Dear “Young and Wanting to Be Rich”, I hope that you are feeling well, both mentally and physically. A recent conversation with one of your peers or near peers has brought into my mind that there is a high likelihood that you would like to be rich. Well, the good news is that you can set yourself up to become rich automatically. Yes! That is a fact. If you take actions soon enough, there is a very high likelihood that you can become rich automatically.
So, let’s get into today’s topic.
First, What is Meant By Rich?
For those of you who have read enough of my previous posts, you may know that when I say rich, it may not mean what most people mean. Rich, to me, means that you make a lot of money. But, making a lot of money does not mean that you are living paycheck to paycheck. This means that all of the income that you earn every month is spent every month. There are lots and lots of people that earn six figures a year (at least $100,000 a year) who are living paycheck to paycheck. So, that is earning at least $8333 per month and not having any money left over at the end of the month. In fact, there are people who make that much or more, who not only don’t have money left over, but still have bills left over after the end of the month.
What Do I Want For You Instead of Being Rich?
Being rich is indeed nice, because, if managed properly it can help you get to where I want you to be. What do I want for you? I want you to be wealthy. What do I mean by wealthy?
In this particular conversation, I am speaking of financial wealth. I mean that you have more than one stream of income, and that at least one of those streams is passive and growing. Wealth means having an income even when you are not working. It means being able to retire comfortably.
How much money do you need to have? Well, you have to come up with that answer yourself. But, the way I see it, the more the merrier. Or, to put it another way, as much as possible.
Am I advocating greed? Absolutely not. The abundance will make it easier to be generous with both your time and money, sharing both to help others.
What Do I Suggest That You Do To Start Building Wealth?
I suggest that you first create a plan. Why? You need a plan because you cannot build something big without a plan. Can you imagine someone trying to build something big like the Hancock Tower or the Eiffel Tower, without a plan. That would not work. If someone did do that, I would not expect the building to be well designed. In the best case scenario, it probably will not look very good, and it may have an inefficient layout. In the worst case scenario, the building may collapse.
How To Start Your Financial Plan
The first step in your plan is to figure out where your finances are right now.
Figure out your net worth.
Your net worth is equal to your assets minus your liabilities.
In this case, your assets are things that you own that you can reasonably expect to be able to sell. For most people that will include real estate and vehicles. It will also include money in bank accounts, and investment accounts.
Subtract your liabilities from your assets.
Liabilities include the amount that you owe on things such as mortgages, auto loans, personal loans, student loans, credit card bills, and this month’s utilities.
The amount that you have left over after subtracting your liabilities from your assets is your net worth.
The second thing is to consider your goals.
Second, no matter what other goals that you may have, you should have two basic goals if you want to get rich automatically.
You want to decrease your liabilities.
You want to increase your assets.
Now What? Let’s Get To Work!
You need to make sure that you receive your pay with it being automatically deposited into your checking account that you use to pay your bills. This is called direct deposit. Direct deposit will save you time, and make it so that you never find yourself in a situation in which you forget to or do not have time to deposit your check.
Another thing that you must do to get rich automatically is to commit to paying yourself first. You work hard to earn your money. So, you deserve to pay yourself first.
Where To Put The Money That Pay Yourself
Those of you who read my letters often will know that I am a huge fan of Roth IRA. But, in order to pay yourself first, before even paying the government, you need to have your employer automatically pay the money directly from your paycheck into a retirement account. A Roth IRA is an after tax retirement account. But, a pre-tax account will allow you to take money out of your pay prior to having taxes taken out. Your employer may offer a 401K or some other retirement account. But, if your employer does not offer a retirement account, you can ask your employer if he or she can make deposits directly into an outside IRA that you start.
How Much Money To Put Into The Pre-Tax Retirement Account
If your employer offers matching funds up to a certain percentage in your company retirement account, try to deposit up to the percentage that the company will match. So, if they match up to 6% try to put in 6%. It’s free money, so why would you turn it down?
More Retirement Money
Some employers let you set up your retirement accounts to automatically increase your contributions each year. If your employer allows this, do it.
Even More Retirement Money?
If you can contribute more pre-tax money than the money that you put into your employer offered account (which you should fund up to the matching), I recommend that you find another way to maximize more retirement contributions. For instance, right now Robinhood is offering to match 1% of your contribution to an IRA opened with them.
Emergency Fund
After you have set up your automatic contributions to your pre-tax retirement accounts, the next thing that you need to do is to build your emergency fund.
An emergency fund is a fund that is there to save you in case of emergencies such as sudden drops in income or loss of income.
Typically, it is suggested that you have three months of expenses saved in your emergency fund. (However, life has shown me that it can be useful to have more than that. But, at a minimum, shoot for the 3 months worth.)
So, have at least 5% of your after tax money automatically go from your checking account into your emergency fund until you get at least 3 months of your required expenses. After you get the 3 months worth, depending on your other goals, you have options. Rather than totally ending your contributions to your emergency fund contributions, you can either continue your 5% contributions, reduce your contributions to 3%, or take a break and then resume your contributions.
Where To Keep Your Emergency Fund
Because your emergency fund must be liquid so that you can access it quickly in an emergency, you should not put the money into financial instruments that are not liquid. So, you would not want to lock your money up into CDs. You also should not put your emergency funds into the stock market, since your stocks could be down severely when you need the money, meaning that you would have to sell your stocks at a loss.
Instead of putting your money into illiquid instruments or fluctuating instruments, you should put your money into a savings account, where it will be quick and easy to access, and its face value does not fluctuate.
