The key is changing your mindset through mini-habits to put wealth building systems in place. Once they are in place, and you have positive momentum, the results will start stacking up quickly.
Here is what I do and recommend:
1) Track everything finance related. Look at your monthly budget. Income vs. expenses. Make small monthly goals to reduce expenses and save extra money. The good news is its never been easier to do this. Personal Capital is a secure website that tracks everything for you, and gives you insights into where you can improve.
2) Set up automated, monthly investments into your brokerage and/or retirement accounts. With the US stock market at all time highs, it is not a good idea to plow 100% of your position in at one time. Use a consistent dollar-cost averaging system of buying weekly, monthly, or quarterly.
3) Make a plan with your asset allocation. Now more than ever its important to get your money working for you. The key is finding a combination of risk/reward that makes sense. The only way to mitigate risk is to have a portfolio diversified among many asset classes. Large and small companies. US and international. Include REITs if youre in a tax-deferred account. Include bonds to add stability (especially if you are above age 40). RootofGood has a great post to get you started on sample asset allocation strategies. My earlier post on index funds will give you a look into how fund expenses can affect returns over time.
4) Create a plan for passive income generation. Interest rates are low, but there are still options out there. Online savings accounts are offering yields near 1%. Also, take a look at peer-to-peer lending.
5) Prioritize paying off high-interest debts. This has to be at the top of the list. Although it is tempting to invest that money and put the power of compounding returns to work, the power of compounding expenses is just as powerful. Im not talking about your primary mortgage here. I mean credit card debt, car loans, student loan debt, or any personal loan that isnt tied to an appreciating asset. I do believe in working to pay down your mortgage, but there are some structural incentives tied to home-ownership and holding that primary mortgage, specifically tax wise.
Iâ€™m constantly looking for new income streams and investments. I read dozens of books a year. I read financial websites and blogs daily. I hear a lot of ideas, but my experience tells me if its too complicated, its probably not worth doing.
I have a system that works for me, and I can live with it. Can it be improved? Surely, and thatâ€™s why Iâ€™m always looking. But while Iâ€™m quick to look at new ideas, I take my time before jumping in.
This brings me to my final point, which is about the nature of Wall Street. Wall Street and the financial media constantly tries to convince us that our investments need to be what I call in motion. They tell us why we need to be in this hot stock or sector, or why we need to get out of another. But if you step back and look objectively, you can see that they make their living based on our motion, not in our results.
So come up with a plan that works for you, and stick to it. Track your progress. Youâ€™ll be surprised that the results!I have two quotes that sum this up nicely. The first is from Warren Buffett. He said Returns decrease as motion increases. The second is from Vanguard founder John Bogle. Time is your friend. Impulse is your enemy.
Readers: What do you use in your wealth building plan?