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Posts Tagged ‘build wealth’

Times are difficult for many but they don’t have to be. Parents are the most important teachers their kids will ever have. If you want your kids to grow up to be financially independent, then be a good role model for them.

  • Tell your kids school is important. Although a college degree is no guarantee of financial success, those with a college degree tend to make more money than those without. Graduate and professional degree earners tend to make more than those with a baccalaureate. https://moneyprovidesfreedom.wordpress.com/2010/06/18/the-value-of-an-education/
  • Don’t display wealth. If you look rich (drive an expensive car, own a huge house, wear expensive clothes/jewelry), most likely you are not wealthy. You are probably living in debt. Be a good role model to your children and let them know that having money in the bank is more important than trying to impress their friends. To achieve financial stability, you must save more than you spend – it’s as simple as that.
  • Compounding for decades. When your children are young, open a 529 College Saving Plan for them and set up automatic monthly deposits. I opened 529 College Saving accounts for my kids when they were born. Currently there is about $40,000 in my nine-year olds account and about $34,000 in my seven-year olds account. It’s easy if you start when they are young and make it automatic.
  • Teach your kids how to live on a budget, balance a checkbook and to save. When my kids receive money for their birthday or for Christmas, some of the money can be spent but some must be saved for a “rainy day.” Discuss money and bills with your kids in an age appropriate way.
  • Teaching personal responsibility. Hard work over time is the only way to succeed for most people. Teach that success and wealth are not entitlements. No one is entitled to a “free lunch.” I don’t believe in allowances. Kids shouldn’t get paid for doing nothing. It’s not that way in the real world. If you want your kids to have spending money, tie the money to the amount of age appropriate chores that they do.
  • Don’t bail out your kids too easily. Let them experience the consequences of their actions while they are still living under your roof.

Many parents need to do a better job teaching their children about money. Kids want to learn about money and it is up to parents to successfully nurture their thirst for knowledge. By doing so, you help make sure your kids will have a financially bright future.

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One of the “secrets” of wealth is long-term investments that pay compound interest. When given a choice between a good investment with compound interest and a great investment with simple interest, pick the good investment every time. Over time, the investment that compounds will outperform.

Throughout stock market history, the average yearly returns for periods of 25 years or longer has been around 9-10%. For example, the yearly returns from 1900-2009 was 9.4%. For the last 25 years, the annual return was 11.9%.

So the secret of wealth is to invest when you are very young so you have time on your side. When your child is 16 and starts his first job, match his income and place that amount in an IRA account. Do this every year for five years and your child will be a millionaire by the time he or she retires.

Let’s illustrate with an example. When your child is 16 years old and starts his or her first part-time job, you place $2,000 into an IRA account for your child every year until he or she reaches age 20 for a total investment of $10,000. Even with no further investments, your child would have about $1.1 million by the time he or she retires at age 67 (assumes 10% interest). That $10,000 investment allowed your child to retire a millionaire.

Opening an IRA for your children when they are young is probably one of the easiest and surest ways to make sure your kids will have a great financial future.

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Parents are the most important teachers their kids will ever have. I believe most parents want the best for their children and want them to be financially savvy. However, many parents are actually doing the opposite and are teaching their kids how to be poor. Here’s how:

  • Telling your kids school is not important. Although a college degree is no guarantee of financial success, those with a college degree tend to make more money than those without. Graduate and professional degree earners tend to make more than those with a baccalaureate. https://moneyprovidesfreedom.wordpress.com/2010/06/18/the-value-of-an-education/
  • Encouraging outward displays of wealth. If you look rich (drive an expensive car, own a huge house, wear expensive clothes/jewelry), most likely you are not wealthy. This type of spending creates financial stress. Famous people who made lots and lots of money but filed bankruptcy anyway include Mike Tyson (boxer), Donald Trump (entrepreneur), Anna Nicole Smith (model-actress), Ted Nugent (rock star), Nicolas Cage (actor) and Larry King (talk show host). You need to save more than you spend to become wealthy.
  • Compounding for decades. When your children are young, many parents don’t open a 529 College Savings Plan or Coverdell account. I recommend opening some sort of college  savings plan for your child before he or she is one year old so the account has many years to grow.
  • By not teaching your kids how to live on a budget, balance a checkbook, or to save.
  • By not teaching personal responsibility. Hard work over time is the only way to succeed for most people. Success and wealth are not entitlements.
  • By bailing out your kids too easily. Let them experience the consequences of their actions while they are still living under your roof.

