New Year, New Money
These simple steps can help you create new wealth in the year ahead.
My opinion may be biased, but I am a firm believer that
everyone has the capability to create wealth—regardless of their
income level. Sure, creating wealth requires a real wish to improve
your financial position, and some disciplined saving and spending,
but it’s not as hard as it may seem.
So, as we enter the time of year when many of you will start setting
goals and making wishes for the year ahead, here are some simple
money moves—many of which you may have overlooked—that
can help you create new money in the new year.
KNOW WHERE IT GOES
Tracking your expenses for 30 to 90 days will teach you how, and
how much, you spend. Chances are you’ll be surprised to see all
the things you buy, and how costly they are, when you honestly
account for your spending habits. When you know where your
money goes, it’s easy to ask yourself if the things you’re spending
your hard-earned paycheck on are necessary. And if they are,
perhaps there’s a cheaper way to acquire them. This is a simple
exercise that will help you identify if and how you can trim your
expenses to immediately start growing your wealth.
SAVE AND INVEST FIRST
One of the best ways to build wealth is to automate it. So, instead
of personally setting aside your newfound savings (see above)
at the end of the month or whenever you see your checking
account balance increase (the leftover dollars after expenses),
save and invest first by directing your employer to automatically
deposit a portion of your paycheck into a savings or investment
account (or both).
One option is to have a flat dollar amount, say $200, deposited
into a savings account and the rest of your net pay deposited into
your checking account. Another option is to specify a withholding
percentage of your gross pay, say 10 percent, to deposit into your
employer-sponsored 401(k) or 403(b), or any other type of savings
or investment account permitted. While you’re at it, if your
employer offers a matching contribution on retirement account
contributions, try to contribute at least the amount required to earn
the full company match.
Making these money moves will make you money, and I bet
you won’t even notice the “missing” money from your checking
account—you’ll be too busy appreciating the new wealth
MAINTAIN AN EMERGENCY FUND
I’m sure you’re familiar with the well-known personal finance
recommendation of setting aside a minimum of three to nine
months of living expenses in an account that’s only accessed, you
guessed it, in case of an emergency. It’s a basic component of
creating wealth because you don’t want to be forced to draw funds
from your long-term savings and investment accounts for a short-term
The size of your emergency fund should consider variables like
monthly spending, how quickly you think you can find a new job
if necessary, and whether a spouse’s or significant other’s resources
are sufficient to meet emergencies. This fund doesn’t always require
cash. For example, in some cases, a home equity line of credit
could serve as an alternative emergency fund. In addition, the cash value of whole life, or other permanent life insurance products,
could be suitable choices for an emergency fund.
INVEST LONG TERM
Unless you’re older than 85, or have a special health situation, I
recommend setting a minimum 10-year time horizon for your
investments. This means allocating a healthy portion of your
investments to equities. Current interest rates are just too low for
most people to accumulate wealth by investing exclusively or even
largely in traditional bonds, savings accounts, and CDs. The right
mix of these asset classes depends on your own financial
situation—goals, resources, risk tolerance, and other factors—and
I recommend meeting with a personal financial planner to develop
a plan that takes all of this into account to establish an appropriate
FORGET STOCK MARKET TIMING
Don’t worry about timing the market, worry about time in the
market. For most investors, wealth creation comes from committing
dollars to an investment and regularly adding more dollars to it—in good times and in bad times.
It’s easy to get caught up in trying to catch a piece of a bull market
or invest heavily at a market bottom, but if 2017 has taught us
anything, it’s that markets are extraordinarily difficult to predict.
Instead, it’s generally better to stick with making regular
investments according to a preset timetable (weekly, monthly,
quarterly, etc.). Keep those dollars invested, especially in equities.
Further, a schedule for investing in equity mutual funds or
exchange-traded funds (ETFs) can take the emotion out of deciding
which individual equities to purchase and when to sell them.
BUY THE UNLOVED
We’ve all heard the adage of successful stock market investing:
Buy low and sell high. If you have the tolerance for it, one way to
“buy low” is to invest in recent weak market performers. For
example, at any time there will be economic sectors—Consumer
Discretionary, Financials, Industrials, Technology, etc.—that
outperform or underperform the broader market. Market makers
and investors can be fickle and may sell off last quarter’s winning
sectors and rotate into others as company, financial, economic,
and geopolitical news is released. You can take advantage of this
by periodically overweighting your portfolio in lower-returning
sectors. While you may temporarily see losses, more often
than not you will be rewarded with higher valuations if you allow
a longer-term horizon for your investments to grow. There are
many sector-specific mutual funds and ETFs that make this
strategy easy to implement.
INVEST IN YOURSELF
Your career is probably the most significant tool you have for
creating wealth. For example, investing in technical and managerial
training for yourself could drastically increase your earning and
career potential. Take stock of your present career path, assess the
likelihood of future and financial success, and make the changes
needed to achieve your goals.
The start of a new year is a great time to assess where you are
personally, professionally, and financially, and make positive
changes for the year ahead. Whatever New Year’s resolutions you
come up with, make creating wealth and ensuring a solid financial
future one of them.