We all want to be rich, but we were wrong to believe that the only way to get there is through savings. We’ll give you some pointers that will show you how to build wealth that goes beyond the savings account and into the realm of investing and spending. Oh, and did we mention you can still have your coffee for $ 3 a day?
Do you remember the finance gurus from a few years ago (we can even say decades) who recommended saving 10% of your income in each pay period? Pretty good advice, right?
Imagine that you are a painter and you need to paint a house inside and out, but you only have a standard brush. It will take a long time and a lot of energy to achieve this goal.
Let’s raise the stakes and say the house needs painting in two days.
While the premise of saving money is great, it’s all in one savings account that is the problem. Don’t get us wrong, a savings account is important if you want to protect your capital for an emergency fund or short-term savings goals, for example.
However … you will never build wealth at this rate.
As Ramit puts it, “One of the most surprising things people don’t realize about money is that saving isn’t enough” and “What they don’t realize and what no one tells you is that money is invisibly losing value.”
Let’s fix it, shall we?
How to Build Wealth in Three Simple Steps
If you think you need to make more money to build wealth, you are probably right (by the way, we can help you with this by teaching you how to ask for a raise). But it goes so much deeper than your income; You also need to know how to spend well. It starts with your money working for you. Ramit has three tools that do just that.
Step 1: The Head of Personal Finance – – Investing money for beginners
Who would have thought that it wasn’t enough to top up your savings account by the day you retire? It turns out that the banks are only using your savings to fund their lending. They will not pay you an interest rate that exceeds inflation because they are not making money. It’s only good for emergencies and short-term savings. That’s it.
For the rest, you need an investment strategy. As a novice investor, Ramit’s Head of Personal Finance can provide valuable insights on how to get the most from your money.
Rung 1: your 401 (k) Your salary can be one of your greatest assets if used correctly. This is especially true of those who have employers whose contributions match. You want to make sure you’re getting the maximum out of the matching as they are literally funding your retirement at the rate you are. So if they match up to 4.5%, you want to increase your contributions to at least 4.5%. As simple as that.
Step 2: Get Rid of Debt Really. You don’t have to hold on to debt like last year’s favorite sports coat. Sure, there are cases when debt helps, like buying a home or financing a startup. But when it’s done, you have to get out of Dodge right away! Make a habit of paying off your credit card debt every month. Imagine all the investments you can make when you don’t have auto payments or student and personal loans?
Rung 3: Roth IRA And we’re retired again. Yes seriously! Do you know how fast you are going to retire? You want to make sure that you are doing all you can Maximize your retirement savings. Roth IRAs offer certain tax benefits that cannot be ignored. There are income limits (up to $ 140,000) and maximum contributions (between $ 700 and $ 7,000) that must be taken into account. Schedule a meeting with a trusted financial advisor to discuss your financial goals and receive in-depth investment advice.
Rung 4: maximize your 401 (k) Yes. We’re still talking about retirement. And it’s worth it! Maximize the allowable contributions for your 401 (k) based on your age and current Roth IRA contributions. However, be sure to adhere to these limits as the IRS can hit you with an excessive 6% contribution penalty. It sucks, but it’s true.
Step 5: Other investments Well done Player 1! You have reached the end of the pension contribution line and are finally high enough to see other types of investments, such as: B. Investments on the stock exchange or in investment funds. This is also a chance to run into additional debt to lower those numbers or invest in your best rich life. This could be further education or college, sign up for a personal trainer, or the hell to save up for the sabbatical to India.
Step 2: automate your finances
If you were in your nineties and even early 2000s, you will remember the boredom of payments. Check for envelopes lost in the mail for fraud, and even take the time to make an urgent payment. Unless you had a cool checkbook with its own folder, you had to go to the bank and brave the queue for cash.
But that is no longer the case. Why are you still taking an admin day to sort your payments and transfers? It’s the 21st century folks! We now have the internet and secure payments. The best thing, however, is the automated payment.
You can automate everything from bill payments to savings. Simply set it up on your checking accounts, either by direct debit or money order.
Investing is just as easy to automate, whether you choose index funds, mutual funds, ETFs, or currencies, whatever your investment portfolio is. Robo-advisors do all of the hard work like asset allocation. You just have to invest diligently every month. Best of all, you can start as low as $ 1!
With this simple transition, this admin day becomes a personal day. Go to the spa or take a day trip to a nearby town. Never waste time on manual payments and transfers again.
Step 3: Focus On The Big Wins – Focus On The $ 30,000 Questions, Not The $ 3 Questions
Who cares. It may sound apathetic, but it should be your default setting when you come across, “I have to cut my $ 3 white Starbucks a day. Why? Because it doesn’t matter. Sure, if you save $ 3 every day for the next 50 years, you might be able to afford a VW GTI. Just make sure you save that $ 3 on an account that keeps up with inflation. But 50 years without coffee?
Instead, take advantage of these savings opportunities and focus on big ticket items. For example, work on improving your credit rating so you can get better interest rates on your mortgage and other financial products.
For example, if you have a $ 250,000 mortgage over a 15-year term with an annual interest rate of 4.5%, you want to pay an installment of $ 1912.48 per month and a total interest rate of around $ 94,246.98. If you now lower that interest rate to 3.5%, you will see a monthly rate of $ 1,787.21 and a total interest of $ 71,697.14. That saves you around $ 22,500! It’s worth it Make a call.
It’s simpler than you think
When you are thinking of building wealth, it is the small incremental changes over time that bring you the numbers. Waiting to win big on the track or waiting for the sign-up bonus of the century is not a good strategy.
Wealth building is a long term game that requires discipline and the ability to prioritize your expenses. With proper financial planning, you can save and invest on purpose.
By Ramits Conscious dispensing techniqueYou have the option to prioritize your expenses that will not only help you build wealth but also promote your best rich life right now. Not only is the goal of living in retirement, it definitely helps to have a healthy bank balance when you are ready for the golden handshake.
You can use this technique to address the following:
- Fixed costs like your accommodation
- Important investments like the one we discussed a few paragraphs ago
- Savings goals for big ticket items like a deposit or a wedding
- Guilt free expenses, in other words, your Oh Yeah! budget
The bottom line is this. Whether you work damn hard for your money or not, you don’t want to wait until you’re too old to enjoy life. At the same time, you want to create space to build wealth. We have to be fiscally responsible, right? But that doesn’t mean we should give up the things we love.
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