MONEY strategy

Why Focus Is Essential to Building Wealth

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Jorg Greuel—Getty Images

Persistence is the key to any successful endeavor.

Building wealth is a process, not an event — a process that takes discipline and a long-term outlook. You must focus on yourself, not what others are doing. Work hard and maintain a consistent approach. This may not be easy, but it’s doable for most people if they choose to make a commitment and stick to it.

In the end, though, the “stick to it” part is what usually trips people up.

In an excellent post on his blog Seeking Wisdom, Jana Vembunarayanan gives a fantastic summary of how to succeed at just about anything. Here are his observations and recommendations, to which I’ve added some suggestions for applying them to your finances.

1. Recognize that it takes a long time to create anything valuable. Investing works over long periods of time. The market has never lost money over any 20-year stretch. The problem for many people is that they don’t understand their time frame. They confuse short- and long-term money and end up bailing at the worst possible moment. Finding a strategy that works, and sticking with it for decades despite the inevitable booms and busts of the markets, is not exciting. While you might feel you are missing out on the latest big thing, you will most likely have the last laugh.

Read next: 4 Personality Quirks That Sabotage Your Savings

2. Work hard every day even if you don’t see improvement in the short term. Building your skills enables you to earn a higher income, so you can save more. Small increases in savings each year are barely observable at first, but over time you can be working toward saving 20% of a $100,000 salary, which will provide great rewards in the future. Many will give up because they become impatient with a seeming lack of progress. Accept the short-term stagnation knowing you will be rewarded with the miracle of compounded returns in the future.

3. Keep doing it consistently for a very long time without giving up. Persistence is the key to any successful endeavor. While it might satisfy a short-term urge to remodel your kitchen by raiding your 401(k) account, resist this temptation and stick to the plan. Investing is simple but not easy. Track your wealth accumulation yearly, not daily. This encourages you to build your future, not mortgage it.

4. Enjoy the process, and don’t worry about the outcome. Put things on autopilot. Set your plan to save a certain percentage of your salary, with an increase of a percentage point or two each year until you maximize your contributions. Find a few diversified, low-cost index funds, add an automatic yearly rebalance, and forget about it. Enjoy your life and ignore the daily end-of-the-world events that saturate the financial media in their quest for advertising dollars. Focus on the fact that you will be financially secure by sticking to your plan. In your free time, devote your energies to finding things you like to do. Find ways to increase your skill level and eventually make money from a “job” that doesn’t seem like work. This way to supplement your income might lead you down some surprising paths while you have the security of your savings plan at your day job.

5. Don’t compare yourself to others; instead, compare yourself now to yourself two years ago. Keeping up with Joneses is, as serial insulter Donald Trump would say, a loser’s strategy. A phenomenon called “lifestyle creep” can sabotage the best-laid plans. It means that the more you make, the more you spend. Your only accomplishment is making the hamster wheel spin faster. Don’t worry about what others have. No matter how rich you are, there will always be someone who has more than you. And such people might just be renters anyway, buying their goodies with credit cards with huge balances. Look at yourself instead. Build a disciplined savings plan, and follow it with no deviations. Competing with your neighbors over who has the most “stuff” is not a good use of your time.

As Warren Buffett once said, “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” Keep these five points in mind, and your probability of success will increase immensely. Good habits will eventually lead to superior results in whatever you do. The key is to figure out what works for you and stick to it. Your process will determine your future. Spend time developing it, and then enjoy your life.

Read next: 19 Secrets Your Millionaire Neighbor Won’t Tell You

More from NerdWallet:

MONEY financial advice

Vanguard’s Founder Explains What Your Investment Adviser Should Do

Jack Bogle, founder of the mutual fund giant, shares what makes an investment adviser worth paying for.

The life of a financial adviser can be very tricky. Many of them believe that leaving a client’s investments alone is the best option, but when, year after year, clients come in asking what the best course of action is for their money, what do you tell them? Jack Bogle, who 40 years ago founded the mutual fund giant Vanguard (it now has about $3 trillion of assets under management), explains exactly what a financial adviser should do and what a financial adviser should say.

