More and more Americans feel themselves slipping into financial insecurity today, with nearly 80% of American households living from paycheck to paycheck. But for many of those households it doesn’t have to be that way. Disciplined saving and investment over a period of time can help lift you away from living hand-to-mouth and put you on the path towards financial security. There are five critical steps that need to be taken in order to do that.
1. Pay Down Debt
Nothing ruins a person financially quicker than not being able to pay off debt. Compounding interest is an incredible way to get wealthy if interest is working for you in growing your investments, but it’s an incredible way to impoverish yourself if it is working against you by growing your debts.
From student loans to auto loans to mortgages, Americans have taken on trillions of dollars of debt, a sum that grows every day. With most Americans’ wages remaining stagnant over the past decade, failing to keep debt under control is a surefire way to make yourself worse off.
If you have debts that are causing you concern, pay them off as soon as you can. Mortgages obviously will take years to pay off, but there’s no reason not to pay off credit card bills every month, nor is there any reason not to pay off student loans and auto loans as quickly as possible. The sooner you can get out of debt, the sooner you can start on the path to accumulating wealth.
2. Put Together an Emergency Savings Account
No household should be without emergency savings. Surveys show that 40% of households can’t even afford an unexpected expense of $400. That’s a situation that everyone should try to avoid.
Everyone should have at least 3-6 months of expenses saved up, with many experts recommending up to 12 months of expenses saved in case you lose your job unexpectedly. That’s not going to happen overnight, but you can easily work up to that amount of savings if you’re disciplined in your spending and saving.
The easiest way to do that is to force yourself to save. Start off by directing 5% of your paycheck to a second checking or savings account, then don’t touch that money. Save it for a rainy day, or for when your car breaks down, or for unexpected medical bills. If you find yourself able to afford the 5% saved, think about upping that to 10%. Keep going until you have maximized your savings. Once you reach your goal of 3, 6, or 12 months of expenses saved, start investing any additional savings you make.
3. Save for Big Expenses
By forcing savings in that way, you can save more easily for big expenses, such as a down payment on a car or house, or for large periodic bills that come in. For example, if you know that you have a big car insurance bill that comes twice a year, save up money so that you can pay it off easily from your savings rather than taking a huge bite out of your monthly paycheck. Getting ahead of anticipated expenses will keep you on sound financial footing and keep you from being overwhelmed.
4. Save for Retirement
Of course one of the major expenses you’ll want to save for is retirement. If you have the opportunity to invest in a workplace 401(k) account, especially if it offers matching contributions, take full advantage of it. That again is a type of forced savings, taking the money out of your paycheck before you ever see it.
With the stock market boom of the 1980s and 1990s well behind us, investors are going to face a more difficult time building up their wealth. Even though long-term stock market growth is supposed to average around 7%, average annual growth over the past two decades has been far lower than that. Investors who really want to build up their wealth so that they can retire comfortably will have to do their homework before investing to make sure that they choose the right assets to maximize their investment income while they’re working.
5. Diversify Your Assets
That’s why a 401(k), while incredibly valuable as a tool for investing, is only the first step. You’ll want to also look at establishing IRA accounts, brokerage accounts, and any other investment vehicle you can. You don’t want all your eggs in any one basket. That means diversifying the companies who manage your assets, diversifying within asset classes, and diversifying into different asset classes.
So many investors think that they can invest in a mix of stocks and bonds and call it a day. But both stocks and bonds are subject to crashes, with stocks regularly seeing booms and busts every decade or so and bonds set to enter a bear market for the first time in decades. Putting 100% of your investment into financial assets is not diversification. You need real diversification into different asset classes and into countercyclical assets, which is where gold comes into play.
Gold has a history of gaining in value when stock and bond markets crash. During the 2008 financial crisis gold gained 25% while stocks lost over 50%. Over centuries gold has maintained its value in the face of inflation, recession, and financial turmoil. Investors who hold gold for the long run understand its ability to work for them to keep their wealth intact no matter what.
For that reason more and more investors are turning to gold to protect their assets. Gold has already seen amazing gains in value this year and will only continue to rise in value as investors fear an economic slowdown. If you want to make sure that you can retire comfortably and not get left on the sidelines, make sure that gold plays a strong role in your investment portfolio.
This article was originally posted on Goldco.
