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What is the best and most efficient way for someone to start building up his or her wealth if they don't have a lot of money?
I know saving money and working hard is always a key to building wealth, but are there any other ways such as buying property and houses, investing in stocks, etc?
Get well educated in a high paying field.
There's a reason why people do the harder degrees in college. It usually pays off.
Don't pay taxes!
Ok... I don't mean tax evasion here. But there are avenues (tax deductions and such) to eliminate a good chunk of your income taxes. Try to get as close to the $49k limit into your 401K as possible. This way you don't pay any taxes on any of that money and it grows tax free. Keep up with the taxcode every year so you know what you can take advantage of. And don't use that crummy software you get at staples or whatever to do your taxes. Those only cover a small portion of the taxcode.
ROTH IRA
Now this one assumes that you have relatively low income right now (ie less than $100K in 2010 and less than $200K after 2010 gross). Max out ROTH IRA contributions. Then study how to effectively convert cash from your 401k to ROTH IRA without paying taxes. This process will probably take years and years to do, but worth it. Read up on the benefits of ROTH IRA.
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The idea behind the two steps above is that if you put enough money away in retirement accounts, at some point you'll have so much money in there that you have the piece of mind that your future is taken care of.
Keep your used car till you can Buying a new car is great. But is does nothing to help you build wealth. A used car will have depreciated most of it's new car premium in just 2 years. Completely by 3 years and the entire car will cost half as much at 5 years. It will also keep your insurance premiums low.
Reduce your monthly expenses
This is where you have to do a cost analysis of every bill you get and have to determine what you need and don't need. Whether it makes sense for you to rent to buy. Buying a home is often a good idea, but you have to have the income to maintain it. It's expensive.
Invest
I am not going to go into strategy here. But if you're under 40, you should have all your retirement money invested. Don't do this blindly though.
Marry someone educated and financially responsible
Dual income beats single income. So if you have that, you're golden. Another option is to marry rich.
Real estate is what has worked for me as far as getting ahead. You do have to know what to buy, but it is a great way to make money if you know what you are doing.
There are a number of things to do..many the previous posters alluded to.
Live under your means from day one. If you get 4 paychecks a month..only live off 3.
If you have debts to pay, use that 4th one to pay off the debts (like CC, car loan) and once paid off put that money away. Use a separate bank and account for future. Money goes in but does not come out When you get a raise..save it. I up my 401K contribution.
Now I do get an annual bonus..varies each year but that is my "fun money". I've upgraded my computer, bought a riding lawn mower, stuff like that and still have not touched my "savings".
Take advantage of pre tax savings (401K) for retirement as well as Roth if you qualify.
While you are saving, learn all you can about the stock market (stocks, bonds, mutual funds, indexes) as well as RE (apt buildings, duplexes, ag land).
I built my wealth via the stock market. A buddy at work built his with small apt buildings (4-6 units). Find the investment vehicle you are comfortable with and have knowledge of how it works so you can leverage your money to make money.
For the working Joe, it takes time. Start out small and don't get discouraged.
Get well educated in a high paying field.
There's a reason why people do the harder degrees in college. It usually pays off.
Don't pay taxes!
Ok... I don't mean tax evasion here. But there are avenues (tax deductions and such) to eliminate a good chunk of your income taxes. Try to get as close to the $49k limit into your 401K as possible. This way you don't pay any taxes on any of that money and it grows tax free. Keep up with the taxcode every year so you know what you can take advantage of. And don't use that crummy software you get at staples or whatever to do your taxes. Those only cover a small portion of the taxcode.
ROTH IRA
Now this one assumes that you have relatively low income right now (ie less than $100K in 2010 and less than $200K after 2010 gross). Max out ROTH IRA contributions. Then study how to effectively convert cash from your 401k to ROTH IRA without paying taxes. This process will probably take years and years to do, but worth it. Read up on the benefits of ROTH IRA.
---
The idea behind the two steps above is that if you put enough money away in retirement accounts, at some point you'll have so much money in there that you have the piece of mind that your future is taken care of.
Keep your used car till you can
Buying a new car is great. But is does nothing to help you build wealth. A used car will have depreciated most of it's new car premium in just 2 years. Completely by 3 years and the entire car will cost half as much at 5 years. It will also keep your insurance premiums low.
