Compound Interest: The Miracle Behind Wealth Building

imagesAn important feature of investment returns is something called “compound interest”.  With compound interest you can turn a modest middle-class investment account into millionaire status by the time you retire.

So how does compound interest work?

With compound interest, not only your initial investment appreciates in value over time, so does all the gains on that initial investment.  For example, you might expect $100.00 that gains a 10% annual rate of the stock market to appreciate to $110.00 after one year and $120.00 after two years without compound interest.  But if no money is taken out, then in the second year it is not just the initial investment ($100.00) that grows at 10%, but also the gains on that initial investment from the first year ($10.00).  So, after two years the investment is actually worth $121.00. After many years of compounded interest, the gains on the initial investment become very significant, making more money year over year.

The really cool thing about compound interest is how it can double the account value after years of saving.  It’s really like a snow-ball effect; it keeps growing, doubling and doubling over time.  Investment professionals refer to the “rule of 72”, which is basic rule of thumb that illustrates the power of compound interest over time.  The “rule of 72” basically says to determine the approximate number of years an investment will take to double in value, you divide 72 into the annual average rate of return earned on the investment.  So basically,  if an investment earns a 10% rate of return it will double approximately every seven years (72 divided by 10 is just about 7).  An investment that doubles every 7 years, will double twice over 14 years, quadrupling your account value.   You can see over time how this snow-ball effect works.  After 35 years of saving, your account could potentially double 32 times.

Wow, that’s crazy to imagine, but this is part of the mindset that you need to have to secure long-term wealth with limited resources.  The average middle-class worker really can manifest some serious wealth with compound interest.  This is why it’s so important to start saving today.  Obviously the younger you are, the better off you are, because you have time on your side.  The more years you can take advantage of compound interest, the better.  Start saving whatever you can at first, even 1% of your paycheck will get you in the right direction.  Then start adding an additional % of your pay whenever you can.  Imagine yourself getting to a point where you can invest 50% or more of your paycheck!  Can you imagine how much wealth you can accumulate when you dedicate that type of income to your investments?

Take a look at some of the investment tips that we have discussed on Middleclasssuccess.com and do your own research to help you try to achieve the best possible return on your money.  The better the rate of return on your investment, the more you can accumulate faster.  Historically the stock market over time has produced solid 10% returns.  Determine what the best investment vehicle will be for you….a brokerage account, IRA, Mutual Funds, 401k, real estate/rental income….maybe eventually all of these will be a part of your portfolio (I hope so!).

Stay focused on your long-term goals and start saving today.  Before you know it, 10, 20, 30 years go by.  If you start the process and stay on track, you will set yourself up for financial success and true wealth building.

 

Retirement: Will You Have Enough Money To Live On?

retirement  Planning for retirement is most often overlooked.  For some people it’s a complete afterthought.  Oddly enough, most people simply think they can rely on Social Security (SS) to get them by in their retirement.  To me this a very scary proposition.  Why in the world would anyone think that SS is going to allow them to live the type of lifestyle they are accustomed to when they actually do stop working?  It doesn’t make much sense to me, so I hope it at least raises the same question for you.

So when you do retire, how exactly are you going continue to support yourself?  I sure hope you have some additional income streams that can allow you to live the type of lifestyle at least close to where you are today.  In all reality you should at least have three or four different income sources to keep you afloat.  Some of which should be continually earning more money, even while you are drawing down on the account.

So let’s look at a few ideas for these income sources:

1. Social Security.  Yes, we already mentioned this one and it should be a source of income for your retirement (assuming you had been paying into the system).

2.  Savings account.  Hopefully you have a healthy savings account built up, if not start working on that now.  This account won’t give you hardly anything in return at the current interest rates, but it is liquid cash that you absolutely need to have at your disposal.

3.  Personal retirement account (IRA/401K).  If you haven’t already started at least one of these accounts, you need to think about starting one as soon as possible.  Research the tax implications/benefits of each type of account and decide what is best for you.  Generally speaking, you either pay taxes on the money going into the account up front or later when it is withdrawn.   Both account types are great for building wealth long-term.

