Steps to Building Wealth
Once you are consistently paying yourself first, you need a plan to what to do with all that extra money.
Step 1- Build an Emergency Fund:
Most financial experts advise adults to have about 6 months of expenses saved for emergencies. This amount can vary from person to person, but having an emergency fund protects against unemployment, car breakdowns, medical emergencies, and having to make costly house repairs.
Teenagers don't need an emergency fund to be that large, but teens should still have an emergency fund for expenses such as car repairs and going to fun or school events that parents may not have the money for. Can you think of any other teen emergencies?
There is more to owning a car than the purchase price, including unexpected repair bills.
How much money should teenagers have in their emergency fund? 9th graders should aim for $200 with that number increasing to $500 by the time you start driving, and $1,000 or more at graduation.
Step 2- Short Term Savings:
Once your emergency fund is filled up, then revisit your financial goals from the previous unit. What are you saving for? Maybe a car, spring break trip, X-Box, prom dress, or college. Open a savings account, if you don't already have one.
Step 3- Investing:
Investing is how you truly build wealth. When Ben Franklin (yes, that Ben Franklin) said, "Money makes money, and the money money makes, makes more money", he was referring to investing. (Ever wonder why he is on the $100 bill?) Here's how Ben's quote works.
- Let's say you invest $1,000 at a 5% rate of return. At the end of the first year, you will have earned $50.
- That $50 is the money that "money makes". Now you have $1,050.
- Next year, that $50 is now working for you, making "more money".
- After year two, you have $1,102.50. That $50 allowed you to make extra money.
I know what you're thinking. I only made an extra $2.50. What's the big deal?
Check this out. If you invest $1,000 today, and add $1,000 per year to that investment for the next 50 years, you will have invested $50,000 of your own money. In 50 years, the value of your investment will be over $720,000. That means your money earned you $670,000. Your money earned you over half of a million dollar, or 10 times what you invested!
