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Building Wealth: A Step-by-Step Guide to Securing Your Financial Future

1. Steps to Set Yourself Up for Building Wealth

Firstly, investigate your job. Are you in a secure career and are you paid accordingly to what you're worth? Are you working paycheck to paycheck without any signs of improving this or getting out of debt? Are there any requirements for increasing your job prospects or earning ability in your career field? Would it be a good idea to channel your energy into a graduate program and increase your income with useful post-graduate qualifications or skills? Do you have a stack of high-interest or credit card debt due to your overconfident stance on auto financing a new vehicle? Take the time to assess these areas because if ignored, it will cost you dearly in missed wealth opportunities in the future.

Construct Wealth Building Start with a solid financial foundation. This step is the building block of your adventure to wealth building. If you ignore this step, you will not gain your full wealth potential and might continuously be fighting to construct wealth. It isn't glamorous, attractive, or exciting, but without a strong foundation, you may as well construct a house of straw. Living paycheck to paycheck, being consistently in debt, and having a negative net worth do not make a strong financial foundation. Assessing, addressing, and considering these few fundamentals will enable you to construct wealth with leaps and bounds into the future.

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1.1. Start with a Solid Financial Foundation

Financial freedom is a dream shared by many people. They long to buy a spacious home, travel to exotic places, buy a new car, and have the money to be able to take time off to spend with their families and interests. Starting with a solid financial foundation is the first step towards building wealth. This means taking stock of your current financial situation and setting the necessary goals to change it. Building a solid financial foundation is about getting rid of debt and setting yourself up for free future cash flow, meaning you'll have more money to spend on the things that you enjoy. Debt is the most significant impediment to being able to achieve and maintain a level of financial freedom. It's like driving a car with the emergency brake on. You can move, but it's going to be slow and will cause the car to wear down more quickly. To get rid of debt, you need a good debt elimination plan. This plan will help you pay off existing debt and guide you away from getting into more debt in the future. Another important part of a financial foundation is having risk management in place. This involves having a safety net that will protect you from catastrophic events that you may not otherwise recover from financially. This safety net includes adequate and appropriate insurance on your life, health, car, home, and other personal belongings. It also includes having a will so that your loved ones will be taken care of properly in the event of your passing. In addition to insurance, risk management includes having access to credit in the form of a credit card or credit line to deal with lesser emergencies like a car repair. An important part of being able to achieve free future cash flow is having investments and only paying for things that hold their value over time. The more that you invest and the less that you spend on depreciating items, the more money that you'll have in the long run. This sort of spending provides wealth while being able to afford things with debt provides the illusion of wealth, but actually steals it from the future.

1.2. Create a Budget and Stick to It

In order to keep track of your money, it is essential to set up and adhere to a financial plan. The most crucial aspect of a financial plan is budgeting. This is the process of setting spending and saving goals, in addition to regulating the allocation of future income to achieve these goals. Understanding the significance of how you spend your money is integral in making a workable budget. For about a month, keep a record of everything that is spent. The records will need to be divided into categories. Whether it is done with pencil and paper or a computer program, the point of this is to quantify and evaluate. You need to figure out where the money is really going and whether or not you are happy with what you are spending. Then, it will be possible to set goals for spending and saving, and monitor the progress of reaching these goals. Always allow some flexibility for the occasional special event or unexpected expense. It is crucial to remember when budgeting that you must stick to the plan as much as possible. It is also important to keep your budget up to date. Revisions may be necessary as goals change or unexpected circumstances occur. Visual aids such as graphs or charts can be an effective tool in monitoring progress or stimulating change. Periods of increased frugality will result in the ability to save money or pay off debt. This can be very rewarding and may provide motivation to continue with a disciplined spending plan. With patience and practice, the process of budgeting will lead to a level of comfort and security.

1.3. Increase Your Income through Side Hustles or Investments

The second way to increase your income is to generate secondary income. This involves finding another job (a side hustle) that you can work in addition to your regular job. Ideally, the secondary income source will be something that you are passionate about and/or something that can generate passive income. The distinction between primary and secondary income isn't that one is less important than the other, but the idea here is that the secondary income will eventually replace the primary income. This would be the point of financial freedom in 1.6 where you no longer need to work.

