Money Managers Live

Seven Steps for Building Wealth: Step #6

Written by Dave Young, President

Step #6:  Avoid Large Losses

Some investment losses are unavoidable. They come with the territory.

The key is to do your best to minimize large losses. Large losses can quickly reverse the benefits of compound interest. You should research thoroughly before turning your money over to someone else. That will increase your odds of avoiding investment scams and sub par money managers.

For example, if you lose 25% of your account, you need to make 33% to get back to even, which is workable. If you lose 50% of your portfolio, you have to make 100% to get back to even, obviously a much more difficult task. A loss of 90% of your portfolio requires a gain of 900% to get back to even. Forget about it.

A much better scenario is to follow your investment strategy and avoid the loss in the first place.

Seven Steps for Building Wealth: Step #5

Written by Dave Young, President

Step #5:  Follow a Sound, Long-Term Strategy

To systematically grow your assets, you must follow a proven investment strategy that doesn't involve "gut feelings."

Emotional investing is a recipe for failure.

A good strategy should significantly increase your returns over time. Your wealth managers should provide you with a strategy that:

*  Works over different timeframes

*  Provides effective diversification--not just diversification for diversification's sake

*  Works in both bull and bear markets

*  Is disciplined yet flexible and evolving

*  Reduces risk and provide downside protection

*  Has a good long-term track record

Seven Steps for Building Wealth: Step #4

Written by Dave Young, President

Step #4:  Avoid Unnecessary Debt

Debt can be useful if used properly. On a recent trip to Africa, I noticed that there were half built buildings everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why the structures were halfway done, he responded, there is no banking system. There is no way for the common man to borrow money. People can only complete part of the building because they lack the funds to pay for building supplies right away. So they build what they can pay for now, and then come back and build more next year when they have more money.

If debt is used sparingly, for assets that appreciate or allow you to make more money, then debt makes sense. For example, a house, a car, or an education all make sense.

Using debts for consumables or things that go down in value, makes no sense. Most credit card debt is for things that hurt rather than help your financial situation.

My definition of a credit card is, "A means of buying something unneeded, at a price you can't afford, with funds you don't have."

Set a goal to live debt free. With 1.5 billion credit cards in circulation, an average household credit card balance of $8,562 and an average interest rate of 19%, it's no wonder that one out of every 50 households filed for bankruptcy in 2005. In the United States the household debt-to-income ratio reached an all time high.

Accumulating debt is the exact opposite of accumulating wealth. If you are paying debts, you are helping someone else accumulate wealth. With the few exceptions mentioned above, avoid debt like the plague.

Seven Steps for Building Wealth: Step #3

Written by Dave Young, President

Step #3:  Hire a Competent Financial Advisor

Most investors would be better off with the help of a financial advisor.

Unless you have the time desire, expertise and resources to manage your own portfolio, I recommend that you hire a professional full-time money manager.

Unfortunately, finding the right advisor is much more difficult than most people realize.

Part of the problem is that titles for financial sales reps are completely unregulated. This means that brokers, annuity salesmen and insurance agents are all free to call themselves advisors, financial consultants, financial planners or whatever looks good on their business cards.

To make sure you don't get stuck with a salesperson touting a deceptive title, make sure you get good answers to these questions:

FIDUCIARY- Is the advisor fiduciary? Fiduciary advisors have a legal obligation to put your interests ahead of their own. Sales reps peddling insurance, mutual funds or other financial products are most likely not fiduciaries. Only about 15 percent of all financial advisors actually meet the fiduciary requirement.

EXPERIENCE- How much experience does the advisor have? Markets are difficult to navigate and constantly change. Ideally, your advisor has experience investing in both good markets and bad markets. In the final analysis, you are paying an advisor for his or her experience.

TRACK RECORD- What is the advisor's track record? Legitimate advisors will be able to show you a clear report of what they've done for their clients over the years. Any potential advisor who refuses to show you a track record should be immediately crossed off your list.