Read next: Jack Bogle Explains How the Index Fund Won With Investors

MONEY 401(k)

The Hidden Costs of Borrowing From Your 401(k)

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Peter Dazeley—Getty Images

You can borrow up to half the balance in your employer-sponsored retirement savings account, but that doesn't mean it's a good idea.

All it usually takes to borrow money from your 401(k) are a few clicks on a website, and a check will arrive a few days later.

That is why U.S. retirement industry leaders talk about the prospect of doing away with 401(k) loans before younger workers follow in the footsteps of previous generations and start using their retirement account like an ATM.

Workers who take out 401(k) loans risk not having enough saved for retirement because they miss out on growth while the money is borrowed. Some may also reduce their contributions or stop them altogether, research shows.

Internal Revenue Service rules say you can borrow up to $50,000 or 50% of the account balance, whichever is greater.

This ability to cash out some portion of your retirement account balance is unique to 401(k) plans. You cannot borrow against an Individual Retirement Account or a pension, for instance.

The problem is with middle-aged workers, who are the heaviest loan users, according data from the Employee Benefit Research Institute. The overall average of loans has hovered between 18 and 20% for the last few years; about 27% of participants in their 40s had a loan balance in 2013, the last year of EBRI’s data. Workers can take out money as withdrawals without penalty after age 59 1/2.

“New employees won’t notice, but sure as heck the older ones would notice it,” said EBRI Research Director Jack VanDerhei.

Among developed countries with private retirement systems, the United States is alone in allowing basically unrestricted access to cash without providing proof of a hardship, according to a recent study led by Brigitte Madrian, a professor at Harvard’s Kennedy School of Government.

In fact, loans were used to entice workers dependent on pension plans to enroll in 401(k)s when they were introduced in 1981.

“They thought it would be hard to get people who were living paycheck-to-paycheck to sign up unless they thought they can get their hands on their money in a loan,” VanDerhei said.

A study VanDerhei did in 2001 showed the loan option made a big difference in how much a person was willing to contribute.

But that was before the financial crisis of 2008 and before the age of auto-enrollment.

Today’s under-40 generation does not pay much attention to the details of retirement plans they get at work, and it is unlikely that any change would prompt them to start opting out in huge numbers, VanDerhei says.

Huge Consequences

While it is alarmingly simple to borrow from your 401(k), borrowers may sometimes have to pay set-up fees. The low interest rate charged is actually credited back to your own account as you repay.

The consequences in lost growth, however, can be monumental.

Fidelity Investments estimates that a person who takes one loan out – the average balance they see is $9,000 – is set back about 7.6% from his or her long-term retirement goal.

Half of Fidelity’s borrowers end up with more than one loan. The real-dollar impact is between $180 and $650 a month in retirement, according to the company’s estimates.

It is not just the loan balance that affects the retirement account. Of the 20% who borrow, Fidelity has found that 25% lower their savings rates within five years of taking a loan, and another 15% stop saving altogether while the debt is outstanding.

“We take these calls, millions of calls every year,” said Jeanne Thompson, a Fidelity vice president. “We see they have taken loans, and they don’t have enough to retire.”

A direr problem is with those who have an outstanding balance when they lose or change jobs. They must repay their loans immediately or face tax penalties on top of credit problems.

“The vast majority of money is actually repaid, on the order of 85% of it,” says Harvard’s Madrian. “But for a smaller subset of people, it can be a problem.”

Legislation to change 401(k) loan provisions is unlikely at this point, Madrian said.

“It would be easier if you had some companies get rid of the option and show the employees were better off,” she said. “Absent some more compelling data, it’s going to be hard to shift the policy landscape on that front.”

MONEY college tuition

Should I Pay for College With a 401(k) or Home Equity Loan?

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Fuse—Getty Images

Both options have serious downsides, but there's a third option.

Q. I need to borrow $10,000 for my son’s college in the fall. I can’t decide if I should outright take a loan, borrow from my home equity or take a 401(k) loan. Help!!