The first way to increase your income is to increase your primary income. This involves increasing your value as an employee in order to get a raise or promotion, or finding a better job with better pay. The best way to increase your value as an employee is to continually update your knowledge and skills in whatever field you are in so you don't hit a career plateau. It can also involve changing jobs every few years to stay fresh at a new company. If you're a business owner, this can involve increasing the scale of your business by increasing the number of employees or sales. Another way to increase your primary income is to start a side business that can eventually replace your primary income. This is a long-term approach that will require significant investment and time.

Investing time, money, and effort into increasing your income can lead you to wealth much faster than simply focusing on minimizing expenses. Because your income is your greatest wealth-building tool, it's important to always be working to increase it. Over time as your investments become more profitable, you can aim to scale back on your regular work and start generating income solely from investments.

1.4. Build an Emergency Fund for Unexpected Expenses

Ey Up, ya made it to the final section o' lad! Building wealth is a fine endeavor, but an often overlooked aspect is to defend what you've done. As far as saving and investing, try and let your money grow rather than principle upon an emergency situation. Accessing money in an emergency situation can range from inconvenient to terrible to disastrous, but it need not affect our progress if the circumstances are prepared for. An emergency fund is the best way to safeguard your progress from anything that would threaten to set you back or force you into high-cost debt. An emergency fund should only be used in true emergencies; this includes times of unemployment, medical crisis, or large unexpected expenses. By having money set aside for an emergency, you will not only be able to prevent the need for high-cost debt, but will be able to proceed through tough times with much less stress and worry.

For some people, it's a tough pill to swallow to set that much money aside and essentially "do nothing" with it, since you're not consuming or investing it, but merely storing it in a safe place. But consider it an insurance policy that will pay you great rates and dividends in peace of mind and the ability to keep moving forward on your quest to building wealth, without stopping and taking one step back for every two steps forward. With this first goal completed, you should work towards a longer-term goal of having 3-6 months living expenses set aside. Exact amounts can vary, but a person with stable employment, little or no debt, and/or a family should strive for the security of having 6 months worth of living expenses set aside.

An emergency fund is the foundation of financial security and wealth. When unexpected expenses arise, people often dig themselves into a financial hole. The result can often be long-term, high-cost debt that can take months, if not years, to repay. And when you're working to repair damaged finances and building wealth, high-interest debt is killing your progress. When a bill comes in the mail, it can be very discouraging to see that the vacation you took last month is still costing you hundreds of dollars in overpriced credit card interest! An emergency fund will prevent the need to use a credit card for an unexpected expense. Start by setting an initial goal of $1000.

1.5. Pay Off High-Interest Debt

When paying off high interest debt, you should always pay off the debt with the highest interest rate first. It sounds like common sense, but believe it or not, it is not something that is universally known. What it means is that you pay only the minimum payment on all loans except for the one that costs you the most. On that loan, you will make the minimum payment, as well as an additional payment of however much money you can afford, until the debt is paid off. Let's go back to the example where the person is $4000 in credit card debt, and this is his only debt. He's gotten a job paying, and saves $1200 a month. He will subtract his monthly expenses from his income to see how much he can afford to pay off the credit card debt. His expenses are $1000 a month, so he can afford to pay $600 a month. He will now pay $100 a month on the credit card bill that costs him 7%. This means he still will have the same $4000 debt after a year, but he will be paying less interest in the long run so this method is more efficient. He will pay the additional $500 a month towards the debt that is costing him 18%. This will further his net money gain in the end run. This is why roughly a year after graduating, I now realize that saving up the money that I have earned to pay off my school loans was not the best decision and that I should have just paid it off immediately.

It should also be mentioned that you should treat this debt like an emergency, and thus stop all saving/spending on anything except the necessities of life until this is paid off. Paying off these debts by making only the minimum payments will take extensive periods of time. Let's take the person paying off the $4000 credit card debt at 18% and assume that they are going to pay the debt off in 4 years. Well, it will take this individual 8 years to pay off this debt making only the minimum payment, and that is what he could have done in just 4 years.

