What follows is the continuation of success habits that will become part of a book I’m writing, “100 Rules of Success”.
SUCCESS IN PERSONAL FINANCES
RULE: Control Your Money
Most of us never had a personal finance class in high school or college nor were we taught about money by our parents. In fact, much of what we learned about money was through observing how our parents handled their money. Most of these ‘mentors’ were a bad example of how to manage money. How do I know? Because less than five percent of all Americans accumulate enough money to become financially independent. Sure, they eventually retire, but most are forced to live on little more than Social Security and modest savings or a small pension. This book is about achieving success and that means creating true financial freedom for yourself. To accomplish this, you’ll have to do things differently than almost everybody you know.
About six months after I graduated from college, I had a bit of an epiphany. I decided I wanted to become a millionaire before the age of forty. Now understand, I knew very little about managing money or investing but I did know I needed to do something different than I was currently doing. I hatched a simple plan:
- I set up an automated plan for what I called, “Deferred Spending”.
- I set up a second automated savings plan where I transferred 10% of each paycheck for investing.
My Deferred Spending Account. Somehow it dawned on me that you were unlikely to create success by borrowing money for big ticket items. I, like everyone else, still wanted this ‘stuff’ so I decided to set up a savings account and wait until I had enough to pay cash for those items. In other words, systematically save until I had the money versus borrowing and systematically paying back. The difference became who earned the interest…me or a lender? Now I was single at the time but I can remember putting $50 in my pocket at the beginning of each week and I’d cover all of my personal expenses, eating out, dating, haircuts, food, etc. all out of that money. If I ran out early in the week (which happened in the beginning), I just quit spending. My wife likes to tell the story of our first date when I invited her to come over and grill steaks with my roommate and a group of friends. We get there and she notices we are actually grilling hotdogs. She asked me, “I thought you said you were grilling steaks?” My response, “Yes we are. Tube steaks!” It was one of those weeks where I was running low on cash but she hung in there and married me anyway! Praise the Lord! She is the best thing that ever happened to me.
My Investing Account. I did not know how to invest. This was 1973 and at that time we did not have all the easy, simple investment options that are available today. Mutual funds and individual stocks were laden with high commissions. Certificates of Deposit typically had a $100,000 minimum. The IRA and 401k plans were not invented yet. About all you had was an old-timey savings account or cash value life insurance, so I focused initially on savings accounts and began studying about investments. My research suggested that you could make a lot of money in real estate since you could ‘leverage’ your money by borrowing against the real estate for a large portion of the investment. I set a goal of investing in one real estate property every year and figured over the next fifteen years I’d own fifteen properties and just had to become a millionaire. Turns out I was right! The good news is that today there are so many more investment options and here are a few simple tips to get you started:
- 401k- This is the single best place to invest if your employer provides a ‘matching’ contribution. Most will match something like 50% of your contribution up to 6% of your pay. This is the equivalent of earning a 50% guaranteed return on that year’s contribution. Don’t miss this opportunity.
- ROTH IRA- if your employer doesn’t have a 401k plan or doesn’t provide matching contributions, invest under a ROTH IRA. With a Roth, you don’t receive a tax deduction for your contribution, but your money grows tax deferred (no taxes on current earnings) and at retirement, distributions are tax free.
Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC and WELCH INVESTMENTS, LLC, which specialize in providing fee-only investment management and financial advice to families throughout the United States. He is the co-author of 100 Tips for Creating a Champagne Retirement on a Shoestring Budget; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning (John Wiley & Sons, Inc.) and THINK Like a Self-Made Millionaire. Visit his Web Site www.welchgroup.com. Consult your financial advisor before acting on comments in this article