If you want to test your own financial habits against some recommended wealth-building strategies, the answers can help you build wealth over your lifetime. How is it possible that an ordinary couple with an ordinary income has built extraordinary wealth by becoming multi-millionaires and retiring in their 50s?
This is the premise of David Bach’s Automatic Millionaire, one of the 12 best-selling personal finance books. The strategy he presents is not as far-fetched as the story seems.
Instead of focusing on increasing your income, increasing your spending and looking rich, if you switch to saving and investing wisely, you can get very rich – and sooner than you might think. It’s easy to read, but it seems difficult for people to implement into today’s increasingly materialistic and credit-oriented culture.
As regularly on the Oprah Winfrey show, David Bach is no stranger to the personal finance industry, at least in the US. But what sets him apart from many experts is the simple strategies he shows that anyone can do to become debt free and build wealth in your life.
Here are six questions you can ask yourself to start your own personal wealth building strategies and get rich in your life.
1. Do you want to get rich?
This is not a trick question. But the real question is to ask yourself WHY you want to get rich.
When you become clear about your goals, you wake up hungry to make it happen and are more likely to do the job and make the sacrifices to achieve them.
2. Do you pay yourself first?
This is the most important financial decision, but few of us do it and we certainly don’t automatically. If you make a dollar, you are the first to be paid. Paying yourself first means putting money aside for your taxes, your retirement accounts, your savings, many of which are tax-free!
The rule is to pay yourself an hour per day of your income – about 10-15% – invested automatically for life. (The average household actually only puts away 10 minutes of their earnings per day – about 2% – which is both shocking and scary.)
3. Do you know your Latte factor?
The average American and probably European spends about $ 10 a day on occasional purchases, such as buying a latte and a pastry before, during and / or after work, perhaps a pack of sandwiches or a salad and a drink over lunch. If not, it’s a magazine or an extra CD, where you can get some chocolate from the gas station.
That $ 10 a day is $ 3600 / year (assuming you’ll somehow have a latte factor not only on weekdays but weekends too). If you put that away instead, it really takes off – and this will surprise you.
Calculate it by, say, an annual growth of 8% over 35 years, which is actually a whopping $ 1,385,505 – over a million dollars – for coffee! Wait another five years, and that would be an incredible $ 2,108,569.
The strategy here is to become aware of what your occasional ‘latte’ purchases are and reduce or disable them and instead pay yourself first.
4. Do you rent or own?
If paying yourself first is the most important financial decision, then the most important investment decision is buying your own home. It is the best wealth creation strategy you can use. Homeowners have a net worth of 40-50 times more than people who rent.
A secondary strategy is to pay off your mortgage debt as early as possible by making overpayments and thus saving huge amounts on interest paid otherwise. But a third arm to this is that if you’ve paid off about half, you’ll use equity to buy another property of the same value and rent it out.
For a 15-year fixed-rate mortgage, interest rates are as low as they probably will ever be and it’s easier than ever to take advantage and build wealth over your lifetime. Using a fortnightly payment plan can save you even more than six digits of interest over 15 years!
5. Do you have debts?
If you’re going to work really hard to make money, make sure you have a plan to keep it! The only economy you can control is your personal economy, so reduce your debt by paying it off from the start and little by little. This is easier and less stressful than trying to pay large amounts.
6. Do you give back?
When your personal finances are suspended, it seems very difficult to consider a tithing level. But it is a healthy habit and will pay you back in so many ways. It is a different kind of wealth. When you feel happiness and satisfaction on a deeper level, you are much more open to opportunities that you might otherwise never notice.