2. Strategies to Save More Money

Costs on basic living expenses can sometimes be greatly reduced though a change of venue. Housing cost is doubly critical because it is usually the largest single expense in a budget and home or apartment can easily be changed for an equivalent or better unit. Even a small reduction in rent or mortgage payment can translate into savings of hundreds of dollars per month. Prices of similar quality goods and services vary widely between locales, and in many cases you can live in a different locale with no loss of utility—high-temperature vacation spots in the off season can be attractive low-cost permanent living choices—snowbirds have understood this idea for years. Step relocation to a new job is an opportunity which should not be wasted, as bundled with the increase in income from the new job it is an optimal dynamic programming choice to increase lifetime utility. Moving to higher density housing can save transportation expenses but it may not be offset by rent due to the inferior quality of life. Substitution of lower cost equivalent products can often be done with no perceived utility loss, but keep in mind that there are some things that you should not skimp on.

Cutting expenses is the best way to ensure you have excess cash to save. By examining each of your expenditures and asking yourself honestly whether they bring you commensurate satisfaction, you will find that you can cut spending in many areas. It is much easier to reduce ongoing expenses than to incur the willpower drain of deciding repeatedly not to buy small and midsize items. The overall result will be a more satisfying life because frugality makes you feel more positive about enjoying indulgences when you do allow yourself to spend. A two-tier approach to deciding whether expenses are worthwhile is to imagine the pain of loss and the pleasure of gain if the expense is incurred and then to monitor your feelings about cutting back after a few months—the pain of cutting back is usually less than the anticipatory pain you expect.

2.1. Cut Expenses and Live Below Your Means

Budgeting your money on a monthly basis is the best way to start saving. Budgeting is a process of creating a plan to spend your money. This will give you an idea of where you are spending your money and how much you can afford to save. First, identify how much you are earning. Then, determine where your money is going. This is best done by carrying a small notebook and writing down each expense. Also, this can be recorded and followed with a spreadsheet on the computer. At the end of the month, total up all expenses and subtract this from your earnings. The remaining money is what you can use to save for your goals. One guideline is to save 10% of your earnings, but this is just a suggestive figure. Save as much as you feel comfortable with. Consider reducing your expensive habits and indulgences. The less money spent on non-essential items, the more you will be able to put into savings. If you are able to reduce your expenses enough, your free cash flow will be high enough regularly to increase the amount you are saving per month.

2.2. Automate Your Savings

The more invisible we can make our saving, the better. And the most basic way to do this is by setting up an automatic transfer from your checking account into your savings account each month. At the start of each year, figure out how much you can afford to set aside for long-term goals. Be it 5% of your earnings, or just a defined sum of money, it should be an amount that pushes you a bit beyond your current comfort zone. Then instruct your bank to execute the transfer each time you receive a paycheck. This way you avoid the inner struggle to decide whether or not to save this month, because the decision is already made. With any luck, three months down the line you'll barely remember that the money was once there. And come Christmas bonus season, you might be in for a pleasant little surprise.

The same goes for saving. The hardest part about sparing ourselves a few bucks here or there is that in every individual instance, it feels like it doesn't matter. These decisions don't carry immediate consequences.

For an example of a good way to counteract this pitfall, I present to you my recent at-home behavior. For weeks, I've left a bowl filled with candy on my living room table. Now, I'm quite possibly the world's biggest chocoholic (dark chocolate only, plz). At least 10 times per day, I sat on that couch, saw the candy, and told myself not to eat any. But after my work/study was done, I usually found that I'd absentmindedly shoveled four or five pieces into my mouth. It was always an in-the-moment, impulsive decision. But one day, I moved the bowl so that it was out of my ordinary walking path. Ignoring any personal bouts of ADHD, I was twice as successful in limiting my intake. Goal-framing and short-term self-contracts might have eventually slain the candy beast, but it's tougher for me to say. But the individual Chez decisions were always tougher.

