Don’t Forget the Basics

by James on September 11, 2012 · 3 comments

Hi All,

If you’re reading this post it means you care about building your wealth.   The road to wealth accumulation can be a long and hard one, so when you’re out hunting down your next deal or shaving some bucks off your budget with coupons, don’t forget the basics:

1. Live Below Your Means

Often when people get a raise or otherwise come into money they tend in increase their lifestyle related expenses.  For example, people who get a new house often feel the need to buy new furniture or get new clothing.  The money you don’t spend on ‘stuff’ or waste on expensive travel or meals could better serve most people by being saved and invested for the future.

2. Buy High-Quality Durable Items

When I was in graduate school, I had a friend who always bought cheap sneakers.  My friend reasoned that the sneakers were great because they only cost 20 dollars – however, they always fell apart after a few months – meaning that there really wasn’t any value to the sneakers at all.  Instead if you want to get real economy, consider investing a little more upfront in to get a long term better value.  For example, consider getting 80 dollar sneakers that won’t fall apart in a few months instead of 20 dollar shoes that are guaranteed to be junk.

3. Save

Its impossible to get wealthy without investment capital.  Anything you want to do – buy a house, pay off debt, invest in stocks, start a business – requires some degree of investment capital.  The best way to get capital is through savings.   It doesn’t matter where you are in your wealth development, a beginner, working on more intermediate projects or already comfortable, etc – you need savings to move forward.  There really isn’t any way around it, you have to come up with capital and the best way to do that is through savings.

4. Have an Emergency Fund

Life in the U.S. over the past five years has proven to be very unpredictable.   Huge numbers of people have lost their jobs and many have seen their income cut and the value of their homes and stock portfolios eroded.  So, prudence dictates that you should consider having a stash of cash.  Without enough liquid funds when unexpected financial situations come about, you could be stuck with higher borrowing costs or in a worst case scenario – inability to take care of yourself or your family for lack of resources.

5. Invest Smart

Investing can really supercharge your wealth accumulation efforts.   But you have to be smart about it.  This means investing in high quality opportunities, such as good quality common stock and mutual funds.   It also means educating yourself about investing and doing common sense things to improve your bottom line, such as avoiding fees and diversifying where it makes sense.

6. Re-Invest Your Profits Wisely

At some point, some of your investments are going to pay off for you.  You’ll likely have either capital gains or dividends to decide what to do with.  A smart idea is to reinvest the proceeds of your risk and labor into your investments or businesses.  This will allow you to take advantage of the time value of money.  The time value of money indicates that in general, the more and the longer you invest, the more wealth you should have at the end of your investing process.  While it doesn’t always work, generally speaking reinvesting can help build your wealth.

7. Take Advantage of What Uncle Sam Gives You

Many employers offer a 401k plan and very often your employer matches every dollar you invest with some percentage.  That is basically free money that makes sense to pick up.  If  you are self employed, there are SEP-IRA and ROTH IRA options available also.   The bottom line here is that you should stuff as much money into tax deferred accounts or other tax reduction mechanisms offered by the internal revenue code.  Do it, it works.

All of these have been shown to work effectively in building wealth over time, so don’t forget to stick to the basics.

Best,

James



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