The road to wealth is littered with plenty of potholes. But you can avoid a flat tire, and smooth out your path to riches by using these 6 simple strategies. Then check out the other stories on this page for the advice you need to inflate your wallet.
1. Create a Personal Expense Account
Open a checking account just for household expenses with whatever’s required to avoid monthly service fees (around $2,000, typically). Next, figure out roughly how much your monthly expenses—everything from electricity to entertainment—should run, and direct-deposit that much into the account from your paycheck. Put the rest of your paycheck into your savings account and let it accumulate until you need it. Not only have you just taken the guesswork out of saving, but you’ve also created a budget without the hassle of doing a monthly line-by-line accounting of what you’ve spent. If you have $2,100 left in your checking account at the end of 1 month, sweep the extra $100 into your savings account. If you have $1,900 left, cut back on expenses the following month.
2. Take a Salary Cut
The cash you don’t see every month can only help you. “Our younger clients not only are not maxing out their 401(k)s,” says Scott Kahan, a certified financial planner in New York City, “but they’re not taking advantage of their employers’ matching funds—that’s free money.” The tax benefits amount to free money as well: Every $1,000 you contribute saves $300 in taxes. Don’t put less than 10 percent of your salary into your retirement plan each month. Because of the tax benefits, your take-home pay will drop by only 7 percent. That seems like a lot, but trust us, you’ll never miss it. And in 10 years, you’ll be giddy every time your 401(k) statement arrives. Oh, if you’re under 30, put all your money in stocks. At 30, start drizzling in cash, bonds, and other safe investments.
3. Don’t Ever Borrow From Your 401(k)
Dipping early into your 401(k) is a terrible idea for two reasons, says J.J. Burns, a certified financial planner in Melville, New York. First, the money you borrow will no longer be compounding with interest. If this sounds like no biggie, consider: Borrowing $50,000 at age 35 and paying it back 4 years later will reduce your nest egg by $325,000, assuming historical returns, at retirement. Second, because you repay your loan with after-tax dollars and pay taxes when you withdraw that cash at retirement, you’re taxed twice on the same money.
4. Become a Predator
During a downturn, emotions like guilt or fear can prevent you from making wise purchases. Are you thinking about making an offer on a foreclosure, or buying some cheap furniture or jewelry off Craigslist from a guy who’s down on his luck? The herd would call you a vulture, but you’re buying from a willing seller—not taking advantage of him. That guy (and even that bank) is just trying to make a clean start. So shrug off the stigma. The economy will thank you.
5. Hold Steady
For people who are a decade or more away from retirement, investing in the stock market has proved to be the best way to grow wealth. But most investors can’t match the market’s performance. Why? Because sell-offs freak them out. They tend to sell on the dips and then miss out on the climbs. A 2005 University of Michigan study found that if you’d invested $1,000 in an index fund in the beginning of 1963 and sold at the end of 2004, your money would have grown to $74,000. If you’d missed the 10 best days for the market over those 42 years, you’d have only $44,000. And had you sat out the best 90 trading days—just 0.85 percent of the total—you’d have only $2,700.
Indeed, the market may feel like a yo-yo if you follow it day to day. But imagine that a boy is playing with that yo-yo as he climbs a steep hill. That metaphor best captures how the market has performed over the years, says Ric Edelman, the author of The Truth About Money. The gains have tended to be longer—and larger—than the dips. Edelman’s koan: “Focus on the hill, not the string.” In other words, stiffen your spine and keep buying through those dips. That’s the only way to make the most of the climb.
6. Keep your perspective
You can’t predict where hemlines are going or when the Saints will repeat, but you can bet your last dollar on two things: First, the economy soars and plunges, and second, nothing rises in price endlessly. The only people who seem to remember these truths and act on them—that is, those who can overcome the recency effect have a lot of experience, says Nofsinger. “People who’ve been in the game long enough, whether it’s real estate or anything else, have seen the cycles and had the chance to curb their overconfidence.”
So seek financial counsel from people who not only are impartial (that is, not trying to sell you anything) but have also been there and done that—two or three times. That means working with financial planners, real-estate agents, and other professionals who have been in business 15 years or longer.