How to accumulate wealth

By Bob Moeller
WEAC Member Benefits

October 2005

Financial Planning Seminars
Achieving Financial Independence

On Christmas day last year, Humberto Cruz, a columnist I respect, stated his “formula” for financial success:

A. Know what you want.
B. Spend less than you make.
C. Save and invest the difference wisely.
D. Protect what you have.

Many members do not recognize the importance of A, do not pay attention enough to B, and think all their efforts should mainly be concentrated on C.

I wish I could talk to every young member just as they are starting out in the education field. I could guarantee their future wealth. In fact, if you know some younger members, show them this article. You’ll be helping them become financially secure. Below is a more specific formula for financial success. I guarantee it will work. I believe most members want simply to live a reasonable life and have financial security when they retire. I would approach it this way.

1. Immediately start living on a maximum of 90% of your pay. Yes, it will be hard for a few months, but if you discipline yourself at first, it will be something you will be proud of once you realize what you are gaining in your future.

2. Put the rest in a good tax-sheltered annuity, 401k (your spouse’s), 457 plan or Roth IRA. Essentially all your investments should be in one of these tax “shelters” approved by the IRS. Avoid life insurance company products as the fees and penalties are too high. Ditto for “load” mutual funds.

3. As soon as possible, invest in a home or condo. Borrow money for the down payment from your parents if necessary. Home real estate has been one of the few investments that has done well year after year. Don’t buy more than you can afford, but definitely stretch your finances a little. Buy only in neighborhoods in which home values have steadily increased. A good location is more important than a cheaper price in a bad location. Start researching so you know a good deal when you see one. However, don’t abandon #1 on this list.

4. Understand how much you spend on simple living expenses. I am frequently surprised at the large number of people I meet with who do not know how much they spend or how they spend it. Without becoming a cheapskate, determine how you can save money, and more importantly get in the habit of analyzing product alternatives, finance alternatives, etc. Drive your car another year. Buy less expensive brands. Do things yourself you might have paid someone else to do. The people who get good at living well on less money (particularly if they are putting away a lot in #1) are the ones who find they have more spending money when they retire than they had while they were working. Yes, it really does happen.

5. Never carry high-interest debt. If you have expensive debt, your first priority is to pay it off. Even under these circumstances, try to adhere to #1 on this list while paying the debt off. At the very least, investigate refinancing expensive debt into zero-interest credit cards or home equity loans while making plans to pay it off.

6. For both current income and future retirement income, get an advanced degree. Do it as soon as you know you are in a district where you want to stay.

7. Buy only term life insurance. Don’t overbuy. You need lots while you have small children and large mortgages. Term is cheap when you are young. You should need very little once you are past 50 and financially secure with the kids gone. Buy 10-year to 30-year fixed coverage, fixed premium term. Shop carefully for the best rates. Never buy cash value life insurance. Variable life is not good. Universal Life is not good. Variable Universal Life is truly awful.

8. Resolve that all your equity (stock market) investments will be done through no-load funds (no sales charges, no withdrawal charges) or through discount brokers. All of your bank CD investing should be done after carefully shopping for the best rates, even if they are from a bank in another state.

9. Your equity investments can be simplified a lot. Many don’t want to spend hours deciding which funds to buy, so use this simple formula. First put a portion of your investment in stable investments like CDs, fixed interest, etc. I suggest that portion be your age + or - 10%. So, if you are 30, make it 20% to 40%. The rest goes into equities. Of that remaining balance, put 40% in a S&P 500 index fund, 20% in a mid-cap index fund, 20% in a small-cap index fund, 10% in a REIT fund, and 10% in an international fund. For the first three, you can substitute a “total market” fund.

10. Spend a little time learning about money and investments. Subscribe to a good magazine like Money, SmartMoney, or Kiplinger’s Personal Finance. Discuss finances regularly with your spouse.

Posted October 10, 2005