

David’s Note: Notice though that what most people classify as fixed income investments (bond funds for example) can also change in value. Tread carefully, and remember that safe doesn’t always mean what you think it means.

Point #9: Select fixed-income securities to minimize credit risk and interest rate risk. Don’t try to be exotic; an extra 1% of interest won’t allow you to buy the home you want any sooner. Make sure your principal is secure and invested in securities that won’t lose their value if interest rates rise.

Point #10: Invest in equity index funds for your long-term investments. You need equity investments to make your savings grows faster than inflation if you have a long time horizon. Retirement and college savings should initially be invested in equities, but gradually re-allocated to fixed income as the time you’ll need the money approaches.

Point #11: Begin the process of saving for your children’s college education by estimating the amount you will be required to contribute. Good tools for estimating your family contribution are available on the college board web site. Focus on the parent’s expected contribution – that is the amount you need to have saved.

Point #12: Calculate a college savings target amount, and recalculate it every few years, or sooner if your income changes significantly. Based on your expected family contribution and the number of children you have, you should be able to estimate how much you’ll need to have saved. Remember, your eligibility for aid is dependent upon your income, so recalculate periodically as your income changes.

Point #13: Invest your college savings in equities when your children are young and fixed-income as they approach college age. You need to gradually reallocate your college savings from equities to fixed income as your children age. You don’t want to be holding stocks when they are 17 because the stock market is just too volatile.

Point #14: Make sure your savings rate is adequate to reach your target. This requires a bit of math. You need to estimate the rate of return you’ll achieve on your savings, taking into account your changing asset allocation over time.

Point #15: Begin the process of saving for your retirement by estimating the amount of money you’ll spend each year. If you can pay off your mortgage before you retire, you should be able to live on about 65% of your pre-retirement income. Naturally, you need to consider the lifestyle you expect to lead during your retirement.

Point #16: Estimate how much money you’ll receive each year from Social Security and subtract that amount for the projected annual expenses you calculated in Point #15. The difference is the amount of money your retirement savings fund will need to contribute to cover your expenses. Multiply that number by 20 to set a target for your retirement fund.

Point #17: Develop a detailed retirement savings plan that will allow you to reach your target. Like the college savings plan, this requires a bit of math. Estimate how much you’ll save each year and how much your investments will grow. If you can pay off your mortgage before you retire, you can use that extra cash toward building up your retirement fund.

Point #18: Adjust your annual savings rate and your retirement spending rate until your retirement savings plan works. Back in Point #2, you set a savings rate of 10%. If you can’t make a retirement plan work on 10% annual savings, you may need to save more. Adjust your savings rate until you can achieve your retirements savings target.

This is a guest post from Doug Warshauer, who recently wrote a new book “If I’m So Smart…Where Did All My Money Go?: Balancing Your Financial Objectives for Lasting Wealth“, which provides more detail on each of these 18 pointers. You can also find customizable spreadsheets to help make many of the calculations described in the 18 pointers on his website, dougwarshauer.com.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • Janet says:

    Grrr, I’m at step 3. But I feel like once I take care of that one, I’m over the hump and can fly through the next steps … while repeating the saving cycle.

  • Great article. Keep them coming MoneyNing.

  • Save 10 percent of your money, good advice. Here is the problem though that I see often. People are spending all this money on financing things like vehicles, clothes, or anything really you put on a credit card or buy from the bank, then they turn around and put 10 percent of their money IN the bank. So in essence aren’t you paying interest and borrowing your own money?

  • Brad Jobs says:

    Great tips. I think the first two covers much of what someone need to do to achieve lasting wealth without going through the complexities of investing. If people can only adhere to the first two, there won’t be a problem with cash.

  • Denis says:

    I’m hispanic and grew up in poverty…my parents never had a college fund waiting for me. I graduated in 4 years through a combination of scholarships & grants and $4k in student loans at a state university. Why do other ethnicities…specifically whites, see the need to start a college fund for their child- sacrificing your retirement and present goals in many cases?? Teach your child to ask questions to their advisors in high school, tell them to do the things necessary to earn scholarships and once they’re in college to work a part-time job to pay for miscellaneous college expenses. Send them to state universities because unless you send them to an elite private school it doesn’t make a big difference from sending them to a public state university.

  • Briana @ GBR says:

    These were great points Doug. I started writing a response for all of them and noticed that would’ve been way too long lol Just know that you taught me some things and reaffirmed others 🙂

  • nick says:

    I would add a pointer here and this one will have a much much greater effect on your wealth than rate of return ever will. If you could simply redirect money you normally pay to someone else through debt, interest and taxes think of what kind of wealth you could generate.

    the average household saves 10% of the income and spend around 30% on debt, interest and taxes….how can you expect 10% of your income to work hard enough to make up for that 30% slipping through your fingers? The only way to make it happen is to put that 10% savings at severe risk hoping for an outrageous, unattainable rate of return.

    Now think if you could become your own bank and instead of paying interest to someone else on the loans you take to make major purchases you pay that interest to yourself, along with some tax advantages that lie within the vehicle used for Becoming Your Own Bank you will be on a much safer and more predictable path to wealth.

  • Investing for college should be done just as you describe – riskier in the early years and conservative as you get down to having to tap the fund. I lucked out with my college fund for my son. Had a custodial account that we invested in aggressive mutual funds and then, a year before college started, I moved everything to basically a money market account. My timing was good as within one year, the bottom fell out of the stock market and this fund was unaffected. WHEW.

  • Ginger says:

    I like these points, especially putting that college savings is a priority right after saving for retirement. Too many parents act like they have no responsibility after their child is 18, yet the college systems requires their financial support or it penalizes the student.

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