10 Rules for Building Wealth

Saving money may seem like one of the most difficult things to do, especially if you have a specific goal (children's education, wedding, retirement) and a specific time frame. It can be overwhelming thinking about how and where to invest to maximize your gains. If you haven't even considered saving, if you've been putting it off for a while, or even if you have been saving for years, it's never to late to take a look at some well thought out advice. I recently read an article in Fortune magazine "Ten Rules for Building Wealth" and thought that there was some very good advice that I would pass along. So the ten rules in summary are as follows:

1) START EARLY- Probably the most important thing is to start saving as early as possible.
2) USE YOUR 401K- You should definitely be signed up for your company's 401k plan. These are pre-taxed dollars that are being put away and most companies match your contribution. Don't pass up an opportunity to save not only your money, but your company's match also!
3) KEEP IT SIMPLE- Stock picking is not an easy task. Make it easy by picking several index funds, ETF's or funds that are based on your changing goals.
4) DON'T TRY TO BEAT THE MARKET- Diversify your assets and rebalance at least once a year by selling some winners and picking up some assets in areas that have been lagging.
5) DON'T CHASE TRENDS- Don't blindly invest in the hottest sector because everyone else is doing it, be sure to understand why this certain asset class is taking off. If there seem to be legitimate reasons for it then good for you, but be careful with those that are "hot" for no apparent reason.
6) MAKE SAVING AUTOMATIC- Once the money is in your hands, it makes it more difficult for you to put it into a savings vehicle. If you are already maxing out your 401k, but need to save more see if your company can transfer money directly from your paycheck to a Roth or other savings account or perhaps your bank can transfer a specified amount every month from your checking to a savings account. It's worth it to find out.
7) GO HEAVY ON STOCKS- The more time you have before you need the money the more heavily you should be invested in stocks. Stocks are the most risky investments, but they offer the most return, so if you don't need the money in the next few years, consider being more aggressive.
8) HOLD DOWN FEES- Try to avoid any mutual fund that charges a management fee of more that 1%. If trading stocks, watch for commissions, they can really add up. If you are not trading aggressively you should be OK, but if you plan to trade often see if your broker offers a quarterly transaction fee.
9) DITCH CREDIT CARD DEBT- Try to pay off your high interest debt first (usually credit cards) and work your way down.
10) DEFER TAXES- Know the tax implications before you sell your stock. In taxable accounts you will have to pay capital gains on your profits. At tax time you may want to consider selling some losers to take advantage of the $3000 capital loss deduction that you are allowed per year.

Well, there you have it, so what are you waiting for? The longer you wait to start saving the less you will have saved- simple enough. An interesting chart shows the difference in savings for someone who started saving a $1000 a year at an 8% growth rate. At age 65, the person who starts saving at age 25 would have @ $280,000, start at age 35 you would have $122k and wait until age 45, your savings at age 65 would only be $49k.

You can read the Fortune magazine article at http://money.cnn.com/popups/2006/fortune/buildwealth/index.html

Good luck and happy savings!