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The Secret Formula to Build Wealth

At least a couple of times a year I get approached by someone in their mid-40s who is in panic mode. They suffer nightly from cold sweats and can’t sleep because it just dawned on them that they have, despite earning a good expat salary, failed to build any wealth at all…


Unfortunately, I don’t have a secret formula for instant wealth.


Wealth, for the most part, is built gradually over time by people who spend less than they earn and invest wisely. It can be this simple. Whether you’re living paycheck to paycheck or have been blindsided with unexpected expenses, hitting the big 4-0 with nothing in the bank isn’t ideal. To make you feel a bit better, many other people are in the same predicament.


Based on a study done in the US, almost 35% of Americans in their 40s had no financial plan for retirement, and have less than $1,000 saved for their post-work years. Regardless of your why, it’s not too late to take a hard look at your finances, devise a plan and get some money in the bank. Here are some steps you can take to turn your financial situation around.


Step One: Analyze The Numbers To Outline A Basic Retirement Plan


To create a plan that will guide you going forward, you’ll need four key numbers:

  • The age at which you want to retire

  • The number of years you’ll depend on your retirement savings

  • An annual estimate of living expenses in retirement

  • Your current savings.


Since these numbers are a vital part of your plan, let’s talk about how to identify them. While many people think of 65 as the “normal” retirement age, it’s not a definitive age. As people live longer, some choose to work into their late 60s and beyond. Taking into account your age, salary, expenses and how long you’re likely to live, you can figure out what age is a realistic retirement target.


Remember to consider any potential income you might have at retirement. Will you have a personal or company pension, or will you depend on your country’s social pension? Now run your numbers through one of the many online retirement calculators.


Enter your age, salary and lifestyle details, and it should create a graph that shows your estimated retirement income and projected living expenses, as well as any gap between the two. Adjusting your planned retirement age helps show how working an additional year or two could affect your savings. How much money should you be saving?


Morningstar’s Retirement Calculator uses your age, salary and current savings to determine how much of your annual income should go toward retirement savings. Be prepared for a wake-up call: a 40-year-old earning $150,000 should aim to save 10 per cent of his/her annual income and that’s assuming he or she already has $10,000 in the bank.


Step Two: Assess And Trim Your Living Expenses


Seeing a gap between your estimated retirement income and living expenses can be sobering. To start closing that gap, let’s take a hard look at your spending. Categorize your expenses into “needs”, “wants” and “savings”. Needs are basic essentials like food, housing and utilities. Wants are less necessary expenditures like clothing, travel or entertainment — and they’re your first targets for cuts. Slash spending from your “wants” category by identifying and cutting out unnecessary expenditures. Don’t be too harsh, since eliminating everything you enjoy is unsustainable, but be as ruthless as possible. You might want to quit your daily Starbucks coffee, or maybe start taking the subway instead of a daily taxi. A couple of years ago,


I analyzed my own expenses and realized I spent around $10,000 on taxis per year. I managed to save most of this by moving closer to work and now take the subway more often. Also, instead of taking two or three long international holidays a year, like many expats do, eliminate one or travel in China. Next, target your “needs” to see what can be trimmed. Consider other small changes too, as those can add up to a big difference. What about eating out less and cooking at home more often? Do you really need your Ayi to come everyday? Maybe you can get away with her cleaning only 3 days a week instead. Consider moving to a smaller apartment or house. A $400 to $600 change in your monthly rent can make a big difference over the long run. Total the amount you’ll save each month from these changes. This is your first wealth building retirement contribution.


Step Three: Choose And Strengthen Your Investments


Wondering what to invest in? Since you’re only about 20 or 25 years away from retirement, you won’t want to invest as aggressively as a 20-year-old might, but you should still find a good mix of options. Index funds are often a good choice (as I have mentioned previously). Since you’re contributing to your accounts each month, help them grow more quickly by adding as much extra cash as possible. Add any windfall money like a birthday gift or a tax return to your retirement accounts to boost your bottom line. If any of your investments pay dividends, reinvest them so your money grows faster.


All set? You’re not quite finished; it’s time to check your work…


Step Four: Test Your New Retirement Plan


Now that you’ve put a retirement plan into action, put it to the test to make sure you’re on the right track. Update your estimates on your preferred retirement calculator.


If you’ve closed the gap between your estimated retirement expenses and income, congratulations!


If not, spend a month or two adjusting to your initial plan, then revisit step two to identify additional saving and earning opportunities.  


Bill Longstreet has been a financial advisor since 2003 and prior to this were a institutional business development director, specializing in fixed income and foreign exchange markets. Bill has a Master in Business Administration with a concentration in Finance (1999) from the Olin School of Business at Washington University in St. Louis.

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