How to achieve financial success

You don’t need a huge income to be financially successful.  Some of the richest people in the world have squandered their fortunes through mismanagement of their money and risky investments that went bad.  The average person has the ability to build a sizable nest egg on an average income if they plan properly and apply discipline to their savings program.  The most important aspect of this is to start early in life since the compounding of interest, dividends, and capital gains over a long period of time will have a multiplier effect on your net worth.  The goal should be to at least save a small amount of money every month on your first job, and continue that throughout your career.

An integral part of your financial plan should be a budget that summarizes your major expenses such as mortgage, rent, utilities, loan payments, taxes, insurance, groceries, car payments, etc.  If your monthly budget exceeds your total monthly income, then your expenses should be thoroughly analyzed to determine where reductions can be made.  A portion of your budget should be allocated to savings, even if it’s only a small amount in the beginning.  A little sacrifice in spending will go a long way in building your savings.  An integrated financial plan that includes your budget and savings goals is needed to help install the discipline required to follow through and make it stick through thick and thin.  The earlier you start, the easier it will be to achieve your goals.

Video: How To: Create a Budget

How much money do you need?

The answer to this is totally subjective since it depends on so many disparate factors and personal perspectives.  For most people, the primary influence is the lifestyle that you grew up with and became accustomed to throughout your childhood.  That becomes the benchmark by which you will judge relative wealth for the rest of your life.  It is also a function of location, since some areas of the country are far more expensive to live in than others.  Your money goes a lot farther in Minot, North Dakota than it does in downtown Manhattan.

One gauge of how much money is required to “get by” is to look at the poverty guidelines maintained by the U. S. Department of Health and Human Services.  For 2008, the level was $10,400 for an individual and $21,200 for a family of four.  These guidelines are used by the government for administrative purposes and determining financial eligibility for federally funded programs.  While this income may allow you to get by in some places, it clearly would not be enough in areas where the cost of living is high.

Video: How to be Financially Successful (Dave Ramsey)

The vast majority of Americans occupy what is commonly known as the middle class, a loosely defined amalgamation of people who consider themselves neither rich nor poor.  Who and what constitutes the middle class is a subject that is constantly debated by economists and saving and investingpoliticians, most of whom have an agenda for their respective positions.  In 2007, the median household income was about $50,000 according to the U. S. Department of Commerce.  From a purely statistical perspective, half of all household incomes were above that figure and half were below.  In most areas of the country, that amount would be sufficient for someone to live comfortably if they stay within their means.  For a family with several children, the amount needed would rise accordingly.

Wealth, like beauty, lies very much in the eye of the beholder.  For those at the bottom of the income ladder, an annual income of $100,000 might make them feel extremely rich.  For those at the top looking down, $100,000 wouldn’t come close to maintaining their lifestyles.  In addition, it’s more accurate to measure wealth through net worth calculations rather than annual incomes since total wealth includes the cumulative effect of savings and investments over time.  Currently, about 2% of all households have annual incomes exceeding $250,000, or four times the median.  Many would consider this “rich” regardless of the value of their net worth.  While being a millionaire isn’t what it used to be, there are about 2 ½ million households with a net worth at least that high. 

Potential income sources

If you have a job and steady source of income, part of your budget should include a long-term savings and investment plan.  There are a multitude of possible venues available to put your money to work including stocks, bonds, mutual funds, CDs, money markets, commodities, and real estate.  Some of these rely solely on capital appreciation, such as commodities and stocks that pay no dividends.  Others provide a steady income stream through interest and dividend payments, such as money markets and dividend-paying stocks.  Real estate also offers a passive income source if purchased for either leasing or renting.

Video: Rich Dad - What You Need to Implement a Plan for Growing Wealth

As recent events have made painfully obvious, diversifying your investments and preserving capital have never been more important.  A fairly easy way to diversify is to purchase mutual funds that invest in a wide variety of different industries, commodities, and international markets.  For seniors that rely on a steady income stream, a low-risk investment strategy is paramount especially during turbulent times.  Younger people can afford to take more risks since they have more time to recover from unforeseen disasters such as job loss and bear markets.

Financial health statistics of the average American family

The financial health of most Americans has taken a beating over the past few years.  The housing bubble has imploded and the stock market has been cut in half.  After years of leveraging themselves to levels never seen before, many Americans find themselves unable to pay their mortgages, credit cards, and other living expenses.  When viewed in aggregate, the Federal Reserve has reported that U. S. households have lost $11.2 trillion in net worth, completely wiping out four years of gains.  On both a dollar and percentage basis, this is the biggest loss since records were tracked following World War II.  In the last quarter of 2008 alone, household wealth dropped a record 9% as real estate and stock prices plummeted.

Many economists believe it is too early to say that the deep slide in consumer spending, which accounts for two-thirds of all economic activity, has come to an end.  Jobs are being lost at an alarming rate, and many families are facing the loss of one or both incomes.  Until the employment situation improves, consumers will be reluctant to spend, which will only prolong the recession and delay any meaningful recovery.