A. All of your borrowing options have potential long-term consequences, so we’re glad you’re thinking this through.

Although it can be tempting to borrow against your home or your 401(k) to help pay for college costs, you may want to think twice before doing so, said Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence, N.J.

“Borrowing against your home versus taking out federal education loans can look appealing from an interest rate perspective, and in light of the rebound in home prices since the recession,” Pawlik said. “However, it is important to keep in mind that adding more debt to your home in lieu of utilizing federal student loan programs available to parents and students can lead to problems with your home down the road.”

Check out the new MONEY College Planner

Pawlik said the primary reason interest rates on home equity loans are typically more attractive than federal education loans is because home equity loan debt is secured by your home, giving the lender a legal claim to your home in the event of default. Using equity in your home to pay for college costs instead of a federal education loan effectively converts the loan into secured debt — debt that is backed by a personal asset, in this case, your home.

Plus, federal student loans typically offer a variety of protections in terms of repayment options, as well as forgiveness benefits, that are not available with a home equity loan, he said. In this way, you give up flexibility by utilizing a home equity loan to pay for college costs, in addition to running the risk of foreclosure on your home if you can’t pay back the loan.

(It’s also important to know how taking out student loans or borrowing against your home can affect your credit. You can get a better understanding of your credit by regularly checking your credit reports and credit scores.)

Then there’s the 401(k) loan option.

Pawlik said it’s a bad idea for several reasons.

First, you’ll be losing out on potential tax-deferred earnings on these funds. Furthermore, some plans won’t allow you to continue to make pre-tax contributions to your 401(k) until you’ve paid off your loan.

“This could amount to years that you don’t have the ability to add to your 401(k) accounts while losing the benefits of tax-deferred growth on those contributions as well as the reduction in taxable income you receive from making pre-tax contributions,” he said.

You also incur double taxation on a loan from your 401(k), given that you will be repaying the loan with after-tax money and then be taxed on those funds again when you withdraw them in retirement, Pawlik said.

If you can’t repay the loan, you may be subject to taxes and penalties.

“The loan balance will be treated as a distribution, which triggers income taxes and a 10% early withdrawal penalty if you are under age 59½,” Pawlik said.

And if you quit or lose your job, plans typically require the loan balance to be repaid in full within 60 days, Pawlik said. Otherwise, you will be considered in default on the loan and be subject to the same income taxes and 10% penalty on these funds.

Pawlik said because the options all have risks, you may want to speak to a financial professional for help so you make an informed decision based on your overall situation, and help to ensure that you aren’t putting yourself at risk in your effort to assist your children with paying for school.

Check out MONEY’s 2015-16 Best Colleges rankings

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MONEY Budgeting

8 Ways to Simplify Your Finances

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Marc Romanelli—Getty Images

Consolidate. Prioritize. Automate.

Do you find yourself overwhelmed by your financial responsibilities? Do you sometimes ignore your accounts and budget because thinking about them adds stress or confusion? Understanding the steps for good financial decision-making and simplifying your role can help you take control of your finances. Check out the following tips to create an easier structure in your finances and watch how each small change adds up.

1. Pare Down Your Accounts

You probably don’t really need more than one savings or checking account or to have accounts with many different financial institutions. One method to simplify your financial life is to consolidate your bank accounts to one checking account and one savings account to cut down on the paperwork and tracking.

2. Prioritize

Picture your future and choose a few financial goals to focus on at a time, like boosting your 401(k) or growing an ample emergency fund. It’s important to be specific about the goals you want to accomplish and plan the clear steps you need to take to reach them. Writing your goals down can help you stick to them.

3. Consolidate Insurance

Just as you probably don’t need multiple bank accounts that serve the same purpose, you probably don’t need multiple insurance accounts. You can save money and stress by bundling your assets that need insurance and consolidating your policies. You can compare the various companies to see who will help you save the most in this process.

4. Keep Track of Your Comprehensive Budget

When you are ready to get control of your financial life, it’s important to make sure you are living within your means. It is important not just to create a realistic, comprehensive budget but to take the steps to stick to that budget. Once you start tracking where you money is going, you may be surprised by how much you are spending in each category and how your money can be put to better use.

