Seven Steps to Better Financial Health
How to not only make money but keep it as well.
Compiled by staff
Published: Dec 17, 2010
Note: This feature was written by Rick R. Schramm is Vice President of Commercial Loans at Illinois National Bank, Springfield, Ill.
Why do most of us live paycheck to paycheck, when we live in one of the wealthiest countries in the world?
As a lender, I review a lot of financial information. Typically, I see two problems with a household's financial fitness - there is minimal liquidity (cash reserves) and minimal wealth (net worth). Both are symptoms derived from the same problem: we know how to make income, but we don't know how to create wealth. Or, as my grandfather used to say, "There are two keys to wealth - making money and keeping it."
The problem is, we aren't "keeping it."
Most people can estimate their household income during the past calendar year. However, do you know the amount of your household's current net worth and how much it increased during the past year? For wealth to be created, your focus has to be on increasing net worth. While income certainly helps, income does not create net worth
Why aren't households creating wealth? First, we are a consumption driven society. We get caught up in trying to live a high-status lifestyle. We prefer to buy now and pay later (live before we earn it).
Second, we don't teach people how to create wealth. In essence, we don't know how and in many cases, we go through life destroying our opportunity for wealth.
Third, we have a false belief system of how to become wealthy. Most people fail to realize how easy it actually is to create wealth in America. Fortunately, wealth is not a function of our looks, our family, our income, our skills and talents, or our level of education. Wealth is the mind-set of delayed gratification.
How is wealth created? It is created by combining seven characteristics:
1. Play defense (self-discipline) not offense (income). Wealth comes to those who turn income into wealth, not to those who choose a lifestyle of consumption.
2. Start early - let the power of compounding work for you. Wealth is a function of time, amount, and return. The sooner you start, the faster wealth can be created.
3. Be conservative with mortgage debt, avoid non-mortgage debt (credit cards, vehicle loans), and never cosign the debt of others. Wealth comes to those who do not borrow their standard of living.
4. Minimize taxes. Wealth comes quickest to those who legally minimize the taxes paid on their income. Wealth is enhanced by deferring or avoiding taxes, by transferring assets and income from taxable to tax deferred to tax-free.
5. Invest in equities (stocks or stock mutual funds) or rental real estate. Wealth comes to those who invest in assets that appreciate, not assets that are expenses.
6. Keep a scorecard. Wealth rarely happens on its own; you have to be willing to keep score and to invest in yourself by learning.
7. Give back. Wealth is created not by hoarding, but by giving.
Is your household doing things that keep you from wealth?
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