Many parents need to do a better job teaching their children that managing money is what leads to a rich lifestyle instead of the money itself. Kids want to learn about money and it is up to parents to successfully nurture their thirst for knowledge.

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The Rule of 72 is a simplified way to find how long it will take to double your investment.  For example: 72 divided by 6% interest equals 12 years to double your money.  I find the Rule of 72 very useful if you want to make some quick estimates and don’t have a calculator handy.

Rate of Return Rule of 72 Actual # of years
2% 36 35
5% 14.4 14.2
7% 10.3 10.2
25% 2.9 3.1

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35% of lottery winners of more than one million dollars are in financial difficulty or have filed bankruptcy within 10 years of winning. So what should you do if you come into a windfall (lottery, inheritance, stock option buyout, court settlement, etc)? Here are some tips:

  • Cooling off period. Don’t do anything at first. Don’t go on a spending spree or go crazy. Don’t quit your job just yet.
  • Split up the money. Federal Deposit Insurance Corporation (FDIC) is capped at $250,000 per depositor, per insured bank, for each account ownership category. Split up the money on CD’s, money market funds, and short-term securities until you devise a longer term plan.
  • List your immediate needs and then your secondary goals. Are you heavily in debt or in poor health but have no insurance? Be realistic and practical.
  • Talk with an accountant. You have to pay taxes on your windfall and will most likely be in a higher tax bracket.
  • Watch out for scams. People want to take your money.
  • Update your will or trust. More money means you need to review your plans.
  • Invest gradually allocating your money into different stocks, bonds, and mutual funds. Index funds may be a good idea. If you have a lot of money, I strongly recommend using a professional advisor. Stay fairly conservative and don’t forget to fund a college plan for the kids and an IRA for yourself or spouse.

If you are lucky enough to get a windfall, make sure to use the money wisely. Also, don’t forget to give to your favorite charity.

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What is more important to achieving financial freedom: having millions of dollars or having much less money but having the tools and knowledge necessary to invest and to spend (save) wisely? Before you answer, consider the following: 

1.  There are many famous people who made tons of money but filed bankruptcy anyway. The list includes Mike Tyson (boxer), Donald Trump (entrepreneur), Anna Nicole Smith (model-actress), Ted Nugent (rock star), Robert Kiyosaki (Rich Dad, Poor Dad author), and Larry King (talk show host) just to name a few.

2.  Approximately 35% of lottery winners of more than one million dollars are in financial difficulty or have filed bankruptcy within 10 years of hitting the jackpot.

So the answer is not how much you make that’s important but how much you save and how wisely you invest those savings. Almost anyone with a steady job and average income can amass a small fortune if they are wise with their money.

Check out my earlier blog Would You pay $1,000,000 for a Burger?  There is a good example of Mr. Bob Works-a-Lot and how much saving $7/day could have earned him if he invested it wisely. Finding an extra $7 a day is pretty easy if you eat out a little less often, keep your car for one extra year, use coupons when grocery shopping, buy clothes when they are on sale, etc. I’m sure you can think of many other examples.

I’ve included a link below that gives some good real life examples of people (extreme savers) that have successfully saved money.

http://financiallyfit.yahoo.com/finance/article-110102-5999-1-secrets-of-extreme-savers?ywaad=ad0035

One last thought: What kind of car does Warren Buffett (world’s 2nd richest billionaire) drive? Answer: A 2001 Lincoln Town car with a license plate that reads “THRIFTY”. 

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Help! Am I still on target? I get many questions from concerned folks on how much money they need for retirement. So, how has the recent stock market and housing woes affected your retirement security? If you want a fast way to find out, T. Rowe Price offers a quick and easy calculator that helps determine if you are still on track. Will your money last as long as you do or do you need to ramp up your savings before it’s too late? Visit http://individual.troweprice.com/public/Retail/Retirement/Retirement-Planning

Under Tools& Resources, select Retirement Income Calculator.

It only takes a minute or so to use and offers lots of practical advice. Let me know if you find this useful.

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