Building wealth

Getting started

Start with an audit. Review the following: 

1. Total Debt

2. Total capital/assets 

3. Monthly income

4. Monthly expenses. 

Example:

1. Debt: college – 20,000; car – 10,000; credit card – 2,000
2. Total capital / assets: car + 7,000; stocks retirement + 1,000; stocks regular  + 1,000; cash + 1,000

Net worth = – 22,000

3. Monthly income: Job + 4,000
4. Monthly expenses: rent – 1,000; utilities -500; phone/internet – 100; subscriptions -50; college debt – 200; food – 300; miscellaneous – 150; car – 100.

Cash flow = + 1,600 

I’ll walk through the above example as if it is an audit I did for myself. An audit will help determine my outlook, what expenses can be adjusted or cut to meet my goals. In this example I am net positive cash flow, but if I was net negative and building up debt then I would make drastic cuts to expenses where possible and try to find ways to increase or add additional income sources. After I am net positive I would move on to the following. 

With the positive cash flow I need to determine what to do with it. What is going to provide the most value and also balance risk. 

I’ll look at both positive and negative returns. An example would be maybe my college debt is – 6.5% APY, my car debt is at – 5% APY, and the stock market, ETFs like VTI or VOO return around + 10% APY. Also suppose for this example I was slightly behind on a credit card which had – 20% APY. With this information I can consider what to put more money into, whichever offers the better return or in a sense provides the most value for my cash flow. 

I could take that monthly 1,600, not add any additional principal to my mandatory car and college debt payments, but then do 1,000 towards the credit card,  250 towards my retirement stock account, and 250 towards my personal stock account with both being put into something like VTI and or VOO. I am focusing on the debt that’s higher than the other debt and the average gains of the stock market, but still putting some into the stock market knowing that those returns will likely have a longer time frame to grow and compound than it will take to pay off the debt, especially in a retirement account. 

In the above example it would take maybe around a year and a half for my net worth to become positive, assuming the market did ok that year and the next year.

Credit

Hopefully you are never in a position to have to pay credit card  interest rates, if not, consolidate and pay off any credit card debt quickly. There is no world, assuming you want to build up a good credit score for eventually purchasing a home, that you could avoid owning a credit card. However there are other benefits like floating debt until the paycheck comes and the cash back rewards the merchants up-charge their products and service on anyways because of credit card companies merchant fees. 

Moving on to building up your credit score. According to SOFI, it appears these are the factors for having a top credit score:

• Zero missed payments. 

• Minimal credit inquiries before taking a line of credit or loan try to get it to zero, 
• Total number of accounts or loans 11+ open or closed. This means if there was an account you opened that you didn’t like later you can close it and still have it count towards the total number of accounts. 
• Average age of credit for open accounts 9+ years. This is a big one, try not to close your original or really old credit cards, you will take a big hit if you do. It’s stupid but it’s just the way it is. Once you hit the 9+ years you can probably do the math and see which ones you could close out and not severely impact your average. 
• Payment history 100% 
• Credit utilization below 20%, with 0% being best obviously. Could keep your credit card utilization low the month leading up to a loan or line of credit request to have that better credit rating and hopefully get a lower rate. 

The main thing here, besides paying your card on time, is to avoid closing out old credit cards, even if you don’t use them, so that you don’t negatively impact your average age of credit. 

As far as opening new accounts to increase your total number of accounts, that’s a kind of careful and strategic matter you will have to assess because of course it’ll initially lower your score when your average age of credit becomes not as long.

Investing (stock market)

Historically true the stock market as a whole has returned 10% a year, and these returns are accessible in the way of low fee ETFs like VTI and other similar ETFs. 

It’s critically important to be investing in a regular taxable investment account in addition to a retirement investment account. Types of retirement plans/accounts here. 

Let’s take the example of someone who started investing  in their 30s. We know, as of now, at 59½ you can pull from a retirement investment account. However you likely want access to money that has been growing at age 35, 40, 50 etc. This could be for a house, a trip, a car etc. So locking all your money by putting only into a retirement account isn’t the right move. More importantly, growing your wealth in a regular investment account can allow you more flexibility in your 40s or 50s in that you may be able to retire early or take a less demanding or more rewarding job for less pay. Say from 30 to 45 you have substantially grown your regular investment account, it could become a bridge for you to use that money to live off of from 45 to 59½. 

So having that dual investment strategy in a retirement and regular account  is critical. Depending if you want to make a larger purchase like a home it may be sensible to be putting more money into you regular account. Just steadily invest with extra money from paychecks with this dual investment strategy. 

However, don’t forget to build up an emergency savings fund as well. The last thing you want to do is to be forced to sell your stocks in a regular or even worse your retirement account and pay capital gains and or penalties and lose out on future gains as well. So saving cash will allow you to avoid that.

Own or rent

There is more to this than just a financial decision but likely longer term financially it’s typically better to own. However one must account for all the expenses when owning a home, it really adds up. 

Here is a site to help just calculate the general costs and comparison. 

As mentioned above you need a good credit score to help get a loan and get a better rate on a loan.

Other

Once getting squared away with the above, and trying to keep most of your investments in an general market index ETF, it could be worth exploring additional options. Individual stocks and other speculative investments can provide incredible opportunities. Just remember to not be too greedy, take profits. Also be aware of how much hype there can be around anything and how that hype can collapse or could turn out to be fraudulent or a scam so never put more than you can afford to lose, which if you are focusing on an index general market ETF you will be fine.

Also just in general the smarter and more researched you are, combined with heavy skepticism of everything, the less likely you will be scammed. Pretty much everything is a scam or scheme or ways people or companies just want to take advantage of you. Every mechanic, every loan lender, every company, every new hype investment – so research. 

There are probably a lot of other things or details to think about but this is a good start.