Many people believe that accumulating wealth is a random event. Or it is pure luck that determines who is wealthy and who isn’t.

It is true that occasionally someone wins the lottery or receives an inheritance and becomes wealthy, but usually immediate wealth is temporary. Studies have shown repeatedly that most widows who receive a life insurance death settlement either spend, loan out or lose the money they receive within three years of receiving it.

In order to build wealth, you must follow certain rules. In order to keep wealth, you must follow those same rules. If you never learn the rules or don’t have the discipline to follow them, you will not build or keep wealth.

I’d like to offer you seven sound steps for building wealth:

Step 1 - Start Now
Step 2 - Spend Less Than You Earn
Step 3 - Hire a Competent Financial Advisor
Step 4 - Avoid Unnecessary Debt
Step 5 - Follow a Sound, Long-term Strategy
Step 6 - Avoid Large Losses
Step 7 - Be Patient

This is the second of two articles. The first three steps appeared in the March 2008 issue of Business Connect, this article contains the final four:

Avoid Unnecessary Debt
Debt can be useful if used properly. On a recent trip to Africa, I noticed that there were half-built buildings everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why the structures were halfway done, he responded, there is no banking system. There is no way for the common man to borrow money. People can only complete the part of the building because they lack the funds to pay for building supplies right away. So they build what they can pay for now, and then come back and build more next year when they have more money.

If debt is used sparingly, for assets that appreciate or allow you to make more money, then debt makes sense. For example, a house, a car or an education all make sense.

Using debts for consumables or things that go down in value, makes no sense. Most credit card debt is for things that hurt rather than help your financial situation. My definition of a credit card is, “A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”

Set a goal to live debt free. With 1.5 billion credit cards in circulation, an average household credit card balance of $8,562 and an average interest rate of 19 percent, it’s no wonder that one out of every 50 households filed for bankruptcy in 2005. In the United States the household debt-to-income ratio recently reached an all time high.

Accumulating debt is the exact opposite of accumulating wealth. If you are paying debts, you are helping someone else accumulate wealth. With the few exceptions mentioned above, avoid debt like the plague.

Follow a Sound, Long-term Strategy
To systematically grow your assets, you must follow a proven investment strategy that doesn’t involve “gut feelings.” Emotional investing is a recipe for failure. A good strategy should significantly increase your returns over time.

Your advisor should provide you with a strategy that:

>> Works over different timeframes.
>> Provides effective diversification — not just diversification for diversification’s sake.
>> Works in both bull and bear markets.
>> Is disciplined yet flexible and evolving.
>> Reduces risk and provides downside protection.
>> Has a good long-term track record.

Avoid Large Losses
Some investment losses are unavoidable. They come with the territory. The key is to do your best to minimize large losses. Large losses can quickly reverse the benefits of compound interest. You should research thoroughly before turning over your money to someone else. That will increase your odds of avoiding investment scams and sub par money managers.

For example, if you lose 25 percent of your account, you need to make 33 percent to get back to even, which is workable. If you lose 50 percent of your portfolio, you have to make 100 percent to get back to even, obviously a much more difficult task. A loss of 90 percent of your portfolio requires a gain of 900 percent to get back to even. Forget about it. A much better scenario is to follow a sound investing strategy and avoid the loss in the first place.

Be Patient
After you find a strategy that meets the above criteria, it’s all about patience, self control, patience and more patience. We are constantly positioning our funds to take advantage of whatever the markets will give us. We never know in advance when we’re going to be rewarded. We sometimes spend months waiting. But we do know that following this process in the past has yielded tremendous rewards. The portfolios we manage, Managed Income and Top Flight have both tested our patience during periods of underperformance. By exercising patience and staying invested, Managed Income has generated a compound annual return of 9.63 percent since its inception in 2001. Our Paragon’s Top Flight portfolio has generated a compound annual return of 18.03 percent since its inception in 1998. (See our track record at paragonwealth.com and the disclosures regarding our performance.)

These seven rules apply whether you have a large or small amount of money. Building wealth is possible ... if you follow the rules.

Dave Young, president of Paragon Wealth Management, has helped his clients enhance their financial well-being since he began managing money in 1986. He was his own first client after he sold his 12 franchise businesses and couldn’t find a traditional brokerage firm to meet his needs. From his personal investment experience, he knew there was a better option to managing money. Later that year, he started his own money management firm, and has been managing money ever since. To learn more about Dave Young or Paragon Wealth Management, visit www.paragonwealth.com.