Financial Friday

This is an inaugural post in a weekly series on personal finance and wealth building.

Managing your personal finances and building wealth can seem a daunting task.  It did to me about 12 years ago, when I was over my head in credit card and auto loan debt, renting an apartment, and struggling to pay the bills, even though I had a pretty decent paying job.  With the help of my now wife, I figured out how to dig out of the hole, and in a short time turn my negative net worth into what many would consider a positive net worth.

Lots of folks make lots of money selling books on how to get rich.  Some of those books have outstanding advice, some aren’t worth the paper used to print them.  Much like the fitness and strength training world, a lot of effort goes in to making something pretty simple look really complicated.

There are only a few basic steps to building wealth.

Get Out of Debt

One of the most valuable lessons I got out of my Finance classes in graduate school was don’t pay interest on depreciating assets.  That means exactly what it says – when you purchase an asset that will depreciate (clothing, cars, televisions, computers) pay for it up front, not on credit.  I know this sounds easier than it is (simple doesn’t mean easy, trust me), certainly when it comes to items with high up front costs.  Not everyone has the $25,000 it takes to buy a car.

Most people are already in debt.  They carry a balance on their credit cards, they have one or more car loans.  In order to build wealth, you have to eliminate these debts.  (I’ll address appreciating assets and debt later, but for now, ignore your mortgage if you have one).  Your net worth only goes up as your income exceeds the expenses of your liabilities.  Which leads us to…

Live Beneath Your Means

This may seem obvious, but there are an awful lot of people out there who look rich, but they aren’t.  They might drive sweet cars, they might have a really nice house, but they have a negative net worth, because they are spending more than they bring in, and using credit to pay their way.  In the short-term, this might be fun, but in the long-term, wealth comes from having an excess of income or increase in value of assets.  Living beneath your means keeps you out of debt and adds to your net worth by allowing you to…

Save and Invest

Both actions are critical to build wealth.  Without delving too deep into the impact of inflation on you if saving is the only part of this you’re doing right now, you need to purchase assets that will grow in value along with putting away the excess money you have after paying off debt and living beneath your means.  While I can give general advice on the subject, these articles will not provide specific investing advice; I will show you a couple of ways to get the information you need, though.

Maximize Earnings

While making lots of money makes it easier to build wealth, maximizing earnings is more about making the most of your current situation and preparing yourself to take advantage of opportunity that comes your way.  You don’t need to pull down a six figure income, but you do need to work to bring in the most you can given your situation.  There are a lot of wealthy ‘bule collar’ guys and gals out there, bringing in $40,000 a year and still building their net worth because they are the best at what they do, they perform at a high level, and they don’t let solid opportunities get away.

Enjoy Life

Building wealth is hard work.  It takes discipline, and sometimes means short-term pain for long-term gain.  But it doesn’t mean you can’t have fun.  Focusing on frugality is fine, but there’s a point at which frugality takes the fun out of life.  Don’t let that happen.  There’s a reason wealthy people are generally happier and healthier; they don’t worry as much.  You can get there, and part of the journey is learning to have fun with what you have.

If you can follow this simple roadmap, you can transform your life from living paycheck to paycheck, praying you don’t lose your job or get sick to one where you can eliminate the worry and be prepared for whatever the future brings.

Next week, I’ll go a little deeper into building your balance sheet and income statement, and go into more detail on getting out of debt.  Until then, your assignment for the week is to take a look at your life, and think about what it could be like if you didn’t have a credit card balance or automobile loan.  Would you feel more confident about getting your kids through school?  Feel better about your retirement?  Be a little healthier?

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About Paul Stagg

Husband, lifter, MBA in Baltimore, MD. Will post about Powerlifting, politics, Classical Liberalism, Economics, building wealth, self improvement, productivity, heavy music, wine, food, beer, and almost anything else. View all posts by Paul Stagg

5 responses to “Financial Friday

  • Dan

    This is a preety cool blog and I try to check in weekly. I found out about it through Matts Forum. Anyway, my issue is with investing. The getting out of debt, living within your means, and saving money is the easy part. My wife and I (early 30s) only buy things we can afford, we havent had a outstanding CC bill ..ever. We contribute 8% to our 401k with our company adding another 4%. We own a home and are currently working to pay the damn thing off. The market is to volatile for me want to commit any real money to. Other than a bullshit 2% paying CD – what else is there to put your money into for a few years?

  • Paul Stagg

    Thanks for reading, Dan.

    If you’ve ever read me on the old lifting boards, my approach was more towards giving advice to the beginner… the same is true in this context. I’m not in a position to give much specific investing advice. It’s not my area of expertise; while I’m comfortable to toss some money in a Scottrade account I’m not going to tell someone else what to do.

    A more general answer to the question depends on the amount of money. IME, under say $50k I’d just say maybe a money market account; when you are up over $100k it’s worth it to find a financial advisor. But you may find different answers.

  • Dan

    Thanks for the feedback. I am just about at the $100k mark, we should be there by this time next year. In regards to the financial advisors, the ones I spoke to are basically about reducing debt and selling their roth ira packages. Definetly not what I’m looking for at this stage, maybe in 10 years. I have some money scattered in a few commodity etf’s a la Jim Rogers. People always knock savings accounts,CD, mm funds, etc and there shitty returns but sometimes its the only valid option. At least I’m beginning to believe so.

  • Paul Stagg

    You have to find one you trust, I think we got a little lucky with ours.. If your risk tolerance is low, there’s nothing wrong with a low return, just have to know you’ll probably need a high savings rate.

  • Financial Friday: The Balance Sheet and Income Statement « Polyhistor 2.0

    […] March 12, 2010 · Leave a Comment This is part of a weekly series on personal finance and wealth building.  If you care to read the first one, click here. […]

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