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Building wealth easier than you think

| Wednesday, Aug. 20, 2014, 12:01 a.m.

Sometimes people ask me what is the secret to building wealth?

The answer is much easier than you think.

The first part is to pay yourself first. Many people do this subconsciously by participating in a plan at work like a 401k. A certain amount is taken out each pay day and you receive a little less in cash. You take the net income and pay all of your bills and other living expenses. Hopefully after all of these costs are paid, you have some discretionary income left over. You use this money for things that you want, but don't necessary need.

These purchases could be a fancy dinner or other indulgence, a more expensive car, vacation or any other of life's special treats. We do not really need these things, but we earned them and it is our right to enjoy them. We then wait until our next pay day and start all over again.

Now what happens if we do not have a 401k or something similar?

We pay our necessary expenses and then we spend the rest on our discretionary spending. What's the difference?

We did not pay ourselves in the second scenario. That is because if we try to save what is left from our paycheck, there never is anything left. Our discretionary spending took it all. If we feel that we have extra money in our wallet, we buy steak instead of chicken. Impulse items are harder to say no to if we feel we have more money.

So if you don't have a plan at work, start your own.

Decide how much money you will save out of each check and take it out and deposit it in a special account the day you get paid. Do not leave it in your regular account and think you just won't spend it, because that will not work. This money is only for retirement.

If you have a Christmas savings plan, vacation fund or any other special fund, great. Keep them all separate. Avoid the temptation to borrow money from these funds and think you will pay it back later. Later never comes. If you change jobs, do not spend the money in your 401k. Roll it over into a new plan; this is retirement money.

If we really want to retire at 65 and keep our lifestyle the same as working, we should be saving about 15 percent of our income. This is a difficult task.

It is important to start at a young age. Although retirement is not something that most 25-year-olds are thinking about, they have a powerful advantage. Albert Einstein said that the eighth wonder of the world is compound interest.

Look at this example. If a 17-year -old saved $1.50 per day (about the cost of a soda) until he or she retired at age 67 (50 years), he would have deposited $27,375. If those deposits earned 10.36 percent a year, which is high, the account value at 67 would be $921,971. Now if the same person waited five years to start, his total contribution would be $24,638. This is $2,637 less in contributions. However, the account value is $548,228. That is a difference of $373,743. No wonder Einstein was impressed.

In 50 years, what you can buy today for $10,000 will be less, but you will need more money then.

Even if you are older and don't have time as your ally you need to start saving as soon as possible and increase the amount you save. Sometimes people find that they will have to work an extra year or two before they retire.

The other thing that people who have wealth did was control their spending. No ones like to have a budget, but many people do not realize where their money goes. If you are running short all of the time, carry a notebook for two weeks and write down all of the things that you buy. You will be surprised where all of your money goes.

Doing this may show you how you can pay yourself first.

Next week, we will look how some people who did save are making major mistakes that could disrupt their retirement.

Gary Boatman is a certified financial planner and local businessman who is president of the Monessen Chamber of Commerce.

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