One of the best ways to save more money is to avoid making saving decisions in the first place. Though we might think of ourselves as rational calculators of our self-interest, most humans have a tendency to act in ways that are inconsistent with our long-term financial goals as described on [Link]

2.3. Set Specific Savings Goals

Adopt a positive attitude and view the situation as an opportunity to learn. This may sound easy, but the task often requires hard cognitive work. Since goals create expectancy for success, people are motivated to follow the unavoidable path of learning and improvement during goal-directed action, especially if the goals are moderate, specific, and revolve around task mastery. This is very important, because changing conditions often require people to abandon a currently attainable goal for the sake of another, in order to begin the process of learning again. In many cases, failure to learn due to an inability to adjust is the result of too much emphasis on social comparison in goal setting – a topic that demands its own article.

Do not hesitate and try to avoid the bad feeling that can accompany difficult or unusual tasks. Plan how you will succeed, and visualize the steps necessary to accomplish each task. The more specific the mental picture, the better. Several studies have shown that setting specific goals—goals that also enhance learning—are more effective than simply urging people to try to do their best. The reasoning behind this is straightforward: "Try your best" is too vague to be translated effectively into action. Goals such as "I will read this maths chapter on polynomials twice, and check my understanding by solving the problems at the end of the chapter" are more linked to actual behaviour and its outcomes, compared to goals such as "I will learn more about maths this week". Define the goals in terms of your performance, not the performance of others; keep the goals moderate, realistic and enjoyable. Too difficult goals will lead to unnecessary stress and anxiety, while too easy goals will not be satisfying. A good motto for life in general: Learn to love a need for achievement!

2.4. Track Your Spending and Identify Areas for Improvement

To track spending effectively and identify areas for improvement, it’s recommended you create a budget or spending plan. Budgeting involves setting spending limits for the different categories in your plan. This may include housing, food, utilities, transportation, clothing, health, entertainment, education, and insurance. To be effective, budgeting must occur before spending. A useful method is to create an envelope for each category and put the required amount of money in each envelope. When the money is gone from the envelope, stop spending in that category. This is a simple system that forces you to live within your means. Tracking your spending against your budget is an ongoing process that helps you to see how well you are sticking to your plan and whether or not your plan needs adjusting. If your spending is not reflecting your priorities and successfully meeting your needs, then the budgeting process acts as a diagnostic tool to identify the problem areas so that you can implement strategies to improve. Step 3 of the Mvelopes system is an example of an automated budgeting and spending plan system that can be very effective.

By tracking your spending, you can see where you are currently spending your money and measure that against your priorities. If you have set a clear goal and are committed to achieving it, tracking your spending is an essential part of the process. A commonly recommended guideline is to record every cent that you spend for a month, then for the next month continue recording your spending for all areas except those that do not further your goals. This might be eating out, buying clothes, or your daily cappuccino. This will highlight just how much that morning coffee is costing you in the long term. People are often surprised by where their money is actually going and what they are getting in return. For some people, it is a new car when they would have preferred to work part-time and spend more time with their children or on a hobby. Tracking your spending will help you to generate more long-term satisfaction from wise money management by ensuring that your spending reflects your priorities.

2.5. Take Advantage of Tax-Advantaged Savings Accounts

The two basic types of tax-advantaged accounts are (1) tax-deferred accounts, where taxes are paid at a later date and all earnings are compounded and reinvested before taxes are withdrawn and (2) tax-free accounts, where no taxes are paid on capital gains, dividends, or interest at any time. Common examples of tax-deferred accounts are traditional individual retirement accounts (IRAs) or 401(k)s. Usually, contributions to these accounts can be made with pre-tax dollars, often reducing your current taxable income. Because the contributions and the earnings from these accounts are not taxed until they are withdrawn, they will grow faster than if they were in a taxable account. Also, because the assumption is that you will be in a lower tax bracket when you retire, the money withdrawn from these accounts will be taxed at a lower rate than if it was taxed in the current year.

When a personal investor buys stocks, investments, or joint funds in a regular brokerage account, he/she pays with after-tax dollars and must pay taxes each year on any dividends or capital gains. This year after-year taxation can take a significant bite out of your investment returns. Whether you’re investing early or trying to build up your investments just before retirement, it’s always better to keep your tax expenses in check. One way to minimize investment taxes is to put investments into tax-advantaged accounts. In these accounts, taxes are either deferred or completely avoided on capital gains, dividends, and/or interest. This allows your investment to grow faster and accumulate at a greater rate.

