Monday, June 8, 2009

The 12 Secrets of Wealth

This article discusses some simple yet, great ideas on achieving financial independence. These could be considered secrets, but they aren’t really. Most of these points we all know of.

Here are a dozen of the non-secret "secrets".

1. Pay off your credit cards.

With credit card rates at 15% to 20% (or even more), there's just no risk-free investment that can provide you with as good a guaranteed return as you'll get by paying off your high-interest credit cards. (If you have multiple credit cards, pay off the one with the highest rate first.) Once you've paid off your credit cards, only charge what you can afford to pay off in full each month.

2. Live below your means.

Try to save at least 10% of your income. (20% would obviously be even better.) Regardless of how much money you make, if you don't live below your means, you'll never achieve financial independence (unless, that is, you hit the lottery or get a large inheritance, and I wouldn't recommend planning your financial well-being around either of these options).

3. Differentiate between needs and wants.

Fund your needs and try to minimize your spending on the "wants". (You'll want to discuss your goals, and how you plan to achieve them, with your spouse or partner. It's so much easier when you're both on the same page, working as a team to achieve your financial goals.)

4. Start to save and invest early.

Pay yourself first. The earlier you start, the more time you'll have to let the power of compounding go to work for you.

5. Establish an asset allocation plan that's appropriate for you.

Determine the percentage of your portfolio that you want in equities and the percentage you want in bonds, based on your needs and your risk tolerance. (In your planning, remember that over your investing career, you'll inevitably experience at least one bear market (perhaps more), during which you should be prepared to lose as much as 50% of your equity holdings. So, a portfolio that's 80% equities and 20% bonds could lose ~40% in a bear market. You need to set your asset allocation according to the amount of risk you're willing to take so that you don't panic and sell at the bottom of a bear market, after the damage has already been done.)

6. Invest in a diversified portfolio of low-cost mutual funds.

Choose the low cost funds needed to flesh out your asset allocation plan. (I'd recommend Vanguard, the low-cost leader.)

7. Contribute to your company retirement plan

(at least enough to get the company match). If your company doesn't have a match, and has poor investment choices with high costs, consider other available options.

8. Contribute additional money if you can.

If you qualify, fund a Roth or Traditional IRA.Then fund your taxable account.

9. Minimize taxes.

When you invest in a taxable account, place your tax-inefficient holdings (like bonds) in your tax-deferred accounts and tax-efficient funds (like Vanguard's Total Stock Market Index Fund) in your taxable account.

10. Save part of every raise.

When you get a raise, invest at least half of it. (Even being able to spend the other half of your raise is an increase in your spending, so you can certainly do it!)

11. Rebalance.

When you rebalance back to your desired asset allocation, you're controlling risk. (You're selling high and buying low, and that's the "secret" to successful investing.)

12. Stick to your plan

and watch your financial garden grow. (You do have a plan, don't you? See #5.)


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