As you get a few years under your belt, you start to recognize how things work in the “real” world. While many people value learning from experience, early mistakes can have a big impact on your long-term success. Avoiding financial pitfalls can help you create a nest egg even faster. Here are a few tips and tricks successful investors use to build wealth for the future.
[Read: What Older Workers Don’t Know About Social Security.]
Deferred gratification is essential to build wealth. Forced scarcity, or what is often referred to as “paying yourself first”, is a powerful concept. You need to be able to limit your current spending in order to save between 15 and 20 percent of your income for the future. And this concept is most powerful when you begin saving at a young age.
Starting early makes saving easier. While there is never a bad time to start saving for the future, starting sooner allows your assets to start working for you. For example, the monthly saving amount required to become a millionaire by the time you reach age 65 (assuming an 8 percent annual return) changes significantly depending on the age when you start saving for retirement. A 20-year-old could become a millionaire by age 65 by saving just $190 per month, and a 30-year-old could get there with $436 per month in savings. Once you hit age 40, you need to put away $1,052 per month to save $1 million by retirement, and that climbs to $2,890 per month for someone who doesn’t start saving until age 50.
[See: 10 Retirement Planning Moves to Make in Your 20s.]
The best opportunities often appear in the darkest of moments. Most people understand the basic investing concept that it’s best to buy low and sell high. But carrying out this advice becomes difficult once your emotions get involved. When buying opportunities and valuations are the best, it will be a scary time of stock market drops and investment losses. Likewise, when everyone appears to be making a fortune, prices are already high and you’re paying a premium price. Creating a comprehensive plan that takes the emotions out of your financial decisions is the best way to navigate through these emotional shortcomings. Aim to make logical decisions based on the numbers instead of following what everyone else is doing.
Success and experience take time. When you analyze new jobs or positions within your organization, think in terms of what this move will mean for you and your family five years and 10 years in the future. Don’t make financial decisions that only benefit you in the short term at the expense of your long-term success. There is nothing wrong with taking a slight step back to a job with lower initial compensation or making a lateral move if you are positioning yourself for a better opportunity in the coming years. A mentor who has a vested interest in your future success can turbo charge your learning, boost your ability to navigate career hurdles and show you how to make great long-term decisions. Find the best and work for the best as you are building the foundation of your career.
Don’t be in such a hurry that you don’t enjoy each stage of your personal and professional life. Driven and successful individuals often have an internal motivator that has them looking for the next step or opportunity at all times. That ambition can be an important element that drives success, but it can also be a detriment to enjoying each step of this long-term journey. Make sure the things that grab your attention reflect your passions and are the best uses of your time. Don’t be so focused on the next step that you fail to enjoy this stage of your life.
[Read: How Your 401(k) Balance Stacks Up.]
These five tips can be powerful steps in reaching your long-term financial goals. A plan that covers emergencies and lets you build for a future retirement will help you deal with any curve balls that life throws your way. Learning from those who have already accumulated enough to retire can be a great way to avoid financial mistakes.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, “The Money-Guy Show“.
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