4.  Personal brokerage account (taxable account).  Open a brokerage account with a reputable online broker, such as Ameritrade, E*Trade, Scottrade, etc.  Buy stocks, bonds, mutual funds, etc.  Pay taxes on capital gains and build wealth through dividend reinvesting with good solid dividend paying companies.

5.  Real estate / rental properties:  Create a consistent income stream through rental properties.  Build equity in real estate properties and have your renters pay down your mortgage.  Hopefully by retirement time there is no mortgage, so the rental income is pure profit.

There are obviously many more ways to create income sources, but these are 5 simple things that you do to start planning for your retirement right now.   If you manage to secure all five of these income sources successfully, you will have nice income streams to keep you afloat during retirement.  Of course, it’s all about how much you spend that really dictates your success long-term.  Analyze your spending habits closely, especially going into retirement. If you haven’t done so already, eliminate all debt and roll-on into your glory years without any liabilities.

I also found an interesting article from MarketWatch called with 5 tips to help you retire early.  These are some simple tips that can help you reach your goals in retirement, that also reiterate many of the past blog topics we have covered on Middle Class Success.com.   Spend wisely, save relentlessly, and build wealth.

10 Steps To Get Ahead And Create Long-Term Wealth, Part 2

Continuing on from my previous post, “10 Steps To Get Ahead And Create Long-Term Wealth, Part 1”  here are the next five steps that I’ve personally used to help me get ahead and create an environment for long-term financial success.  I want you to understand that you can also get ahead and start building wealth.  Keep the process simple… your finances can be as complicated as you want it to be.  For me, I like everything in my life to be simple, so I use very simple methods.

As I keep things simple, I continue to educate myself, as you will see in Step #10.  There are so many resources out there at your disposal.  Step #10 will touch on some of them that I’ve found useful.  This website is dedicated to try and inspire people that are in the same situation as I was, just trying to find a way to create some wealth with limited resources.  I’ve learned so much in the past 10 years, I only wish I could have started the process earlier. Still, the key to long-term success is starting now, no matter what point in your life or what your current finances are.  Start now and secure your future for yourself and your family.

Continuing from Part 1, here are the next five steps that have worked for me:

Step #6:  Be conscious of your spending 

Evaluate every purchase and decide if you really NEED to make the expense.  Living frugally is really the key to creating an environment for long-term financial success.  No matter how much money you earn, if you make good financial decisions you can definitely get ahead.  The good majority of people I know that are struggling with their finances have done so because of bad financial decisions, over and over again, then they wonder why they have no money and live paycheck to paycheck.  Remember, being frugal and controlling your spending is a true mindset and lifestyle that you have to implement in order to get ahead with limited resources.

Of course, living frugally doesn’t mean that you have to totally deprive yourself completely.  We all have hobbies and different interests that cost money.  You also need to treat yourself with a reward occasionally, you earned it!  Just be smart about your expenses and really think about each purchase.  After I changed my mindset on accomplishing my financial goals, I soon realized that material things just weren’t important.  Just ask yourself, “will buying this help me make my goals”?  Most people simply don’t think about spending money, they act impulsively, then when the reality sets in with their spending it just gets them down and depressed.  Again, it’s all about making good choices.  If you do this, you will come out ahead and the money you save by living frugally will help you secure your financial freedom for good.

Step #7: Setup automation on your accounts

In earlier steps, I mentioned always paying yourself first before your expenses.  Once your budget is totally tweaked and you fully understand how much you have coming in and going out, you can setup automatic transactions for deposits to your savings or investment accounts.  This way you make sure money is funneled into your accounts, so you get paid first.  Then you can also setup automatic payment transactions for your expenses.  It really helps to have a system down to make sure you don’t forget to pay a bill.  Automatic transactions eliminate the human element, which really helps from potentially paying late fees if the payment is accidentally overlooked.   You can setup automatic payments for just about everything.  It just simplifies the process and helps you manage your budget better.

I also use an EXCEL spreadsheet for all of my bills every month.  I mark off each bill or financial obligation once I see it clear my checking account, just to make sure I didn’t miss anything.  Do what works best for you, but keep it simple and efficient so it makes it easier and less stressful to deal with every month.

