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Plan A To Getting Rich

I am sure the general consensus is that not worrying about money is better than worrying about it. So how do you get to that point? You could always just quit worrying about money; let the bills pile up. That probably won't work out too well, however, when you decide to need to buy a house or something else. The alternative is to build your wealth in a slow and steady manner, over time. This is exactly the idea that is outlined in the Automatic Millionaire.

It is a great read, and I am sure it will be inspiring... you have no further to look than the first chapter to see that. However, I had developed this "Plan A" idea independently of the book. So what is the main idea? Well, just live a normal life, and spend less than you make; it is that simple. How and what are the questions that are left to you to decide.

How do you save? Well, the best methods for Plan A savings are to take advantage of tax-deferred growth made available through retirement accounts. Further, with 401(k) and 403(b) accounts, you typically get an employer match that is like an automatic return. The typical match seems to be about 50% for the first six percent that you contribute. At the very least, you should take advantage of the match provided by your employer. By saving six percent in an employer matched retirement account, with a match of 50% on those contributions, you are accumulating 9% of your annual pay, and it is only affecting your net income by 3-4%, since it is pre-tax money that also lowers your adjusted gross income, and may lower your tax bracket. Keep in mind, there is a $15,000 annual limit for 401(k) accounts, and there are early withdrawal penalties unless you take advantage of provision 42(t), but that will significantly lower your accumulated earnings.

One of the largest gripes about 401(k) plans is the lack of control that you have when investing your funds. With 401(k) plans, you are limited to the investment opportunities made available by your employer. The retirement savings option here is IRAs. In addition, you can contribute up to $4,000 a year (through 2007), in addition to your 401(k) contributions, to an IRA. You can invest in nearly anything under the sun with an IRA; it depends upon what is available with the brokerage firm you choose. I have even been exposed to people investing their IRAs into real estate purchases.

So, those are the tax-deferred options available to save for retirement. Being wealthy is not all about retirement savings, however; who wants to wait until they are 59 1/2? What else is out there? Your home, for starters. Pay down your mortgage. By paying an additional payment, annually, you can shorten the amortization of a mortgage from 30 years to 23 years. There are many ways to do this, but the simplest seems to be paying an additional ~10% to your principle, monthly. Other methods include paying half of your monthly mortgage every two weeks (works well if you are paid bi-weekly or weekly). Getting rid of your mortgage, which is typically one of your largest expenses, can free up a lot of money. Further, you end up paying much less in interest over the life of the mortgage. In Automatic Millionaire, the McIntires went crazy with this idea and were able to move into a new home, while renting out their original home, and paid off its mortgage too, all before they entered their 50s.

Beyond those simple things, you want to have some very liquid assets that can be used in an emergency. Suze Orman recommends saving 8-months worth of expenses in an emergency fund. You can save this in a nice money market account and get a decent return when compared against traditional savings accounts. Further, if you are able to drastically reduce your expenses by paying off your debts, 8-months may not be as much money as you would think.

If you contribute to your 401(k), have maxed out your IRA contributions, are making extra payments to your mortgage, and have a nice emergency fund established, what else can you do? Invest some cash into some mutual funds. Mutual funds are special funds that are automatically diversified by the fund manager, so you do not have to play any of the silly market games (who has time for that anyway... you work hard, and you have a life). Traditionally, the market yields a 10% return over the long haul. However, since this is Plan A, keep your mindset conservative and consider it 8%.

So, you have some ideas on how to invest in a slow and steady manner, but how do you get the funds to do this? Well, you have to pay yourself first. This is the entire idea behind Automatic Millionaire. Setup your finances to be automated so that you invest automatically, and pay your bills automatically. This way, you do not leave yourself with the discipline demanding decisions month after month. Then, you can feel free to do as you wish with what is remaining. It is a liberating feeling to not really care about a budget, because you just live with what you have available to you.

If you follow this simple plan, and have the time to accumulate wealth, you will succeed. How much time? The more the better. The later you start, the more you will have to save... and that means a lot more. Starting this by your forties can provide acceptable results. Starting this in your twenties will give you a much better outcome, however. Also, if you started in your teens, you would be flabbergasted by the results.

If you are in doubt about whether you can free up the necessary funds check out Reducing Your "Latte Factor" Easily.

Categories: Investing, Becoming Wealthy, Expenses, Books

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