Sunday, April 29, 2007

Automate to Accumulate Wealth

To get to work on time, you probably set the alarm on your clock radio and let yourself hit the snooze button no more than three times. This automates the process of waking up. That makes you a more reliable, and therefore valuable, employee.

It's a good idea to automate the process of building wealth. Don't make saving something that you have to remember to do. If you automatically send part of each pay check into a retirement, investment, or savings account, the process of building wealth becomes much more reliable, and eventually, rewarding. You are paying yourself first. By making saving a priority, you are more likely to accumulate wealth.

Automating the wealth building process can be done a number of ways:

1. Payroll Deduction. Retirement accounts sponsored by your employer, such as a 401(k) account, will typically be funded through payroll deduction from your salary or wages. People who are 50 or over and want to make "catch up" contributions will have to separately authorize them; do so if you can afford them. You may also be able to buy other investments, such as U.S. Savings Bonds, through payroll deduction.

2. Automatic Transfers. You can arrange to have money automatically transferred from your checking account to another account at a specified time, such as the first of the month. The other account can be an IRA, a savings or money market account, an investment account, a mutual fund, a money market fund, or a variety of other accounts. It can be at a different financial institution than the one where you maintain your checking account. All you need to do is a little bit of paperwork (or online authorization), and the process will begin.

3. Extra Mortgage Payments. One way to reduce your housing costs is to prepay your mortgage bit by bit. In other words, if your mortgage payment is $3,000 a month, add a little bit more to each month's payment. Even an extra $100 or $200 a month is helpful. Your mortgage payment coupon may even include a line for adding an extra payment (but make sure you won't be charged a prepayment penalty). The extra payment will be used to reduce the principal balance of your mortgage. As a result, you'll repay the loan sooner and build equity in your house faster. Building equity matters. The real estate markets in many parts of the country are backsliding by day and by night. But extra mortgage payments remain a reliable way to build equity in your house. It doesn't matter that you might plan to live in this house only a few years. This method builds equity even if you stay in your current house only a short while.

One way to prepay your mortgage gradually is to make payments every two weeks. The amount of each biweekly payment would be half your monthly payment. You'd make 26 biweekly payments a year, or the equivalent of 13 month payments annually. You could repay the mortgage several years early this way and save tens of thousands of dollars or more. If you're interested in this idea, see if your bank will automatically deduct the payments from your checking account every two weeks. If not, you might have to pay a service company to make the biweekly payments, and that will involve fees that make the idea less attractive (although not necessarily a bad idea).

Once you routinize the process of building wealth, it will become largely painless. Even more important, it will become reliable. That takes you down the path toward champagne and caviar.

Weird news: do you think you can guess who was and wasn't a cheerleader? Think again:

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