3. Getting Out of Debt

After you have developed a liquid reserve of at least three months worth of expenses, it is time to focus on getting out of debt and constructing a financial plan. First, you must begin with a rigorous assessment of the amount of indebtedness you actually have and categorize your debts into two groups: tax-deductible debts and non-deductible debts. The typical way to differentiate between the two is that a non-deductible debt has a higher interest rate than what you are eligible to claim in taxation from the interest incurred from the loan. By choosing to pay off non-deductible debts before tax-deductible debts, there will be less debt incurring wealth-reducing interest, increasing future cash flow. Now, using your debt categorization, create a debt repayment schedule by listing your non-deductible debts in order from highest interest rate to the least. Your aim is to pay the smallest amount possible on tax-deductible debts, allowing for the greatest reduction of non-deductible debt. If possible, allocate up to 15% of monthly income for repayment to increase the effectiveness of debt reduction. Formerly, before doing this, you could have tried paying off your debts in the form of increased spending on gifts. Earned gil can be used in ffxiv for this, which is a great way to get rid of extra cash if playing this game. The fact that debt is actually a loan from the future to augment present-day enjoyment is easily forgotten. The next step in reducing debt is to seek possibilities for debt reduction via negotiations for lower interest rates/sum repayments or seeking a debt counselor. Lower interest rates can be negotiated by long-standing clients with a good record, asking for an extended payment period or noting a competitor's rates. In many cases, knowing the artist or buying from them directly enables you to negotiate the price of what they are selling. Tactics for debt reduction are much the same. If the payer is successful in convincing the lender that their current financial situation restricts them from continuing interest payments at the present rate, a good lender will reduce the rate to prevent default on the loan. Debts may be consolidated only as a last option before seeking external help, as borrowing interest rates will be lower on secured loans but the risk is your home if payment cannot be made. Be sure to avoid consolidating into a refinance of your current mortgage as this will only increase unsecured debt into secured debt with the risk of foreclosure on your home. Professional help may be the best option for people with high debt and low prospects of being able to reduce the debt effectively by themselves. A debt counseling service will attempt to negotiate a debt repayment plan on your behalf along with reduced interest rates. This is different from a debt agreement which is an act of bankruptcy and still incurs a bad credit rating. While repaying non-deductible debts, save all and any money left over after you have allocated funds for living expenses and allocated payment amounts for tax-deductible debts. If fortunate, a tax deduction can be claimed on expenses incurred from investment in managed funds to salary debt repayment. By this, you should clearly increase repayment amounts on higher interest loans in the same manner as allocating funds to pay these debts. Finally, upon the clearance of all non-deductible debts and to ensure future wealth, you must avoid entering debt by only purchasing items with available money and always maintain a debt safety reserve, much the same as the liquid reserve that you have previously built.

3.1. Assess Your Debt and Create a Repayment Plan

Assessing your debt is the crucial first step. It involves understanding how much debt you owe, and to whom you owe it. Start by gathering all your monthly statements and bills. Don't forget to include any loans that you may have from family and friends. Make sure that you have the following details for each debt: - Name of creditor - Total amount owed - Minimum monthly payment - Repayment period or deadline It can be worthwhile inputting this data into a simple spreadsheet. This will help you to organise the information, and will provide you with a snapshot of your total debt picture. Be prepared for the possibility that the debt total may be larger than you realised, and that assessing the debt may be an uncomfortable experience. Once you have a clear picture of your debt, it's time to create a monthly budget if you don't have one already. It is important to ensure that the budget is realistic, including all monthly living expenses. The idea is to make sure that all secured debts (e.g. mortgage payments) and essential living expenses are covered. Any remaining funds will be used to repay your unsecured debts. A well planned budget is a vital tool for staying within your financial limits, and to prevent adding to existing debt.

3.2. Prioritize High-Interest Debt First

This method is effective when the debt is tax-deductible. When the interest on a debt is tax-deductible, the effective interest rate is reduced by a factor equal to your tax rate times the interest rate, i.e. if the interest rate is 6% and your tax rate is 25%, the after-tax interest rate is 6% * (1-0.25) = 4%. In this case, it is better to forgo paying off the debt and instead increase your investment in a tax-exempt vehicle. An investment is considered tax-exempt if the returns on the investment are not taxed or if the money invested is tax-deductible. This makes it so that the cost of the debt is higher than the after-tax return on the investment, but the rate of return on the investment will be higher than paying off the debt.