Step #8:  Fund Your Retirement

Step #8 goes right along with Step #7.  Pay yourself first!  Your long term-wealth building is just that, long-term!  It takes time to accumulate wealth, especially with limited resources.  If you don’t already have a retirement account, you need to start one now!  Time is on your side and it will take many years to build up a significant amount of wealth to live on in retirement.  I’m not a mathematician, but the basic numbers from my Social Security (SS) benefit tell me that I will need much more income to live on in retirement.  If you haven’t done so already, take a look at your potential SS benefit and really think about how much money you will need to live on.  If you think that you are going to make it on SS and live the way you currently live, you’re in for a real shock.  Do the math and really think about this, it won’t be hard to see that you will need different sources of income to keep you afloat…especially if you live 20 to 30 years after you retire.

At a minimum, take a look at your employer and see if they offer a 401K plan.  If so, do they offer matching funds?  If they match your deposits up to a certain percentage, take advantage of that, it’s free money!  If they don’t offer a 401K, you can start your own IRA account.  There are lots of good options, so do your homework and see what works best for you.  If possible, have one of each going and utilize them for different tax purposes long-term.  I also highly recommend opening a taxable account with an online broker, such as Ameritrade, E-Trade, Sharebuilder, etc. I am a huge fan of dividend paying stocks.  With a brokerage account you can buy good dividend paying stocks that pay you to own them.  You will be amazed how much you can accumulate with a good dividend stock portfolio.

We will take a closer look at these different types of retirement accounts in future blog posts.  Visit my website for more on this subject later.

Step #9:  Earn extra money

Once you have your budget set and fully functional, you may realize that you still don’t have any money left over. At this point, you may need to simply find ways to earn extra money.  The best way to push your financial goals over the hump is to bring in more money.

Maybe you can find a promotional opportunity at your current job?  If not, maybe you can work with your employer to ask for a pay raise.  Most of the time employers don’t realize how important you really are to the organization until you bring it to their attention. If you are highly valued as an employee, you might be surprised that they will do whatever it takes to keep you.  If not, maybe you can look at switching jobs and finding a better avenue for future advancement opportunities somewhere else?  If you are happy where you are, maybe you can just consider working a second job?  That may be the answer to help you bring in that much needed extra money each month.

You should also look to get rid of stuff around the house to free up some extra cash.  I’ll bet if you look around the house, you’ll find plenty of stuff that you can get rid of that you really don’t need.  Put your ads on Craigslist, it’s free!  You could also sell stuff on eBay with online auctions.

Getting extra money selling stuff you don’t use or need around the house can really help you get a jump start.  I can honestly say that I’ve used Craigslist successfully for everything that I’ve tried to sell.  It works great for advertising your stuff and won’t cost you a dime.  You might also find local papers in your community that you can advertise your stuff for free.  Do some research and look for the best alternative to paid advertisements in your area.

Step #10:  Learn as much as you can about money and finances in general

Educate yourself and learn as much as you can when it comes to money.  There are so many good resources for this, including on-line blogs like this site, books and financial newspapers or magazines.  You can go to the public library in your community and check out books for free!  Knowledge is power, the more you learn the better off you will be. Remember I said that I prefer to keep my finances as simple as I can, I also keep this prospective when reading new books or articles.  I take whatever I can from each type of material and implement what I believe would work for me. Every book I’ve read has given me different perspectives to consider.  Some offer great information or ideas that I really find valuable.  Either way, it’s all really a continual learning process.  I find that reading and researching financial books and topics help to keep me focused on my own goals in creating long-term wealth.

Getting a grip on your finances and building wealth can be overwhelming, stressful or even intimidating at times.  That’s why I really like to keep things as simple as possible.  Learning different perspectives from multiple resources can be beneficial, but ultimately finding what works best for you is the key to your own financial success.

In summary:

Use the 10 steps I’ve outlined here (part 1 and part 2) to help you get started on your journey to taking control of your finances for good. Stay focused and persistent with your goals.  Make good financial decisions that will put you in a position for long-term success.  Use addition income resources to build a security blanket account to cover unexpected expenses, then use anything left over to start using your money to make more money.  Do your research and continually educate yourself.  Once you change your mindset about your finances, you will actually break the mold of the typical blue-collar worker and get ahead of the game for good.  Best of luck to you!

