How to be happy about your money

How do we see money?

Most people think that the only way they can be wealthy is if they hit the lotto. It never occurs to them that almost anyone can be wealthy. Does that seem like a crazy thing to say? The truth is that wealth is not outside anyone's reach.

It may be particularly hard to imagine wealth when we are in the middle of a recession. After all, the country has seen the stock market drop precipitously and wipe twelve years of investment gains off the statements of most people's 401k or IRA's. But some people who understand investing are happy as can be right now. While many of us see misery, they see opportunity.

Most people who hire a financial adviser learn a few common principles that good advisers agree on. You have to put aside a portion of every paycheck for saving or investing. You cannot carry credit card balances from month to month and you need a diversified portfolio.

If you have never invested in securities like stocks or bonds or mutual funds, that last point may sound a bit foreign. That's okay, we will get into diversification a little later.

During this recent recession, a funny thing happened in America; people started saving more. Americans have a bad reputation for having one of the lowest savings rates in the industrialized world. Asian countries save a lot more than Americans.

The U.S. is a credit-based economy and culture. That fact has caused many of our current problems. In the fall of 2008, it became apparent that the credit markets in the U.S. were virtually frozen. When banks stopped lending, it caused enormous problems for individuals and business; both of whom depend on credit.

This was when the first government bailout occurred. The purpose was to inject money into the system to encourage banks to lend again and to restore confidence in the financial system. It worked to some extent, but the problems with the U.S. economy ran much deeper. There was the housing and mortgage crisis that precipitated all of this to begin with.

The simple fact that the credit market could cause so many problems says alot about American culture. We rely on cars loans, home loans, credit cards and student loans in the U.S., just for starters. We generally don't pay cash for many of the larger purchases we make.

This dependence on credit works okay for businesses, but it can put a drag on the financial success of an individual. Finance charges on credit cards are often high enough to create semi-permanent debt. If a credit card user pays the minimum payment each month, the balance can go on for years.

During that time, finance charges balloon the original purchase price. If you bought something on sale and then stretched the payments out over years, then you did not end up with a sale price. That twenty-dollar blouse or shirt could end up costing fifty-dollars or more. That original savings, in effect, disappeared.

Think of it this way; if you are earning two-percent on your savings and paying a twenty-one percent finance charge, what are you left with at the end of the year? If you came up with a negative number, you'd be right.

So lesson one, pay off any credit card balance you currently have. If the balance is a staggering amount, get professional help from a free credit counseling service. You have to pay off those balances before you can embark on your wealth accumulation journey.

Once the credit card balances are zero'd out, the trick is to resist the temptation to start accumulating debt again. One way to do this is to cut up all credit cards unti you are left with one universal card and one debit card. This means that those store credit cards have to go. You can have a pile of debt or a pile of money; its your choice.

A funny thing happened on the way to the bank

 A funny thing did happen on the way to the bank; most people never made the trip in the first place. In addition to credit card debt, another obstacle to building wealth is not saving.  Saving or investing is a habit.  Most people have bad habits, but this is an incredibly good habit.

If you are in the habit of watching your favorite show every week or stopping by the coffee shop every day, then you know that you can establish a habit. With that in mind, you really need to develop one more habit. That habit is the positive routine of repetitive saving or investing.

For many people, saving or investing funds out of every paycheck is a far-fetched concept. That gallon of icecream or that latte or new flat-panel TV offers more excitement and anticipation. Saving money does not offer the same immediate thrill.

On the other hand, if you knew that you would be wealthy someday, you might accept the concept. Believe it and try to grasp the concept because it is tremendously important to what you are about to put into practice.

A penny saved is a penny earned; really

Some of the wealthiest individuals who ever lived spent most of their lives in the middle-class. They developed the habit of saving money and built up considerable wealth as a result. They were remarkably similar to everyone else with that one exception. They considered saving to be a priority and they developed a habit that helped them create a large nest egg.

As a general rule, these individuals did not carry credit card balances forward either. Many never owned a credit card. To build wealth, you have to understand that cash is king, both for savings and purchases.

To begin accumulating weatly, you have to decide what percentage of your earnings you are willing to save or invest every pay period. If you have access to a 401k plan or a 403b plan or a deferred compensation plan, then put as much into that plan as you can. These plans all offer the additional benefit of growing tax-deferred. The erosive effects of taxes will not hinder the growth of these accounts.

With many retirement plans, especially 401k plans, your employer may offer a match. If they do; take it. Free money does not come along every day. If you invest three percent in the plan and your employer invests three percent, you already have a one hundred percent return on your money.

If half the balance in your retirement plan was contributed by your employer at the beginning of the recession and you lost half your savings, then you still have the money you contributed.

Some tax-deferred retirement plans offer a Roth component that allows for savings with after-tax money. In the future, you may be able to withdraw that money tax-free.

Any retirement plan is better than no retirement plan for most people. It makes saving easy and provides the benefit of tax-deferral. You have a better chance of accumulating a fair sum of money if you maximize your retirement plan and leave it alone. Withdrawals and loans can only diminish the balance, so avoid raiding these funds if you can.

After you max out your retirement plan, saving money still remains your goal. If you don't already own a savings or investment account, now is the time to start. Many accounts with brokerage firms and banks can be opened online. As is the case with any determined goal-setting, the journey begins with the first step.

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    Please note: the author is not providing investment, legal or tax advice. Please meet with an attorney, tax accountant or financial professional for professional advice.

    This is the first article in a series on savings and wealth creation.

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