How To Get The Most Out of Your Savings Account(s)
Okay. You are going to keep your emergency fund in a savings account. In order to make the most of your emergency fund, you should keep your emergency fund in a high yield savings account.
My two favorite banks offering high yield savings accounts are Ally Bank and CIT Bank. The CIT account is actually a money market account. This means that you can only withdraw money 6 times a month. But, since I am talking about an emergency account, it is not likely that you will be taking money out more than 6 times per month.
How To Decrease Liabilities
In order to decrease your liabilities, you have to take several steps.
First, you need to realize that the interest that you pay on any loans that you have (including credit cards) is stealing your ability to contribute to your assets. So, you need to get rid of liabilities as soon as possible.
To get rid of debt, you will need to pay more than the minimum payments.
Start by eliminating your credit card debt. I suggest getting rid of credit card debt first because credit cards usually have higher interest rates than other forms of debt. Credit cards in particular will take a long time to pay off, if you pay the minimum required payments. Cardholders paying the minimum is one way that credit card companies get rich while you get poorer.
While working to pay off your liabilities, make sure that you do not incur any late fees.
Ultimately, you want to get to the point that you are paying off your entire credit card bill each month.
Late Fees Are Another Insidious Drain on Your money.
To avoid late fees, make sure that all of your bills are to be automatically paid.
For credit cards, set the automatic payments to at least 10% more than the minimum payment. Then manually send an additional payment to speed up paying off the credit card bills.
Once You Decrease Your Liabilities
Once you decrease your liabilities you hopefully will have more money to save.
What to Do With Money That Is Saved By Reducing Liabilities?
Once you have more money to save, you can use those saved dollars to buy more assets. You want assets. Assets pay you money.
What Assets Should You Look Into Acquiring?
You should talk to your financial advisor about the types of assets that you should buy.
But, here is what I like…
I like dividend stocks. In addition to any stocks that you may have in retirement accounts, you can start a portfolio in a taxable investment account. Building a portfolio that includes quality dividend stocks allows you to create another income stream.
If you choose to buy stocks, you should set your accounts up so that money automatically goes from your checking account and into your taxable investment account. Then make sure that you actually invest the money once it is in your investment account.
How To Supercharge Your Dividend Stocks…Automatically
When the new money that you are having automatically goes into the account, it is not yet invested. But, you can automatically make recurring investments into designated stocks at designated intervals. This can be done with the Robinhood app because it allows recurring investments. I am not aware of any other brokerages that allow that. But there may be some.
If you choose to purchase dividend stocks, you can grow your stocks by having your dividends automatically reinvested. Most investment firms offer DRIPs, dividend reinvestment programs.
Combining the DRIP with the automatic deposits into the account and the recurring investments will give your investment account maximum chance to grow.
Another Asset That I Like
I understand that you may not be in a position to purchase this asset (at least not yet.) But, I like this asset so much that I want to mention it anyway.
I like multifamily real estate as the first homes for young people. Buying a multifamily as your first home, automatically puts you into a position in which tenants automatically help to buy an asset for you. This is fantastic!
Not only would this increase your assets, but it would also help diversify your income portfolio. Your retirement account and your taxable investment account are tied to the stock market. The portfolio diversity would come from the multifamily property being instead tied to the real estate market.
Another benefit of buying a multifamily is that you can sometimes use a portion of the future expected rental income to increase your income used for qualifying for the mortgage.
Furthermore, if you choose to live in your multifamily, then you are reducing the cost of the biggest expense that most people have…housing costs. Smart!
But remember, once you have a mortgage, be sure to have the payments made automatically. This will ensure that you will never miss a mortgage payment.
You can automatically speed up paying off your mortgage by paying one extra payment each year. It is best to make this payment at the beginning of the year, if possible. If you do send in an extra payment, make sure that you note to the mortgage company that the entire extra payment is intended to go toward the principal. It is paying down the principal that will reduce the amount of interest that is ultimately paid.
Automatic Reminders
Evaluate your plan quarterly and evaluate to determine if you should and can find a way to increase your income, giving you more money to put to work toward making you rich.
Also, make sure to review your automatic payments every quarter to determine if you need to increase them.
Set up reminders to do these two things that happen automatically.
So, There You Have It.
Did you notice a specific adverb that was used repeatedly? The word is: automatically. Building wealth over time is best done automatically.
Key Takeaways
Making your finances as automatic as possible, has the following benefits:
- By having your money automatically deposited into your checking account, your money will be available immediately.
- You will always pay yourself first, which means that you will be automatically saving for retirement.
- You will automatically build your emergency fund.
- You will increase your savings, which leaves more for investing.
- You will pay off your credit card faster than otherwise by automatically paying more than the minimum.
- You will never miss a payment by having your bills on automatic payments. This will both help your credit rating and make sure that you avoid fees.
- You will stay on top of your plan by automatically setting reminders to evaluate your plan and contributions.
I hope that this was useful and that you have started or soon will start automating your finances.
I am always rooting for you.
Hugs,
Rich Mom
P.S. Please don’t wait to start automating your finances. The simple rules for investing and building wealth are: Start early. Do it every week. Never stop. Automation makes it easy to follow those rules.
Would you like to get more ideas about building wealth? Check out:
A Small Passive Income Is Better Than No Passive Income
Start Creating Passive Income Today
What is a Dividend Aristocrat?
Looking for financial resources? Check out the Rich Mom Poor Kid Resources Page.
Who is Rich Mom?
If you’re wondering who Rich Mom is, check out my “About Rich Mom” page.
Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
The information shared here is not intended as financial advice, just encouragement and entertainment.
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