Many of us are working harder than ever at our jobs trying to earn money to provide for our families. We know we need to save and invest and build wealth for the future, but where do we start? In my book, “The Big Payoff: 8 Steps Couples Can Take To Make The Most Of Their Money – And Live Richly Ever After” (Harper Collins), I offer some steps to help you reach that goal. Here's a start.
Step 1: Stretch your budget
Before you can begin to build wealth, you need to stop putting off paying your bills or living beyond your means. Couples may find they are able to stretch their budget very simply once they find out exactly how much money is coming in and how much is going out. You’ll be surprised how much you may be able to cut back.
Step 2: Save for emergencies
Most financial experts advise you to have at least three to six months of cash reserves in case you lose your job or choose to take an unpaid leave. Impossible, you say? Well, see how much of your expenses you can cut out or cut down and start to stash that money in an emergency fund. Though it needs to be available for emergencies, couples shouldn’t just stick their emergency reserve in cash: money market accounts, certificates of deposit, and ultra, short-term bond funds are other viable options.
Step 3: Build your retirement savings
Of course, your company’s 401(k) plan is a great place to begin. But so many workers don’t do it or don’t contribute at least enough to qualify for their company’s matching contribution, if one is offered. The 2006 Retirement Confidence Survey by the Employee Benefits Research Institute found 39% of workers have less than $50,000 saved for retirement. If you’re self-employed or own your own business, there are other vehicles like a SEP-IRA, Simple IRA or Solo 401(k) that can help you grow your retirement savings. A stay-at-home spouse can also continue to build wealth with a Roth or traditional IRA.
Step 4: Bone up on home buying (and selling)
Purchasing a home is the most important investment decision most couples ever make. You need to realistically calculate how much house you can afford. Figuring out how you’ll pay for it over the next five, ten or 30 years is critical. You want to pick a loan with terms that won’t keep you up at night (that probably means a fixed rate loan) and you want to continue to build equity (that means you have to pay more than just interest). As your home appreciates, it can be the fastest way to build wealth.
Step 5: Empower your children
It may seem like saving and paying for your child’s education will drain your wealth. But consider how much a solid education can empower your children for building their own wealth someday. Ideally, when a couple decides to have children, it should start putting money in a college fund, such as a state-sponsored 529 college savings plan. There are no income restrictions and withdrawals are tax-free, plus your state may offer you a tax deduction on contributions.
Step 6: Make healthy, wealthy and wise decisions about your medical care
Most couples have no idea what their health care actually costs. They don’t find out until they switch jobs and compare the benefits packages of various employers, or until they lose a job and health care coverage--and are forced to foot the bill. Deciding between different health plans and planning ahead for out-of-pocket costs, through flexible spending plans and health savings accounts, could eventually save you money.
Step 7: Protect your family and your finances
Insurance is always a gamble. You pay now to protect yourself against something that may never happen or won’t happen for years down the road. Yet having adequate life, health and homeowners insurance are essential components of a financial plan. How much is enough? It depends on your lifestyle and who or what you need to protect. Start by protecting your income. You need to make sure you can still pay the bills if you become disabled and are unable to work for a while.
Step 8: Share your wealth with others
Preparing for death is certainly not a pleasant thought, which is why most couples put off planning for it. But it’s essential. It’s not only about money. You don’t have to be extremely wealthy to start thinking about drafting a will. If you have children, your will designates their guardian. Your estate plan also should also detail who you want to handle your medical or financial decisions if you are unable to do so.
You may not be able to complete these steps immediately – and certainly not all at once. But even taking small steps, the reward – the ability to build wealth – will be well worth it.