5. Pool Your Plastic

If you have debt, you may want to consider transferring the balances on high-interest credit cards to a credit card with a lower rate. This will help cut down on your money management and save you some money on interest. It’s important to inquire about balance-transfer fees and factor that into your decision.

To get a good balance transfer offer, you’ll need a decent credit score.

6. Go Paperless

You only need to keep important papers, so go through what you have and shred whatever you don’t need. Then streamline your future financial records by going paperless. Most companies and banks offer this feature and this can cut down on your clutter and filing. Call to set up paperless statements or bills and keep folders on your computer to help you track where your money is coming and going.

7. Automate Good Habits

If you can’t trust yourself to follow through on positive financial behaviors, consider not giving yourself the option. Set up direct deposits and contributions so you can watch your financial goals come into grasp without having to be proactive about it. If you never see the money sitting in your account, you can’t spend it.

8. Inventory Your Stuff

Take stock of everything you own, from clothes to furniture. You will find that you probably have more than you need and even things you have forgotten about. You can sell or donate what you don’t need and watch your financial clutter decrease with your life clutter.

The easier your financial management is, the more likely you are to stay on top of it and be in better fiscal health. Use the tips above and search for your own shortcuts to make this strategy a reality and watch your assets grow.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More from Credit.com:

MONEY Savings

Here’s How Much Cash You Need in Retirement

Q: I am in my eighth year of retirement. A few years in, I found myself spending a considerable amount on repairs and upkeep on my old house. I also had to replace my car. Luckily, I was able to build up a reserve fund to cover costs so I didn’t have to dip into my investments for these “life happens” events. What is your advice on how much cash a retiree should have on hand to feel secure? – Karen Hendershot

A: Of course, everyone should have a cash cushion to handle unexpected expenses, but retirees need a larger cash reserve than people who are still working, says Richard Paul, president of Richard W. Paul and Associates in Novi, Mich. “The stakes are higher for retirees,” Paul says. “When you’re no longer earning an income, the money you have saved isn’t easily replaced.”

If you need to tap your investments for emergencies, you risk spending down your portfolio too quickly. And if you have to sell securities in a down market, you’ll need to take a bigger chunk to get the amount you need.

Relying on your investments for unexpected expenses could also trigger some nasty tax consequences. If you liquidate money from a taxable account, the income could bump you into a higher tax bracket and cost you even more.

So, how much do you need? While the standard recommendation is to have six to 12 months of money set aside to cover emergencies, retirees should have at least 12 to 18 months of cash, says Paul. That should be enough to cover daily expenses as well as any emergencies that might crop up. “This creates a safety valve, so you’re not at the whims of the market,” he says. Use an interactive worksheet like this one from Vanguard to tally up your monthly expenses.

Exactly how much you will need depends on your individual circumstances. If you have guaranteed cash flow, say from a pension and Social Security, that covers your daily expenses, you won’t need to have as much set aside as someone who is already withdrawing money from a portfolio to cover living costs. You can’t foresee emergencies but you can plan for them. If you have an older home, for example, you can anticipate needed repairs or upgrades like a new roof. If you have any medical issues, you’ll want to keep a larger stash for medical costs. “Medicare doesn’t cover everything,” Paul notes.

Since people tend to enter retirement with most of their money tied up in investments, such as 401(k)s and IRAs, Paul recommends that you start building up an emergency fund before you retire. While you’re still earning, start funneling money into a savings account and move a portion of an IRA into a short-term bond fund.

On the flip side, you don’t want to keep too much of your savings in cash. You won’t earn much interest in a money market fund or basic savings account, so balance that cash cushion with investments that can keep up with inflation. “You still need your money to grow,” Paul says.

MONEY financial advice

How to Become a 401(k) Millionaire

Fidelity Investments' Jeanne Thompson lays out three simple steps.

For millennials, retirement is something that feels like it’s forever away, which is a good thing when it comes to preparing for it. Jeanne Thompson, Fidelity Investments’ vice president of thought leadership, lays out three simple steps for hitting the ultimate 401(k) milestone: a million dollars.