This is a conservative form of the approach stating that you should pay off all debt with interest rates at 8% (or some other arbitrary cutoff point) before beginning to invest. This method is a guaranteed return and can be thought of as increasing your investment in a fixed income asset with the yield being the interest rate on the debt. The higher the interest rate on the debt, the higher the yield on your fixed income investment.

Start with credit card accounts being the most common type of high-interest debts and usually the easiest to pay off. Prioritizing your debts involves paying off your high-interest debts first. Begin by listing all your debts and organizing them by type and interest rate. Any debt with an interest rate significantly higher than the rate you are receiving on your investments is considered high-interest debt. This is because the after-tax cost of the debt is higher than the after-tax return on your investments.

3.3. Negotiate Lower Interest Rates or Settlements

The key factors for success in negotiating with your creditors are your current credit rating, the length of time you have been a loyal customer, recent repayment history, and the offers that are currently available from other lenders in the market. Your creditor will be reluctant to lower your interest rates if your credit rating is less than perfect or you have not been a long-term customer. It doesn't hurt to ring your creditors and ask whether you are eligible for a lower interest rate. If your recent repayment history has been exemplary, you are in a much better position to negotiate. Informing your creditor of offers available from other lenders can be an effective threatening tool to take your business elsewhere if an interest rate reduction is not offered. If your current credit rating makes you ineligible for interest rate reductions, consider paying off the higher interest debts first to improve your credit rating before negotiating and then transfer the money you are saving into interest rate reductions to pay off other debts faster. A good credit rating is valuable and must be maintained and improved upon to continue receiving low interest rates on credit.

Instead of taking a simplistic approach in your quest to get out of debt, the next option focuses on a more sophisticated method to reduce your debt by reducing the 'cost' of the debt. By negotiating lower interest rates on your debts, a larger percentage of your repayments will go towards the principal (actual amount borrowed) as opposed to paying primarily the interest. This method will have you out of debt faster than originally planned assuming you apply the saving effectively. Lowering the interest rate on a $10,000/10-year loan will decrease the monthly payment by $50 if the interest rate is decreased by 5%.

3.4. Consider Debt Consolidation or Refinancing Options

Debt consolidation involves taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both. (For the sake of simplicity, we'll use the terms "loan" and "debt" throughout this buying guide to refer to the debt with pay-off terms favorable to the debtor.) Debt consolidation has the potential to help the debtor in a few ways. First, if the new loan has a lower interest rate than the rate(s) on the old debt(s), the debtor will save money over time. Second, and perhaps more importantly, a consolidation loan may free the debtor from the cycle of never-ending, non-revolving debt. Non-revolving debt is simply a set amount of money, from which the debtor makes a fixed number of payments to pay it off—installment debts. On the other hand, credit card balances are revolving in nature, and the debtor can continue to borrow money to pay off what has been repaid; borrowing and repaying is allowed so long as there is credit remaining. The continuing nature of credit card debt can keep the debtor from ever repaying what is owed, because high interest debt will continue to grow as long as the debtor can only afford the minimum payment. If the new consolidation loan is a crutch to an impulse spender, it is perhaps wiser for the debtor to convert unsecured revolving debt to secured or unsecured installment debt; while the debtor may pay more interest over the long term for the latter, the temptation for further credit card use may be avoided.

3.5. Seek Professional Help if Necessary

In some cases, managing debt can be a daunting task, especially if substantial or if an individual feels that interest rates are high. Failure to meet debt repayment schedules can result in the loss of assets (such as a car or home), wage garnishment or in the worst cases, bankruptcy. There are numerous nonprofit organizations that claim to be able to help manage debt, though finding an organization that is legitimate, and that offers a service that is actually helpful can be difficult. The cost and quality of services can vary significantly so it is often a good idea to consult with a bankruptcy attorney. As unpleasant as the idea may be, it is often wise to set up a free consultation to gain a better understanding of the options and consequences of what filing for bankruptcy would actually mean. Hopefully, one can gain a better understanding of options available other than bankruptcy and what types of impact those options may have.

