The Road to Wealth

by John Brummitt

Maybe the road to trouble is paved with good intentions, as the old saying goes, but the road to wealth is full of potholes and detours. The road to financial stability is not an easy path to follow with today’s lifestyles. But you can avoid many detours and potholes by following a few simple strategies.

Create an Expense Account

Expense accounts aren’t just for businesses anymore. Most people hate to set up a budget, and they often stick to it for only a couple of months. Instead, consider creating a more flexible expense account. The process is simple. Set up a personal checking account with no monthly fee. Most free accounts have a minimum balance, so transfer the minimum balance as the account is opened to avoid charges.

The minimum balance is your cushion, and you should never spend below the minimum balance. Next comes the difficult part. Look through your monthly bills and determine how much of your paycheck you need to cover your expenses. Direct a monthly deposit to cover that amount. Then, set up a direct deposit into savings for the balance of your paycheck.

At the end of the month, check the balance and move the excess (anything above your minimum balance) into savings. If you dip under the minimum balance, transfer necessary funds from savings. Each month, strive to move money to rather than from savings. This simple “expense account” approach to finances creates a balanced budget without tracking every expense.

Don’t Miss the Benefits

Many employers offer matching funds for retirement. This means your employer will match your contribution to a retirement program. Follow these simple steps to reduce taxability and to benefit from compounding interest. Contribute 10% of your salary to maintain your current standard of living in retirement. The nice thing about putting 10% into a retirement account is that it will only decrease your take home pay by 7% because of tax benefits. In a few years, you will actually look forward to opening your retirement statement.

Buy From the Guy in a Tight Spot

In an economic downturn, it pays to be a smart shopper. Use resources like craigslist.com, ebay.com, and foreclosure sites to purchase items at huge discounts. Buy from the guy in a tight spot who needs the money. Contrary to popular opinion, you are not “taking advantage” of this guy, but rather helping him out of a bad situation. If he were not willing to sell, the item would not be listed. And by purchasing from him, you save money. Smart shopping is better for everybody in the long run.

No Loans From the Nest Egg

Borrowing from your nest egg is a bad idea for two reasons. First, you lose the compounding interest. Perhaps you’re thinking, “So, what is the big deal?” Just look at the math involved. If you are 35 years old and borrow $50,000—the maximum allowed by the IRS—and you pay it back in four years, you potentially will lose $325,000 from your retirement savings (based on historical returns of the market).

Second, you borrow tax-deferred money from your retirement account but pay it back with after-tax funds. In the end, you are taxed twice on the funds you borrow, making retirement fund loans much less appealing.

Don’t Panic!

Investing in the stock market has been the best way for people to grow assets for the last several decades. Most of us don’t have other options for investing our retirement or savings. Because people do not understand market cycles, they are more likely to panic when large sell-offs occur in the market, like we have seen in the third quarter of 2011.

When the market starts down, the first reaction is to jump ship. Then, when the market starts climbing, many investors want to jump back in. The problem is that by selling in the dips and buying on the climbs, they miss the gains and end up losing twice on their investments. They sell at a loss and buy at a loss.

In a study by Morningstar, Inc., a review of a 20-year investment, 5,044 trading days, in the stock market produced an 11.82% return. Taking out the 10 best days, the return drops to 9.20%. Take out the 30 best days of trading, and the return drops to 5.37%, and if you take out the top 50 days you end up with a return of 2.33%. That means that 99.01% of the time you have money in the stock market will likely be a wash, gaining nothing. Jumping back and forth in your investment only increases your chances of missing the best days.

While the strategies in this article are not rocket science, they are extremely beneficial for the pursuit of financial stability. You don’t have to make drastic changes to your lifestyle or move huge amounts of funds over in order to reach your financial goals. Track your expenses, make best use of your benefits, shop for the best deals, protect your nest egg, and stay calm during economic downturns to achieve your goal faster and with less effort.

About the Writer: A 2011 MBA/Finance graduate from Tennessee Technological University, John Brummitt is chief financial officer for the Free Will Baptist Board of Retirement: www.boardofretirement.com.