Tuesday, October 9, 2007

My Road to Wealth

You will find countless magazine articles, blog entries, etc. on each of the guidelines below with different variations. However, I will present all of them gathered and presented from my experiences. I truly believe if I can stick to these, I can attain wealth for my future. I have organized them into prioritized Tiers. Again, the order and priority will be different for each individual, but if you aren't sure where to begin I would recommend starting with something like this…

Tier I

Spend less than you earn
You won't be successful until you can conquer this skill. If you can't, you need to spend less (cut-back, live more frugally) or make more money (extra job, raise).

Pay off your 'bad' debt accounts
Includes credit cards, car loans, misc. loans
Obviously, you must pay the minimum amount due on each account. After that, put some extra toward the account with the highest interest rate. When that account is paid off, take the amount you were paying on the old account and add it toward the next highest rate account. Continue until all accounts have been paid off. This can also be referred to as 'snowballing debt.'

Build an emergency fund
This is a set amount of money placed aside for emergency situations that can easily be accessed (interest bearing savings account, ie INGDirect). The amount differs per person and responsibilities they have, but I've heard anywhere between 2-12 months of expenses to cover potential job loss, disaster, etc. Because my spouse and I both work and don't have any kids, 2 months is sufficient for us.

Tier II

Invest in a 401K, 403B
Ask your employer for details and make sure you invest at a minimum the amount it takes to get the maximum match from them if they offer one. In addition, a good practice to have is an incremental increase each time you get a raise (ie. 1-2% each time). The money comes out of your paycheck before you have a chance to notice it's not there!

Invest in a Roth IRA
This is where you can see the beauty of compound interest at work. Your money grows until retirement and earns interest that is never taxed. In other words, once you take it out, that amount you see is the amount you get to keep.

Tier III

Save for education
Retirement funds need adequate time to accumulate and continue to grow. I placed this below personal retirement because a child's education can always be funded by different methods: grants, scholarships, loans, etc. However, education costs continue to grow at an aggressive pace, so it is important to investigate and fund accounts such as ESAs and state sponsored 529s.

Pay off your 'good' debt accounts
Ok, no debt is good – after all, it means you owe someone else money! However, there can be tax advantages to education and mortgage loans as well as home equity lines of credit. Therefore, I don't consider these as important to aggressively tackle as 'bad' debt.

Invest in taxable accounts
Whether it is a home improvement project such as finishing a basement, a big vacation to Europe, or a new car, chances are that you have some mid-term goal in mind that you would like to be saving for. Depending on the timeframe, choose the investment that best weighs risk vs. return and put money toward that.

Give back
If you have accomplished all of the above, now is the time to start sharing with those less fortunate than you. I am not suggesting that you should wait until now, only pointing out that if you haven't by this point, now is a good time. There are many worthwhile charities; there is almost certainly one that matches up with your interests and concerns.

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