Greetings soldiers! Remember last post when we discovered that wealth building is one of the 4 critical reasons to save money? Here’s why it’s such a big deal. According to Bankrate.com, over 40% of Americans have less than $10,000 saved for when they retire. Ouch! Let’s get into what the 3 keys to wealth building (aka investing) are and how they can accelerate your financial future.
The first key to wealth building, believe it or not, is money. How much of your monthly income is available for wealth building? Is your money tied up in payments? Statistics show that many people are drowning in credit card (~ $1.027 trillion nationally as of March 2018), student loan (~ $1.5 trillion nationally as of March 2018), and auto loan debt (average car payment $523/month as of 1st quarter 2018). If you are stuck in an infinite loop of making payments, you are missing out on wealth building.
One major practice you must implement when building wealth is budgeting. The only way to know how much money you have on hand is to follow a spending plan. According to a study by U.S. Bank, only 41% of Americans use a budget. Once you know the state of your accounts, you can allocate a portion of your income towards saving for the future. Many financial advisors and planners recommend saving 10-20% of your income. If you want a more strategic outlook on how much you should save, I encourage you to seek wise counsel and meet with an investment professional.
The second key to wealth building is time. Save early and often. Regardless of the investment vehicle (index fund, mutual fund, ETF, real estate, etc.), the earlier you start, the more time you give for the investment to generate a return. This yielded return over time is the work of a powerful concept known as compound interest. Albert Einstein famously stated that “Compound interest is the 8th wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” Compound interest takes your initial money, generates interest, and continuously “stacks” interest on top of the original interest year after year. This is a perfect set up for our third key to wealth building.
Rate of Return
The third key to wealth building is rate of return. Rate of return is the gain or loss on an investment over a specified time period (Investopedia). Disclaimer: Jericho Force does not provide investment advice. Please seek the counsel of an investment professional. So, what’s a decent rate of return? Let’s take a look at two examples. First: Inflation, which is the general increase in prices over time. According to the U.S. Labor Department, the current inflation rate is 2.7%. Food for thought: If inflation is the general rise in prices over time, wouldn’t you want an investment to produce a rate of return that outpaces it? The second example is the stock market. For the S&P 500, an index of the top 500 American companies, the average annual return from 1928 to 2017 is approximately 10%. Do not assume you will get a 10% return on the stock market. This is an average and there are a number of factors that come into play when investing, such as the type of investment and the fees associated with it. I will reiterate, seek out a good investment professional. Inflation and the stock market are good examples to refer to when exploring rate of return.
Soldiers, now that we’ve inspected the 3 keys to building wealth, it’s time to think about creating an action plan. What are you going to do to start building wealth and investing for the future? Oorah!