By: Abram McConnell
In today’s society, it is not wise to rely on social insecurity as a means of building wealth; it takes savings. What you chose to save will be the key factor in deciding the amount of wealth that you will build. There are a few concepts to keep in mind when it comes to savings.
The first thing you much consider is that savings comes from your income. According to a recent poll by the American Payroll Association, 71% of Americans live paycheck to paycheck.
Would you like to join the increasingly smaller group of Americans that do not? If so, you must gain control of your income. This is done by shedding as much debt as possible in order to create more disposable income. Think about the possibilities of living with no car payment, no credit card payment, and no student loan. I recommend holding off all savings until you have no debts but the house in order to free up as much income as possible. Once your debts are paid, you will have the ability to save more quickly.
Once you have paid down your debts, it is time to save. A savings rate of 15% of your income will generally lead to financial stability. When saving for wealth, it is wise to first max out your company’s matching 401(k) account because you will earn free money through it. If you have the option, select the Roth 401(k) over a standard one. The reason is simple, you will pay taxes now, but keep from paying taxes on the account when you withdraw- including ALL of the growth you’ve accumulated. Most companies only match from 4-6%, so for the rest of your savings, chose a Roth IRA over a traditional for the same reason as listed above.
When allocating your savings within your accounts, remember that diversity is security, but the greater the risk, the greater the potential reward. I recommend spreading your money over no less than four types of accounts. I invest in Growth, Growth and Income, Aggressive Growth, and International Funds; spreading the money evenly over the four areas.
Remember that saving for wealth resembles a crock-pot much more than a microwave: it will take longer to build the wealth you want, but it tastes better knowing that it is secure. While saving for wealth, we often want to feel financial security now. This type of savings is best thought of as an emergency fund. In order to keep from going into debt or tapping into your retirement fund (and facing heavy penalties or high interest rate loans for early withdrawal) an emergency fund is crucial. Many experts recommend a savings equal to 4-6 months of your expenses.
In our unstable financial environment, it is more important than ever to practice saving money to build wealth. Whether it is to ensure that you retire with dignity, strengthen financial stability through the creation of a solid emergency fund, or even create the luxury of having a “take this job and shove it” fund to provide greater opportunities; saving to build wealth should be a crucial facet of your overall financial plan.