A Firstline Securities Limited Blog by: Alicia Hernandez
Building wealth is a consequence of developing a few smart money habits and sticking with them. You don’t need to earn a large, six-figure salary to accumulate a good-sized nest egg and build wealth. To ensure a solid financial future, plan ahead and develop your spending and savings strategy for each phase of your life, whether you’re a recent University graduate, a mid-life parent getting your kids ready for tertiary education, or a senior citizen looking forward to retirement.
This blog, adapted from an article written by Kathleen Elkins in December 2016, discusses some of the common mistakes you should avoid when building wealth.
Come up with specific money goals
“The number one reason most people don’t get what they want is that they don’t know what they want.” self-made millionaire T. Harv Eker writes in his book “Secrets of the Millionaire Mind.” “Rich people are totally clear that they want wealth.”
To reach that level of clarity, he suggests writing down goals for your annual income and net worth. Like all goal-setting, be realistic, but don’t be afraid to challenge yourself. After all, the wealthiest people aren’t afraid to think big.
Automate your finances
If your financial plan isn’t on auto-pilot, change that immediately, encourages self-made millionaire David Bach. Automating your finances, sending your money automatically to investment accounts, savings accounts, and creditors, allows you to build wealth effortlessly.
It’s “the one step that virtually guarantees that you won’t fail financially,” Bach writes in “The Automatic Millionaire”. “You’ll never forget a payment again — and you’ll never be tempted to skimp on savings because you won’t even see the money going directly from your paycheck to your savings accounts.”
Save, don’t spend, unexpected cash
Pretend that extra money, such as a bonus, or any windfall, doesn’t exist.
Get in the habit of putting any surprise cash, even if it’s just that $20 bill you found in your coat pocket, to work. Apply it to student loans, debt, your emergency fund, or an investment account. It’ll add up. Plus, establishing this habit early on will help you avoid lifestyle inflation when you get more surprise cash in the form of a raise.
Spending on unnecessary, small, daily purchases, such as your morning coffee
Bach coined the term “The Latte Factor,” the idea behind which is that eliminating your $5 daily latte could help you save quite a bit of money over time. Perhaps you could reduce or eliminate your morning doubles!
Just as you can put your unexpected cash to work, you can put this money to work. A $5 daily doubles amounts to about $35 a week, or $150 a month. “If you invested $150 a month and earned 10% annual return, you’d wind up with $948,611 in 40 years,” Bach notes.
Start by determining your “latte factor,” cut back on that expense, and direct the money towards an investment account, the financial advisor suggests: “We all throw away too much of our hard-earned money on unnecessary ‘little’ expenditures without realising how much they can add up to.”
Track your spending
You can’t build wealth if more money is leaving your wallet than coming in. To ensure you’re earning more that you are spending, track your daily expenses.
There are a handful of apps that will do this for you, such as Personal Capital, and Level Money. You can also use a spreadsheet on your computer or simply record your everyday purchases in a notebook or on your phone.
Not Prioritising high-interest debt
It’s important to understand that all debt is not created equal. An effective strategy is to rank all of your debt in order of interest rate, from highest to lowest. Thereafter, prioritise the debt with the highest interest rate, while still paying the minimum on all of your debts, in order to pay less over the lifespan of your loans.
The important thing is that you get out of the red as quickly as possible. After all, it’s hard to start building wealth if you’re not debt free or close to debt free.
Doing it alone
The mistake most people usually do is trying to build and manage their wealth without the help of an expert wealth management professional. In fact, professionals like lawyers, engineers and doctors need a perfect wealth management support as it is not just an allocation of wealth in different compartments. Wealth management is a series of iterations that finally results in the proper allocation of assets. A professional wealth manager provides customised plans to meet your life’s goals after deeply analysing your and family’s needs.