Disclaimer:

We are not professional financial advisers.  All of the information presented on Middle Class Succuss.com is for informational purposes only.  Our goal is to try and help as many people get control of their finances and create an environment for long-term success as possible.   Please continue to do your own research and/or consult with a financial professional to make the best possible decisions for your own financial future.

Wants Versus Needs

We all WANT different things, big homes, fancy cars, whatever it may be….but do we really NEED this stuff?  When it comes to sticking to your budget, it’s so important to really think about this question.   It’s really worth repeating over and over…do I really NEED this?

If you are going to be successful long-term you need to really think about every purchase and decide if it’s something that you absolutely need.  I remind myself of this all the time.  Do I really need a new big screen TV?  Well, the truth is in this case, I definitely don’t need a new TV.  It’s killing me too, especially with the Super Bowl right around the corner!  But again, I just had to take a look at my budget and just realize that it’s not a smart move right now.

Every year I look around the office at work and notice how many people continue to buy new cars every couple of years.  It’s amazing how far in the hole a new car can put you.  Obviously we all really should have reliable cars, but to purchase a brand new car?  It’s really not a good move for your long-term financial goals.  In all reality, it’s so much better to go out and find a nice, clean, well-taken-care-of, used car.  It will save you thousands and thousands of dollars over the life of the loan, in most cases.  I just can’t stand the idea of paying a car loan for years, it’s just such a waste of money.

Remember, the goal here is long-term financial success.  When it comes to big purchases, you really need to think it through and understand whether or not you really NEED to make the purchase.  Staying on course with your investments and savings will get you ahead and keep you ahead.

So, next time you are looking to buy something really ask yourself if you absolutely need to make the purchase.  I realize we all have to have spend money on fun things or hobbies, just to keep our sanity sometimes, but when it comes to cutting corners on your budget you need to think it through.  This is especially true when you still have not established a financial cushion with your savings account.   This must be done first before you get to a point where you can start dropping cash on material things that you likely don’t need to have.

Stay focused on building wealth and forget about wasteful spending on things you really don’t need.  Once you get to a good comfort level, you will be able to pay cash for those things that you just can’t live without.  Just make sure it’s cash…no loans or credit cards!

 

How Do You Measure Financial Success?

measure

 

Financial success could mean just about anything, if you ask any given person.  So ask yourself the question, what does financial success mean to you?   Is it reaching a certain level or amount of money?  Becoming debt free?  Having a few extra bucks in your pocket at the end of the month?

All of these examples could be good measures or goals of financial success.   For a lot of working-class people, just having extra money left over after bills and your financial obligations are paid every month, is truly success.   At this level, money left over is your way to start saving and investing in your future.  As you progress in this system of money management, your financial goals start to change to new levels or larger amounts incrementally.

Depending on what level you are at with your own finances, you should always have goals. Your first two goals should be:

1. Eliminate small debt.  Focus on credit cards or loans.  Pay them down, one at a time, and don’t use the credit cards again.

2. Create a security blanket savings account.   You must have an “emergency” savings account saved.   Shoot for a balance that gives you a comfort level to cover the majority of issues that arise, then continue to add whatever you can every paycheck.  I mentioned savings account, because this account has to be liquid or readily available to handle unexpected expenses.

These two goals actually work together, because as you pay down debt you will have extra money left over to increase your savings account.  Just make sure you stay disciplined and focused on stashing this extra money.  Eventually you will get to a comfort level in your savings account where you can easily handle any expenses outside of your normal budget and you won’t need to use any credit cards.  Once you get to this point, I would consider this a huge success for most people.

When it comes to credit cards, it’s a good idea to keep one credit card account open and available (once it’s paid off), to be used to handle emergency and/or unexpected costs that exceed your savings account level.   This card must only be used for this purpose!  Hopefully you will not run into this situation often, as it will unfortunately set you back.

