This article was originally published in Wedgewood Life magazine and is reprinted with their permission.
Although everyone’s situation is different, most people will go through various stages of wealth development throughout their lifetime. Over the next several articles, we will discuss the following stages:
- Creation – Individuals begin to understand basic personal finance concepts and start to create personal wealth. They are starting their careers, experiencing increased earnings potential, and trying to adhere to sound personal financial principles.
- Accumulation – People transition past initial wealth creation toward greater accumulation via more established careers and progression towards peak earnings potential. At this stage, you are starting to contemplate when, how, and what retirement might look like.
- Distribution – During this final stage you may be enjoying retirement, spending time with family or enjoying your hobbies. You begin to think about your legacy within your family and community, and other ways that your wealth could impact others.
We will devote future articles to creation, accumulation, and distribution, but in this article, we highlight a few key concepts that set the foundation for your overall wealth development strategy.
- Spend less than you make. – While a very basic concept, several studies have illustrated that roughly half of Americans spend more than they earn each month. According to the Association of Young Americans and AARP, 50% of Americans have credit card debt, more than 40% hold a mortgage or car loan, and over 30% are strapped with student debt. Typical reasons for spending beyond your means include “keeping up with the Joneses”, lack of awareness on where your money is spent each month, or living for the moment even if you can’t afford it. While these reasons for spending may seem valid, the first step to building your wealth is finding a way to live below your means and creating free cash flow to invest for your future.
- Find your passion. – Find a career you enjoy and not just a job. This will have a trickle down impact to your financial affairs. You are more likely to experience overall happiness with life and exhibit passion for your profession. This passion for your profession may result in higher earnings potential over the course of your career, and provide opportunities to accelerate future wealth creation.
- How much should I save at the start? This is a common question received from someone at the onset of their career. Most of the time people are looking for a simple percentage to save inside their employer provided 401k account. The easy answer is simply just start saving something initially and then save until it hurts. First, you should make sure you have three to six months of monthly expenses in cash or cash equivalents for unanticipated future expenses. Then, save an amount every month that reduces your free cash flow to $0.
- Discover the path to home ownership and its impact on long term net worth. – The last core concept is finding a path to home ownership. A 2016 Federal Reserve study showed that the average net worth of a homeowner is roughly $1,034,000 or 11x greater than an average renter’s net worth of $91,000. The typical path to ownership includes coming up with a realistic budget, saving for a down payment, and exploring mortgage options.
These personal finance concepts should serve as the building blocks to your future wealth creation. While simple in nature, they are powerful in action, and will establish a strong base for your financial future.
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Individual situations can vary, therefore, this information should be relied upon when coordinated with individual professional advice.
