Proactive Wealth Strategies

Pay yourself first if you want to build wealth.

The term "wealth" can mean different things to different people. For the average person, wealth can seem out of reach; a term reserved only for the rich. If you use a different perspective, however, and measure wealth as the result of having constructed a financial portfolio that allows you to improve your standard of living as you get older and enter retirement, then everyone is capable of building wealth if they follow some very simple rules.

Start Saving Early

There is no greater friend to compound interest than time. Even if you are putting away small sums of money, the effect of added time can be worth thousands of extra dollars in your pocket. Consider an individual who invests $100 per month beginning at age 25 and earns a compound interest return of 5 percent per year. At age 65 that individual will have $148,850. If the same individual instead started investing at age 35, that $100 monthly investment would grow to only $82,000. To put it another way, the individual at age 35 would have to invest $181.60 per month, or 81 percent more, to achieve the same result at age 65.

Buy a Home

Despite all the turmoil in the financial markets in 2008 and 2009, buying a home remains one of the soundest investments available. A home can provide equity in later years that can be utilized to create more wealth. You can borrow against your home equity and use the funds to invest. In many circumstances the interest on your mortgage or on your investment loans can be tax deductible, which helps improve your financial situation.

Eliminate High Interest Debt

We live in a society that encourages us to spend beyond our means, using our future income as leverage. The problem with this approach is that it comes at a price, namely interest. Credit cards fall under the banner of unsecured debt, and because of that fact, they are widely and easily obtainable. The interest rates on unpaid balances are staggering. Even as the Federal Reserve's key interest rate hovers at or near 0 percent in 2010, credit card companies continue to charge some customers nearly 20 percent in interest.

An easy solution to high credit card debt is consolidation. You can use your home equity or the prospect of your future income to get a loan or a line of credit from your bank at a much lower interest rate. That can significantly lower your interest payments.

Pay Yourself First

One of the most popular pieces of advice about savings is "pay yourself first." Basically it means to ignore your budget until after you have taken a certain percentage off your take home pay and put it into your savings. You may find that using this approach will actually help you with budgeting as you will have less money left over for frivolous expenses and you will learn to be more savvy with less.

References

• CBS News: Pay Yourself First