So, what is your measure for financial success?  No matter where you are in your own  financial situation, there is always room for improvement.  Set goals and make your own measures.  Track them and stay focused.  Work on your monthly budgets, closely monitor your spending.  I suggest using a great budgeting tool called Mint.com, it’s free and really easy to use.  You can link this program to all your accounts, both savings & checking, and all debt accounts etc.  You can then setup each category of spending and input a budget amount.  Monitor the budget amount for each category monthly and adjust accordingly.  It will take a few months to really understand where your money is going.  Once you get this system tweaked, you will know exactly how much you are spending in each particular category.   It’s amazing once you actually see where your money is going, the realization sets in and you’ll know where you did well in your spending and where you went wrong (exceeded budget).

Stay focused on monitoring your budgets every money and you will be amazed how much progress you can make once you set you mind to this task.  You will know exactly where you can “tighten the belt” and cut back.  Evaluate each area closely and determine where you can save money.  Put anything you have left over in your savings account until you reach a good comfort level.  Once you made that level, it will be time to start finding other areas of investing to actually make money on your money.

Financial Stress

financialstress

When it comes to stress, is there anything worse than financial stress?   The pressure of paying bills, putting food on the table, or even just hoping that you have enough money left to put gas in the tank of your car to get to work that week… wow, it can just be overwhelming at times.  I’ve been there myself and it’s a terrible feeling.  I remember looking at my checking account and stressing over the fact that I only had $30.00 left to last until payday.  It really changes your prospective on things.

For me, I knew I had to buckle down and squeeze out every dollar I could to make it until I got paid.  The stress it creates to be down “to the wire” like that, is incredible.  It was times like this that I knew I would be crushed if any type of emergency were to happen.  I always told myself that I would get ahead and create a cushion, just for that reason.

I’m sure you’ve had times where you can relate.  Financial stress puts an incredible burden on a relationship also.  There is nothing worse than fighting over money issues.  It’s sad because we seem to get caught up in these types of situations and somehow forget how truly lucky we are to just have each other and appreciate all the good things around us.   How many good relationships have you seen go down in flames because of financial issues?

How do we turn the table on this type of stress?  As I mentioned earlier, we work to create a cushion and save enough money to create an emergency fund.   In my opinion, you need to save and maintain a minimum of $1000.00 in your savings account.   You need to have at least this amount saved to cover a good majority of the issues that arise, and you need to have it in an account where you can quickly and easily access it.   That’s why It’s best to have this money in a bank savings account.  Better yet, set a long-term goal to have one month’s pay in this emergency fund, that would give you a nice security blanket!  You will also need to start funneling money into other areas where you can actually get a decent return on your money, but for now you definitely need to have a savings account available first.

I assume (and hope) that you have a decent medical insurance plan.  When I mention “emergencies”, I am really implying the majority of the issues are financial emergencies.   Medical emergencies are a whole different animal, but either way, having money available for whatever reason is critical.

Once you get the cushion you need, the stress level will dramatically drop.   This is the start of your financial success and the first stage to getting ahead of the game.  Stay focused on this task, then start funneling money into other areas or investments.  One step at a time, first thing’s first, get that savings account established then you can start looking to make some money on anything that’s left over.   More articles to come on that!

Pay Yourself First

paycheck-for-all

First thing’s first, you must find a way to pay yourself before anyone else.   What I mean by this is, you need to stash some money right off the top when you get paid.   It doesn’t matter how much you keep for yourself (be realistic with your budget….you do have a budget, right?), but you must find a way to put a little cash away every pay check.  If you do this first, then you can plan accordingly to pay all the rest of your bills and follow the budget that you’ve created.

In the past, I always paid all my bills right after pay day.  For me it was even more difficult because I only got paid once a month!  After I got paid, I went ahead and paid all of my bills right away.  Unfortunately, that normally left nothing for me at the end of the month.  Once I realized that I needed to pay myself first, I always found a way to keep that money stashed.  I told myself that I wouldn’t touch it once it’s in my savings account.  It’s amazing how you can always find a way to pay yourself before everyone else and still get by! Everything else seems to always work itself out by the time the next paycheck comes.