1) Save a lot. Seriously, save as much as you can. One of the BrightScope co-founders phrases it simply as “Save until it hurts.

2) Start now. When you start saving while you’re young—Thompson says 25 at the latest—you give your money as much time as possible to mature alongside you.

3) Invest for growth. Keep your eye on stocks, and don’t shy away from aggressive investments.

Read next: The Painful Secret to Retirement Success

MONEY Donald Trump

Donald Trump Employees’ 401(k) Plans Come With a Huge Catch

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Chicago Tribune—TNS via Getty Images Presidential candidate and businessman Donald Trump

They have to wait a year to open an account

It turns out that Donald Trump—the real estate mogul and Republican presidential hopeful who has promised to be “the greatest jobs president that God ever created”—is a bit of a Scrooge when it comes to his employees’ retirement plans.

Workers who are eligible for Trump’s company 401(k) cannot actually open an account until they have been employed by the tycoon for a year, Bloomberg reports. And the employer match—a generous-enough 4.5% for employees who invest at least 6% of their earnings—doesn’t kick in for six years. (That’s the longest amount of time allowed by United States law).

While these policies may simply signal how much Trump values loyalty, one other important 401(k) feature is lacking in the plan: automatic enrollment. Studies have shown that by automatically signing employees up for savings, employers can greatly boost how much workers end up having for retirement.

“If the plan really wanted to facilitate employee savings, it would institute automatic enrollment, reduce or eliminate the eligibility requirement, and vest employees in the employer match more quickly,” Harvard Kennedy School professor Brigitte Madrian told Bloomberg.

Read next: 8 Epic Business Failures with Donald Trump’s Name on Them
 

MONEY Greece

Here’s How Greece Could Affect Your Retirement Savings

Reaction As Greece Imposes Capital Control
Bloomberg—Bloomberg via Getty Images A customer places her daily cash machine withdrawal limit of 60 euros into her purse after using an automated teller machines (ATM) outside a closed Eurobank Ergasias SA bank branch in Athens, Greece, on Monday, June 29, 2015.

Your 401(k) or IRA will probably be fine

Greek leaders are scrambling to nail down a new bailout deal before July 20, when the country would otherwise default on a €3.5 billion bond repayment to European creditors and might be forced to abandon the Euro currency altogether.

As recent stock performance in the U.S. suggests, fears of what a so-called “Grexit” could do to Europe’s economy has spread to American shores. Indeed, U.S. markets may very well be choppy for at least the next several weeks until there’s more certainty about the future.

But there are many reasons to believe that any impact on your 401(k) or IRA investments would be short-lived.

For one, Greece comprises only 0.3% of the global economy. And a typical target date mutual fund, used by many retirement plans, has an even smaller sliver of exposure to the country.

Even if the worse case scenario happens and the Greek crisis affects Europe—or even causes a slowdown among U.S. companies that rely on European demand—history has shown that people who keep investing through recessions make their money back more quickly than one might expect. For example, if you had been so unlucky as to start investing $1,000 per year in the stock market right before the most recent recession, you would have made your money back after only two years post-recession.

That’s a good reason to stay calm and not do anything rash.

Certainly, investing in today’s globalized markets comes with risks. While Greece is relatively tiny, for example, China is a top global trader—and its current market crash could potentially affect economies across the world. But the fact that it’s hard to predict how market forces will play out on a global level is a reason to stay diversified, with portfolios exposed to many different countries and their economies.

Watch the video below to learn more about why foreign stocks are important to your portfolio:

MONEY financial advice

The Painful Secret to Retirement Success

The co-founders of retirement and investment analytics firm BrightScope share the secret of a well-funded retirement.

BrightScope co-founders (and brothers) Mike and Ryan Alfred say saving is the most important thing you can do for your retirement. Start saving early and start saving a lot—way more than the 5% or 6% that workers put in their 401(k) to get an employer match. Ryan, president and chief operating officer, said he knows it can be hard to start saving when you’re young and just started a career, but he thinks you should start saving a little bit and try to increase how much you save each year.

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