If you are reading this it is either because you want to Create Wealth or you have reached Step 10 in your Net Worth Millionaire Plan. Either way, this article is a great step on a path to financial success. I believe that by preparing properly and following this personal financial plan you can create wealth.
What is Wealth? First, I would like to separate Net Worth and Wealth even though they go hand in hand. Net Worth is your Assets (what you own) minus your liabilities (debts-what you owe). Your assets includes all of your money in savings, checking, retirement, equity in your home(s) and other valuable items i.e. stamp, car or art collection. Your liabilities include any amount of money that you owe to someone or some organization such as a credit card company, mortgage company, IRS, bank and etc.
I believe true Wealth is any money that is not already designated for a specific purpose. For example, if you have money in an emergency fund and a retirement account, I would count that toward your net worth but not toward true wealth. Money designed for wealth creation should be used to create cash flow on a specific schedule. Such as monthly rent from a real estate property.
Before you can create wealth, ask yourself the following questions:
- Do I have a personal financial plan?
- Have I calculated my Net Worth?
- Am I following a monthly budget?
- Do I have an emergency fund to cover 3-8 months worth of expenses?
- Did I pay off all my consumer debt i.e. loans? Credit Cards?
- Am I saving 15% of my income into retirement?
- Am I saving for my kid’s college expenses?
- Did I pay off my mortgage?
If you answered NO to any of the questions above, you are not ready to create wealth. Real wealth creation happens when all your personal finances are in order. Let me explain one at a time.
PERSONAL FINANCIAL PLAN
Everyone needs a personal financial plan. My Net Worth Millionaire Plan will provide you with a clear and easy step-by-step process toward your financial freedom. My plan will help you organize and prioritize your finances. Read the The Boring Secret to Getting Rich to help you understand the importance of living below your means. The less money you spend, the more money you have to complete these steps.
You will have to make a lot of personal financial decisions. For example:
- Should I take advantage of my employer’s 401(k) match or save an emergency fund first?
- Should I save for my kid’s college education expenses or my own retirement first?
Without a plan, you can become overwhelmed or lose motivation because the amount of money that may be needed to finish your plan. If you have a little emergency fund, slowly paying off some debt, investing only up to your employers 401(k) match, you will not really see tremendous financial progress because you are barely diving into each area. I have personally experienced and have witnessed others become really motivated when they see themselves Winning. If you follow a plan, that is intentional and automatic, you will accomplish more. When you accomplish more, you will develop Hope and hope is one of the most powerful motivators to success. For more information, read my article about this 10 Step Personal Financial Plan.
CALCULATE YOUR NET WORTH
When you calculate your net worth (Net Worth Analysis) you will have an accurate understanding of your current financial situation. Once you calculate your net worth, you can clearly see where you are doing well and any improvement areas that need to be fixed.
I recommend you set one to three net worth goals and evaluate it every three months. This will increase your personal accountability as you work toward achieving your goals. When you work hard and see your net worth increasing you will be more determined to complete your goals.
FOLLOW A MONTHLY BUDGET
Writing and following a monthly budget will allow you to be intentional with your money. Every dollar should be identified before the month begins. A Simple Monthly Budget will keep you on track toward your financial goals. This is a must. My article called Budgeting-Your Financial Freedom Tool will give you a more in-depth analysis on why it is important and the freedom it provides.
EMERGENCY FUND
An emergency fund is a set of money, usually 3-8 months of expenses, saved in a savings or money market account to cover personal financial difficulties or emergencies. This money is not to be invested and it is never to be used except for actual emergencies. Read You Need An Emergency Fund for more information.
PAY OFF ALL CONSUMER DEBT
Consumer debt is one of the biggest drains on your personal finances. Consumer debt is any debt that does not go up in value such as an auto loan, credit cards, student loans, bank loans, IRS back taxes, personal or 401(k) loan and etc. Investing for the future is difficult when you send your money toward paying off debt. So Pay Off All Consumer Debt now. This will free you from the financial stranglehold that debt has on your money.
INVEST 15% INTO RETIREMENT
Saving for retirement is a critical personal financial decision. I recommend investing 15% of your income into retirement funds. If you follow the steps on my Net Worth Millionaire Plan, you will be in a good position to be able reach that 15%. The sooner you begin to invest into your retirement account(s) the more time your money has to grow. Read How Much You Should Save For Retirement for a better understanding.
SAVING FOR COLLEGE
Saving For College is a huge financial undertaking. You must be in a good personal financial position before beginning this step. Calculate how much you need to save per month and put it on automatic.
PAY OFF YOUR MORTGAGE EARLY
Usually, a mortgage payment is your biggest monthly expense. Paying Off Your Mortgage Early will allow you to begin to create wealth. You will have more money to invest and create wealth.
WEALTH BUILDING
Now it is time to create wealth. Once your personal finances are in order and you have an emergency fund, no debt, investing in your retirement and saving for college you are ready to begin wealth building. Money, not designated for a specific purpose, is true wealth. This is MONEY!!!
Many people are not sure what to do with this kind of money. With your personal finances, money is allocated toward something so it is a little easier to figure out where to put it. For example, an emergency fund should be placed in a savings or money market account, paying off debt goes to the lender, Retirement fund goes to your 401(k), IRA or other retirement vehicles, saving for college in a 529 account. Where does one save/invest their money to build true wealth?
Create Wealth and cash flow through the following:
- Invest in the stock market through mutual funds
- Buy a business or start your own
- Invest in real estate
Before you begin to create wealth, thoroughly understand each investment opportunity through research and analysis. If you have not already done so, I also recommend speaking with a trusted fee-only financial planner. They will take a 360 look at your entire financial picture and would be a good place to start your wealth creation. You will want to invest in an asset that creates cash flow. Collecting rent payments from a rental property you own would be considered a cash flowing asset.
CREATE WEALTH ACTION STEPS
- Follow steps 1-9 of your Net Worth Millionaire Plan:
- Make saving and investing automatic
- Determine how much you want to invest to Create Wealth
- Research and analyze different wealth building options
- Decide your investment vehicle to wealth creation
- Create Wealth
To summarize, before trying to create real wealth, follow your Net Worth Millionaire Plan. Preparation for most of life’s biggest financial hurdles will open up the door to create wealth. Invest in assets that create cash flow.