Over time, you start to realize that you have accumulated a significant amount of income from that contribution.  It’s amazing how it can grow.  Remember, when the budget is tight, it’s really about baby steps to get ahead.  You have to be patient….and frugal!   Keep to your budget, stay disciplined and focused on saving, and you will be shocked how it can add up.   Start today and work to secure your financial future!

Budget?…Who Needs A Budget?

"Starving" piggy bank

Do you have a budget established?  If not, you absolutely need to get one started right now!   It’s imperative that you know where every cent of your income is going.  Without this information, you cannot clearly understand what you need to do with your finances or where you are going wrong every month.  I highly recommend using Mint.com.  It’s really easy to set up and better yet, it’s free!

With Mint.com you link all of your bank accounts (secured, read-only) to the program, so it can track money-in/money-out transactions.  You can also link any credit card accounts or loans, so you can track everything in one convenient site.  Once you set your own budgets, you can easily track your spending by categorizing each and every transaction.   At any given time, you can see exactly what you have spend for each budget category.  If you go over budget for a given category you can easily see it, then it helps you to understand how to plan your finances accordingly.   Once you go through and categorize every transaction, you will be able to see trends in your spending.

Mint.com gives you some really cool tools to evaluate trends in spending, month over month or year over year.  It also gives you suggestions on how to save money every month by applying for a lower interest credit card, for example.   It actually gives you links to apply for the best cards available (not that I’m preaching the idea of getting credit cards, but it’s just one more nice feature).  I even use Mint.com to link up to my asset accounts like Ameritrade, so I can monitor those as well.  Give it a try, it’s really easy to use.

Remember, without a budget there is really no accurate way for you to monitor your spending.  If you don’t know where your money is going, how in the world are you ever going to be able to plan to get ahead of the game!   Obviously there are many different types of programs available for this purpose.  Even a pad and pencil could do the job.   But to be able to link everything you have (income, debt, assets, etc.) all in one place, you can’t go wrong with this program. I like to keep it simple…..and free!

Is Time On Your Side?

Time-Clock-Money-Vial

Depending on your age and current financial situation, time is critical for your future financial success.  Obviously the younger you are the better the situation because you have more time on your side to start the process of investing in your future.  You also have more time to cover the ups and downs of life in-general, including life changing events and the current climate of the financial world.  Although you have a significant advantage starting out at a younger age, just getting the process started at any age is better than not doing anything at all.

For me personally, I never understood (or really bothered paying attention) to my long-term financial situation.  This is unfortunately all too common with working-class folks like myself.   I think a lot of people just assume that everything will just work itself out and something like Social Security (SS) income will provide for them after they retire.  The reality of this proposition is frightening to me when you actually look at the sheer number of your SS benefit, in comparison to the type of living you are accustomed to.

It doesn’t take a mathematical genius to figure out that you simply can’t afford to maintain the type of lifestyle you currently have working now, with only a fraction of that income coming in from SS to live on.  With that said, do the calculation yourself on paper (or in your head, because it’s really that simple) then start understanding the realization that you will need other sources of income to be able to come close to your current standard of living.  As I mentioned earlier, it doesn’t really matter what age you are, starting right now is the key to moving forward.    I certainly wish I would have started to aggressively save money and investing years ago, but raising a family and working pay check to pay check was my dilemma, like so many millions of other people.

The bottom line here is, start paying yourself first (saving money) every month.  Even if it’s $10, $50, $100 every paycheck.  Start there first, stay focused on this task, and never stop.   The money will compound after years of saving and you will be shocked how much you can accumulate over time. Hopefully the money will be invested in an account that will give you a decent return on your investment.  That is a discussion for many more blogs, but for now let’s keep it as simple as putting money in your savings account.  After all, we all should have a savings account that can be quickly accessed in case of an emergency.

I can’t stress this enough, it’s very important to build up a savings account first, then investments will follow.   Of course reducing/eliminating any and all debt is also the key to long-term success.   Many more blog posts to come on that topic also.   For now, get that savings account built up to a comfortable level, then consistently add to it every pay check.  You will be amazed at how much it will grow year over year.