4. Maintaining Financial Success

One other way to learn about personal finance in the modern era is to gain insight for free from the internet. There is a vast array of free information from investment news services, personal finance bloggers, and educational material available from forums and investment service providers. However, use this information with caution. Be sure the person giving the information has the right knowledge and experience and fully understand that if it seems too good to be true, it probably is. Also, be aware that while some of this information can be of great value, often you get what you pay for. Reading an article for 5 minutes is very little time investment and can have low value or impact. Generally, the more time and effort you invest into understanding an issue, the clearer it becomes and the better the decisions which result from this understanding. Step-by-step guidance from a trustworthy, experienced professional in the field is often the best value for money.

Firstly, being a life-long student of personal finance will help to continuously refine your approach to financial independence. The most efficient way to do this is quite simple - by understanding and focusing on the mathematics of personal finance and wealth building. By reading the best material on the subject and applying the knowledge to your personal circumstances, you can and will become better off in the future. It will enable you to make the best decisions at the time because everything will become clear and the correct decision will be self-evident. Over time, this can literally save you thousands of hours and increase your wealth in a very short period because with better decision making comes greater efficiency. Time spent constructing or updating a financial plan can also be very educational. This includes clarifying your goals, understanding how much you should save, understanding investment selection and asset allocation, and reviewing risk management. Some legal or tax issues may also require a detailed understanding from time to time, however beware that becoming bogged down in complex, technical or legalistic material is not efficient and can be counter-productive.

4.1. Continuously Educate Yourself about Personal Finance

The best way to maintain yourself informed is to actively seek knowledge. Personal finance publications abound. Magazines such as Money and Your Money present a variety of personal finance articles which will maintain you abreast of the present market trends. Monetary newsletters can be a constructive method to study as well. Our regular Morningstar Investment Investor newsletter, for instance, provides a Weekly Wrap-Up of market performance and the way it impacted our investment strategies. The newsletter also includes a feature article detailing specific investment strategies. Websites such as CNN.com and Yahoo.com have full finance sections that are up to date several times a day. Although not targeted specifically at individual finance, entire sections of these sites are dedicated to habitual business and market news. These can serve as one-off resources to keep you informed, although it might be beneficial to locate an internet news source that may deliver revenue particular news. An further tip to investigating the finance industry is to look in your local Sunday newspaper. Typically, on Sunday, the business and money sections are expanded and offer beneficial and relevant articles on a wide array of personal finance topics. Along with this, papers usually offer the full mutual fund listing in the back of the business section, generally Times Quotes or some related compilation. You can learn how particular funds have performed during the previous week, month, year, or many years. This type of analysis may be what originally led you to pick your current funds and may provide peace of mind on their current and future prospects.

4.2. Invest for Long-Term Growth

Investing can appear complex and overwhelming, especially to an individual new to investing. With something like investing, though, the most useful lessons are basic lessons. Here is one encapsulated basic lesson: Regardless of your field, long-term achievement will depend on your keeping to the fundamentals and continually developing your skills. Now for the basic lesson in long-term investing: 1) Decide on an asset allocation with a sensible risk level. 2) Invest monthly at a fixed amount. 3) Reinvest earnings and do not raid invested principal. 4) Stay the course. The beauty of this lesson is its universality. No matter the investor, the ability, the market conditions, or the investment, an adherence to these basic steps will serve well. The best way to start investing for long-term growth is to make an early start. Because of the way compounded development works, an investment made when you are young can grow to a remarkable sum by average retirement age. Let's take a hypothetical example assuming an 8% yearly return. Suppose there is a 25-year-old worker who maintains a $200 monthly investment into an investment he does not touch until he is 65. By age 65, this person will have invested $48,000 and the investment will be worth about $372,000. Now suppose another investor who does the exact same thing but does not start until age 35. At age 65, this second investor will have invested $36,000, a full $12,000 less than the first investor. But even with investing $12,000 less, the second investor's investment will only be worth about $183,000. This example shows the power of compounding. An early start gives a longer time period for compound growth to truly shine.

