By: Matthew Broom
Building wealth is simple. But that doesn’t mean it’s easy. Buy-now-pay-later makes it appealing to consume goods we can’t afford, while the temptation of getting rich quickly can lure you into trading crypto on obscure Reddit tips. You may think complicated financial products and strategies will bring fast wealth or money and while that can occasionally be true, it certainly isn’t for most of us.
Why do simple rules work so well? They provide clear solutions to complex problems, reduce the need for precise logic and calculation, and maintain a bias for action. Following a simple, understandable investment strategy keeps you from having to predict how monetary policy, geopolitics, and the balance sheets of thousands of public companies will affect your investments.
Save before spending.
Save and invest 15 to 20 percent of your money before you ever have a chance to spend it. Start by saving three to six months of monthly expenses in a liquid and accessible emergency fund. Your exact savings percentage will vary based on how much you have already saved, how long it will be until you need the money, and how you’ve invested it.
Invest in a low-cost, diversified portfolio.
Costs matter. Consider two investment portfolios with values of $100,000 that achieve an eight percent annual rate of return for 30 years. One has yearly fees that total one percent, and the other is half of that. If you invested in the more expensive portfolio, you’d miss out on $100,000. As my favorite financial guru Benjamin Franklin once said, “Small leaks can sink great ships.” How do you avoid this? Invest in broadly diversified low-cost index funds. Learn more about low-cost index fund investing by reading John Bogle’s influential book, ”The Little Book of Common Sense Investing”.
Building wealth is about earning interest, not paying it. An affordable mortgage is okay but if revolving credit card balances are a normal part of life, it will be tough to get ahead when you owe money. Ask anyone who has had financial troubles in the past if having debt was a major contributing factor. Odds are that a resounding “yes” will be their answer. Building wealth is not only about taking the right actions. It is equally important to avoid the wrong ones.
Get 10 to 12 times your earnings in life insurance.
If your family relies on your income and money, you need life insurance and you should maintain 10 to 12 times your earnings. Depending upon your situation, you may need more or less, but 10 to 12 is a good starting point.
It’s simple, not easy.
It’s not easy to follow a disciplined financial plan of avoiding debt and regularly investing for your future. You’ll see your friends and family mortgaging houses they can’t afford and financing cars they don’t need. Envy and jealousy are often our natural reactions to those spending money but, remember, the ability to tolerate debt is what you don’t see. Follow simple rules, adjust as life evolves, and allow compound interest to work its magic. Before you know it, you’ll join the millionaire-next-door club.
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