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Practical Steps To Building Substantial Net Worth

The American Dream—owning a home, a car, having a steady well-paying job.  This dream of prosperity has become a social norm in America over the past 100 years.  The conclusion of the American Dream is that, after working for roughly 30 years, a person can retire and live comfortably off the net worth he or she has established over an entire working career.  Most Americans would agree that comfortable retirement is one of their largest life goals.  Of course, it is right?  Who would want to actually retire poor?  So, if this is true—if most, if not nearly all, Americans would agree that a comfortable financial retirement is one of their primary life goals, then why do so few Americans actually reach this goal?

Recent studies have continued to prove that Americans are not good retirement planners.  Government statistics state the following:

  • 70% of Americans do not believe they are financially prepared for retirement
  • The average savings for a 50 years old is $2500
  • 62% of Americans retire with less than $25,000 in assets

These statistics are quite startling.  If most Americans have the stated goal of building a substantial net worth for retirement, why do so few actually do it?  Is it because most Americans simply do not earn enough money during their working career to pay bills and save?  To answer this question, let us turn our attention to the lifetime earnings.  Have you ever thought about how much money you will make during your career.  Not how much you will make per year, but total.  Determining this calculation can be quite revealing.

A person who enters the workforce at age 25 and lands a job paying $30,000, will earn over $1.8 million over the course of a 35 year career.  Is that enough money to save $100,000 or more?  It should be right?  If you take the basic personal finance rule of saving 10% of what you make, that means the average person should be able to save at least $180,000.  Thus, the problem is no that Americans do not earn enough—the problem is that Americans do not properly manage the money they do make.

Most Americans live far beyond their means, and unfortunately this has become a societal norm.  The American economy is based on consumer debt and everywhere a person turns, she is encouraged to go into debt to finance a lifestyle that should be avoided.  This behavior pattern is thrust on our youth as they are encouraged to go into debt to finance college, then they are encouraged to use credit cards and buy their first car.  This behavior pattern is “normal” and most Americans enter into adulthood already heavily indebted.  Then, as they progress through adulthood, the behavior never changes.  They simply pay off old debts and take on new ones.

The first practical step to building substantial net worth is not to invest in risky assets, but rather it is to eliminate liabilities.  Net worth is determined by taking your assets minus your liabilities; thus, the first step to building substantial net worth is to simply eliminate liabilities.  Then, once liabilities are eliminated, focus can be turned to building assets.  The best way to eliminate liabilities is to cut spending as much as possible and redirect those funds into paying down debt.

The best way to practically do this is track all your expenses for one month.  At the end of the month, sit down and honestly evaluate where you are spending money, and then cut back in every possible area.  Doing this will help you break the debt cycle in your life, eliminate liabilities, and set you on the path to financial independence. 

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