4.3. Diversify Your Investments

Imagine a donut as your investment portfolio with the hole in the donut as your risk tolerance. The risk level is too high if the hole is very small or if the portfolio is made up of just one investment. If something happens to the single investment, the effect on the portfolio is substantial. Now if the donut is filled with different investments or jellybeans, the risk is diversified by dividing the jellybeans among the various investments. Diversifying investments changes the risk/return tradeoff for a portfolio. LPL Financial provides the figure below as a general guideline to how asset allocation can affect retirement income potential. An important point to consider is that diversification and asset allocation strategies do not assure a profit or protect against a loss. Given the uncertainty of the financial market, it is important not to seek too much risk and also not to be too conservative. In general, investments with higher returns are also accompanied by a higher risk. An investor's initial investment must be broken down into the amount of capital that is expected to increase wealth and capital that is disposable. This is a factor important to those who seek sustainable income and to retirees.

Diversification spreads investment risk among different asset categories and investments within each asset category. By including asset categories with investment returns that move up and down under different conditions within the framework of a long-term investment strategy, an investor can protect themselves from market fluctuations. Diversification may enhance returns by having a portion of a portfolio in assets or investments that perform well in differing market conditions.

4.4. Review and Adjust Your Financial Plan Regularly

Since goals are achieved over a period of time, short-term and long-term, this would also involve changing specific details of your plan and the plan overall. If a goal is significantly way off, it may require increased savings and investing. If you are well progressed towards a goal, you may decide that it is ahead of schedule and you can allocate fewer resources to achieve it. Any change in your personal financial situation can also require a change of strategy. For instance, a change in job, the birth of a child, a new home loan are all events that require a review and possible change to your financial plan. By having semi-regular major reviews and minor reviews when necessary, this will facilitate changing your plan to best achieve your goals.

This particular step includes constant monitoring and redirection of your financial plan. This can be compared to sailing a ship. A ship can veer off course in its journey. The further off course it goes, the more it needs to redirect its course. Similarly, the longer you have to correct your financial direction, the more it will cost you in terms of time and money. This is why the following reviews are essential.

4.5. Stay Disciplined and Stay the Course

Investors sometimes become overconfident during bull markets and conclude that their new findings have repealed the fundamental laws of investment. The only way to get a valid cross-section of the financial community is to stay the investment course with a sound, broadly diversified portfolio... and adopt new ideas only after they have been tested over a complete market cycle. Saying this is much easier than doing it. The 1979-81 speculative fervor in the United States directed at the common stock market, and the huge shift of funds into the professional management of common stock portfolios, were based on the single-period theory of risk that stocks are less risky at any given time than bonds (because they have provided higher returns in total return indices). This conclusion is contradicted by the theory of investment in the two-period model, in which risk is measured by the probability of a lower standard of living in the final consumption period. The theory of investment in the two-period model suggests that bonds are less risky than stocks because of the lower price volatility of bonds, and this has been supported by historical evidence in the comparison of government and corporate bonds with common stock. Despite the strong theoretical and empirical evidence, the single-period theory of equating risk with price volatility has been quite ingrained in the last four decades, and the periodic attempts to refute it have not changed overall investment policy. The investor's adoption of capital market expectations, as inferred from the constant mix policy, is an even more formidable task today than it was circa 1970. The explosion of alternative investments in the form of complex derivative instruments and nonstandard debt contracts has made our model of a traditional investment policy using stocks and bonds look almost archaic. Unfortunately, our capital market expectations model does not yet lend itself to an integration of nonstandard investments with traditional investments in a global portfolio framework. But the real deterrent for the common stock investor has been the diversification in broad-based professional management of stock portfolios, and the higher degree of patience by the public in judging the relative performance of stocks rather than abandonment of the stock market during bad years. The "trends in the investment management industry" have been unfortunate for the investor; stock prices have become more volatile with the institutions buying high and selling low during shifts in market conditions as any other group of investors. The ability to persevere with an investment policy in the face of radically changing recommendations of so-called experts, gurus, and Wall Street strategists has been severely tested over the past two decades.