Wealth Building 101

A crash course in money handling will put you on the road to prosperity

02/11/2014

From retirement portfolios to real estate investments, the past few years have been a bumpy road for traditional modes of wealth building. Read what some of the experts have to say about creating and securing wealth now and in the decades to come.
 
No matter what’s going on with the economy at large, the first step in any wealth-building plan is getting your spending and saving habits in line. If you’re frittering away more money than you’re taking in, wealth will remain forever elusive. How and where to save, however, are important considerations that can greatly impact your wealth potential.
 
Wealth Building 101Basic savings accounts and even many CDs will erode your wealth in the long term. The liquidity of savings accounts makes them useful for emergency funds, but the low interest they pay out is often outstripped by inflation. For most people, building long-term wealth should begin with maximum contributions to an employer-sponsored 401(k) or other retirement accounts.
 
“Not only do your personal [401(k)] contributions reduce your tax liability dollar-for-dollar today, but your money also grows tax-deferred,” wrote Nicole Seghetti of The Motley Fool. “Even more enticing, many employers fork over free money. Chances are good that if you’re offered a 401(k) or a similar retirement plan through your employer, they grant you a 401(k) match. Contribute at least the bare minimum to pocket your employer’s free money.”
 
Retirement accounts aren’t the only area where tax advantages can help with long-term wealth building either. Financial planner and regular Forbes.com contributor Liz Davidson points out that playing smart with your taxes can have a huge impact on your bottom line.
 
“Some tax strategies include harvesting losses against your gains, getting double tax breaks on medical expenses by funding an HSA with your employer, or ‘bunching’ your expenses or even your year-end bonuses into the following year so you don’t phase out of student loan interest deductions,” said Davidson. “Becoming versed in tax strategies can save you thousands of dollars each year that can go to your wealth building instead of to the IRS and your state tax department.”
 
Figuring out how to make the most of your money doesn’t end with keeping Uncle Sam out of your pockets. It also means getting the most value for every dollar you spend, which leaves you more dollars to wisely invest for the future. This doesn’t mean you have to turn into a penny-pinching scrooge, but it does mean you shouldn’t be a hapless consumer stooge.
 
“You want value,” wrote Peter Suchy in his book How to Build Wealth. “Gain the proper perspective of buying and selling and realize that two parties who are acting within the law, not taking unethical advantage of each other, and who act in their own selfish self interest actually make things as fair as they can possibly be.”
 
In other words, go ahead and haggle. The less you spend while still acquiring what you need, the more wealth you have—both instantly and in the long term.
 
“When I want to buy real estate I am looking for a fire sale,” said Suchy. “I am looking for people who either are going to sell to me or jump off the bridge tomorrow. When I buy a car, I look for what the dealer cannot wait to unload. When I buy stocks, I am looking for the stock that is worth a lot more than people are willing to pay at the present time.”
 
Suchy’s closing advice is especially important today. Saving and taking advantage of tax codes (legally, of course) are always important. With volatility and uncertainty still present in real estate and the stock market, buying high value at low prices is the best way to ensure your wealth-building plans aren’t derailed by sudden unforeseen events.
 
It all adds up to a pretty simple system: Spend as little as you can while remaining reasonably comfortable, and invest what you save in a way that maximizes value and minimizes tax liability. Professionals are available to help in each of these areas, and if you tailor your personal finances to meet this general plan, your wealth is all but guaranteed.

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