“I know of no more encouraging fact than the unquestionable ability of man to elevate his life by conscious endeavor.” Henry David Thoreau
Thoreau was born in Concord, Massachusetts in 1817 and died in the same in 1862. He was a poet, philosopher, abolitionist, tax resister and naturalist. As dreamy as he may have sounded to some, there could not be a more practical, ageless quote that points out the fruits of choosing to make the personal choice to be proactive. One catchy way to say this is to “Plan your work, then work your plan.”
In order to form our plan, we must take the time to educate ourselves on the clay which we will be working, shaping and molding. To this endeavor, we will discuss savings options, credit, investment options, and basic tax approaches.
1. Savings in it’s most basic form means spending less than you make and setting the money aside. While it may seem foreign to many, just a few generations ago, the primary means to acquire a house, transportation, etc. was to work, save the money and then make purchases with cash. Yes, even houses! According to Statista, the average American saved 12.9% of their income in 1970 compared to 7.6% in 2018. CASH IS KING! Your first and most critical step to creating financial wealth is to begin a regular savings plan.
What savings requires most is a disciplined plan. It’s not rocket science. Simply set aside a certain portion of each check and deposit it to a savings account. Additionally, if your employer utilizes ACH draft to deposit your check, they can usually deposit a predetermined amount into savings for you. For those paid bi-weekly, earmarking only $50 for savings deposit, would give you $1300, plus interest, by year’s end.
2. Today, due to marketing schemes designed to make huge profits for finance companies (CREDIT CARDS), we borrow money on everything from major appreciating assets to depreciating assets such as chewing gum which has no value left within a couple minutes. In order to create wealth, it is imperative that we understand that we need to minimize debt, particularly on depreciating items and systematically save money.
We must understand that the power of compounding either works FOR or AGAINST us.
In finance, the Rule of 72, in essence, refers to the formula time=72/rate, which calculates the amount of time that money will double at a certain interest rate. Ex., an 8% investment will double in value in nine years, ie., 9 years=72/8%..
The trick is to use your TIME to save cash and then put that cash into motion on a doubling, quadrupling and even higher path! That saved cash will GO TO WORK for YOU. The powerful concept of compound interest also works just the opposite if the investor is borrowing money on depreciating assets like clothes, automobiles, food, etc.
So to summarize the first step of to creating wealth is to accumulate cash. We do this by establishing a regular savings plan. Then we avoid debts on things that don’t go up in value. Hint-put the credit card on lockdown. Pay your bills on time or early if possible. With a little time, we will accumulate cash that will become our catalyst for starting the wealth snowball.
In Part 3, we will discuss investment options and basic tax strategies. Specifically, we will explain the concept of stocks, mutual funds and IRA’s (Individual Retirement Plan). We will also discuss how the professionals time the markets.