CONFLICT OF INTEREST- Is there a conflict of interest? Generally, conflicts of interest are eliminated by avoiding salespeople who receive commissions. By working only with advisors who are paid through management fees and not commissions, you can make sure their interests are aligned with yours.

SURRENDER CHARGE- Is there a surrender charge? You should be free to move your money out of an investment if you are dissatisfied. This means you should never own a product with a surrender charge.

To be continued...

Seven Steps for Building Wealth: Step #2

Written by Dave Young, President

Step #2- Spend Less Than you Earn

This seems like obviouse advice, but it is often ignored.

According to a recent article in Smart Money, Americans collectively spent more than they earned after taxes for the past two years in a row. This bad habit afflicts people at all income levels - those with less may fee as if the extra expenses are a necessary evil, while those with more may assume their high income protects them from any future financial trouble. This mentality must be changed in order to build wealth.

I've personally met individuals who earn $40,000 a year but save $5,000 of that for the future. Although it may seem like a small annual amount, that money adds up to future wealth and security. In contrast, I have met others who earn $200,000 a year and spend $220,000. This is a quick way to destroy a fortune.

While it may sound simplistic, in order to build wealth, you must spend less than you earn.

To be continued...

Seven Steps for Building Wealth: Step #1

Written by Dave Young, President of Paragon

Many people believe that accumulating wealth is a random event. Or it is pure luck that determines who is wealthy and who isn't.

It is true that occasionally someone wins the lottery or receives an inheritance and becomes wealthy, but usually immediate wealth is temporary. Studies have shown repeatedly that most widows who receive a life insurance death settlement either spend, loan out or lose the money they receive within three years of receiving it.

In order to build wealth, you must follow certain rules. In order to keep wealth, you must follow those same rules. If you never learn the rules or don't have the discipline to follow them, you will not build or keep wealth.

I'd like to offer you seven sound steps for building wealth.

Step #1—Start Now

Albert Einstein said, “The most powerful force in the universe is compound interest.” For compound interest to be truly powerful, it must have the benefit of time. The more time the better.

For example, compare two investors who each put away $2,000 a year and earn 10% annually. The first investor starts at age 19 and puts away $2,000 per year for eight years in a row and then holds it there. The second investor waits eight years before investing $2,000 per year for 38 years. At the end of the 38 years, the first investor’s account will have grown to $941,054. The second investor’s account will be at $800,896. The first investor invested $60,000 less but ended up with $140,158 more.

The other factor affecting compound interest is the rate of return. Everyone knows that a higher rate is better than a lower rate. What most people don’t realize is that the benefit is exponential. A 15% rate of return is not merely three times more than a 5% rate of return. It can actually be anywhere from seven times to seventy times more depending on how long you’re investing it for. Small increases in rates of return make an enormous difference in the long run.

There will always be reasons to begin saving later, but as you can see, holding out for the perfect circumstances can be very costly. The sooner you start, the greater the effect of compound interest.

To be continued...

The Story of the New Debit Card

Written by Dave Young, President

My youngest son, Austin, turned 14 a few weeks ago. All he wanted was $300.

Before his birthday, he noticed ads for debit cards for kids. He decided to take all his money and deposit it into an account so he could have his own debit card.

Austin had to wait for two weeks to get his debit card. He is not the patient type so this was difficult for him.

He checked the mailbox every day until it finally came. He was so excited. It was his own personal debit card.

The first thing he decided to do was check his balance. His friend told him he could check it at another bank. Austin put his card in. The machine asked for a pin number. He didn't know what that was so he put his account number in.

After a few seconds, he heard a grinding sound. He asked the teller where his debit was. She told him that it had been ground up because he didn't put in the right number. He was so upset! His new debit card was destroyed!

He called me and told me what happened. He wasn't very happy. He asked for a new card, but he had to wait again until it came.

This story reminded me of what often happens if a person does not have a decent financial plan. If you don't have a good financial plan in place, often like the debit card, your financial life will be ground up.