Reduce your monthly expenses
This is where you have to do a cost analysis of every bill you get and have to determine what you need and don't need. Whether it makes sense for you to rent to buy. Buying a home is often a good idea, but you have to have the income to maintain it. It's expensive.
Invest
I am not going to go into strategy here. But if you're under 40, you should have all your retirement money invested. Don't do this blindly though.
Marry someone educated and financially responsible
Dual income beats single income. So if you have that, you're golden. Another option is to marry rich.
I think NJ Best post here is very good. I have just a few things to add.
In the investing category, I think "balanced" mutual funds are best for most of us because they are more stable than funds that invest 100% in stocks. They usually invest around 60% of their money in stocks and around 40% in bonds, give or take 10 percentage points either way. These funds can lose money, but are more stable than 100% stock funds. Most people don't have the guts to stick with funds that invest 100% in stocks when times are bad, so they sell low and buy high. Most of us overestimate our tolerance for risk (myself included). I know my 401k would have a bigger balance today if I'd invested in a balanced fund from the outset and just left it alone.
If you can get one of these balanced funds in your 401k, that's great. You can also open an Individual Retirement Account (Rother IRA or Regular IRA) with the fund company to get one of these funds. Here are some top notch balanced funds with great long term returns:
If these are available in your 401k, then great. Otherwise, they're not worth it because they charge fat commissions to get into (whereas the others above do not).
American Funds American Balanced
American Funds Income Fund of America
American Funds Capital Income Builder
Invesco Van Kampen Equity and Income
Other notably good (but not top notch) balanced funds that are worth looking at if they're in your 401k would be:
Vanguard Balanced Index
Fidelity Balanced
Fidelity Puritan
In the marriage category. NJ said it well, but forgot to mention you've got to get married and stay married. The "getting married" part is easier than the "staying married" part. A big key (but definitely not the only one) to staying married is marrying someone who's financially responsible (i.e. doesn't run up debts and saves regularly).
I also highly recommend this book in what to look for in a potential mate, even though it's written for women, 80% of it (or more) applies to men, and 80% or more applies to gay couples as well.
Also, Jean Chatzky wrote a great book called The Difference on the 4 main types of people (financially speaking). She broke people down into 4 categories:
Rich: 3% of the population
Financially Comfortable: 27% of people
Payday to Payday: 55%
Further in Debtors: 15%
In the book she writes not just about the careeer choices of the wealthy and financially comfortable, but also lists 20 habits & traits that rich people tend to have. She says the more of these 20 traits/habits you have, the more likely you are to be rich. She says you typically need 10 out of 20 to reach "financially comfortable" status.
She also delves into the psychological aspects of well off people, and how to get yourself there.
It's one of the best books I've seen on the topic:
There is also no "one" answer to this, all of the things you mentioned are good strategies for building wealth, just don't put all your eggs in one basket. Max out your employer contribution to your 401K to start, then look into buying some real estate (everything is "on sale" right now), then look into mutual funds, bond funds, etc. The idea is to have a little of everything so if one thing takes a hit you have a good chance of the other things doing well. If real estate prices where high right now, buying into other investments would be a better option (for example).
If you are young and don't have a lot of tax deductions, real estate is one way to create tax deductions as another example.
Do you remember playing the most famous game of all time when you were a kid?.....I.E. Monopoly!
Some how as adults we forgot the value of applying this simple skill to our current lives. Just imagine how much better off you would be, if you just owned one rental property at the time of retirement. What a nice pension that would be, and it was your tenants that paid that off for you over the years. A great example of someone else working hard for you!!
Do you remember playing the most famous game of all time when you were a kid?.....I.E. Monopoly!
Some how as adults we forgot the value of applying this simple skill to our current lives. Just imagine how much better off you would be, if you just owned one rental property at the time of retirement. What a nice pension that would be, and it was your tenants that paid that off for you over the years. A great example of someone else working hard for you!!
You would have to own the property outright for it to be good.
I love Monopoly. I frequent Atlantic City (The town in which all the properties in Monopoly are based) all the time ... I don't know why anyone would want to own property there, lol.
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