Have a Wealth PlanDoesn’t a wealth plan sound better than creating a budget? While spending is an important element of wealth building, think bigger. First, focus on the result of how much wealth you want, to live how you want. This motivation will trickle down to influence all your actions, including spending and wealth management. Before you think you’re too young, too old, too poor or too rich for a wealth plan, realize that wealth plans are important for every age and situation.
Get Comfortable with the Word WealthCan we go ahead and drop the negativity associated with the word wealth? Note that the feeling behind the word wealth is the answer to your money problems if you have any. Common feelings are unworthiness or entitlement. If you’re here you desire wealth, so let’s use the word with confidence and anticipation.
Plan to Increase IncomeHow often is the focus of wealth building scrimping and saving to invest in stocks and bonds for an annual 7% return over many decades? Compounding wealth is an easy way to build wealth, no doubt, but it can take decades. And while smart spending is crucial to accumulating wealth for those without enormous bonuses or inheritances (most people), increasing income is more powerful. There is more upside to income than saving a little more money each month. When extra income and saving money each month are both present, wealth accumulates faster.
Clarify Your Lifestyle PrioritiesYour wealth plan will be based on your lifestyle priorities first. Get super clear about what your priorities are.
- Do you want experiences, such as exotic, long term travel?
- Do you want to live on a simple farm in the country with your own French chickens?
- Do you want to pass wealth to your heirs?
- Do you want to have a vacation home and drive a new luxury car?
Estimate a Time FrameMany people delay creating a wealth plan because they don’t know how long to plan for. You will probably have more than one stage in planning for wealth. For example, an early retirement at age 55 may be part one of your wealth plan. Part two of your wealth plan could be to have income generating assets for retired life that allow you to live well. Part three could be to leave an inheritance, which can be done easier when your retirement assets are income generating and you are living within that income based on your priorities. With this wealth building step, your life and money all work together like a beautiful tapestry based on your choices.
Know Your Net WorthMost people avoid their net worth like a plague. It may feel better to avoid this important number, especially if you’re not where you want to be, or you have deep remorse for money mistakes. Or maybe you’re not sure how to calculate your net worth. Here are the steps:
- List all your assets and total them.
- List all your liabilities and total them.
- Subtract what you own from what you own.
Prioritize Your SpendingThink of your money as a tool that you can use however you choose instead of a scarce resource. This approach is much more empowering. Then choose if you want to use your money for the newest gadget or to compound in your retirement savings. You can look at any potential expense this way. The factors under consideration will vary depending on your level of wealth but it’s all relative to your level of wealth. It feels no differently whether you’re a multi-millionaire pondering the yacht purchase or someone with $250,000 considering the newest phone. Do you want first class travel or coach? Do you want a road trip to the beach or a trip to Paris. It’s all a choice, and it relates to what you really want.
Get on The Same Page with Your SpousePlan wealth with your spouse or anyone who contributes to your cash flow. This wealth planning step creates harmony and success in reaching your goals. Plus, it encourages all parties involved to create and manage wealth toward the same goal. A good approach is for each partner to create their own wealth plan individually. This encourages each person to get clear about what they want. You may find that you and your spouse have different priorities. This calls for a bigger conversation. It calls for compromise and merging your two plans if building wealth is a priority.
Take Care of YourselfIt’s fun to take your children on amazing trips. While family experiences are hugely important, being financially independent for life may be a better gift than a trip to Europe. My experience has shown that the road trip can be as much, or more fun, than the trip to Europe, complete with high expectations. Then there is also the trend toward supporting grown children. It’s hard to not support your grown children financially if they need it and you have the money. Yet I suspect it would be even harder to run out of money, and depend on them for money to pay the bills, though.
Plan for ChangeWhen job income is flowing in steadily and generously, or when the stock market has delivered stellar returns for eight years straight, remember this wealth building step: Plan for change. Jobs end. Bear markets happen. Recessions happen. Real estate crashes. Runaway inflation happens. Things change. Sometimes changes are beneficial. This is so cool when it happens. Stock markets rise. Bonuses get paid. Home values increase. Businesses get sold for capital gains. Other times, changes damage your wealth. Plan for change, both good and bad. It’s a reality.
Use History as A Guide in Your Wealth PlanUse history, not emotions, as your guide for what will “probably” happen. It’s easy to do this. It just takes a little time and attention. For example:
- It’s easy to see the history of bear markets and bull markets.
- It’s easy to see how the stock market performed in the years after bear markets and bull markets.
- It’s easy to see how real estate has performed over time in the past.
- It’s easy to see what bonds did when interest rates rise.
Accept ProbabilitiesI love sure things, but with investing, we have only probabilities for future returns. This is all we can use when we make a wealth plan. Examples of probabilities that affect wealth building follow:
- We will probability have a bull or bear market within the next two years
- Real estate values will probably go up or down back to the normal valuation
- The stock market will probably perform well for several years following a bear market
- Dividends from stocks and retirement withdrawals probably will or will not support me for life at my current level of wealth
- Between me and my spouse, we will probably near some form of care assistance at some time in our lives
- We can probably sell our business for a profit
Take Advantage Of “Certain” ThingsOn the other hand, there are some certain things. “Certain” things can be used to your advantage in wealth building. Be aware of what’s probability vs what is darn near certain unless there is a total and complete disaster. If this is the case, your money won’t matter much except for the cash you have on hand. Examples of 99% certain things are:
- Almost all the companies in the S&P 500 will stay in business for decades.
- Bear markets happen every few years.
- Bull markets happen more often than bear markets over long time periods.
- Taxes will have to be paid if I make enough money.
- The interest rate on my home for the next thirty years is very low historically speaking.
- Real estate and small business ownership have legitimate tax benefits.
Set Completion Dates for Wealth TrackingHere are some examples I have set for wealth tracking on which I take imperfect action:
- Calculate cash flow by the 8th day of the following month.
- Update net worth quarterly or after any major change.
- Complete the Income Statement from our small businesses and real estate by the 10th day of the new month.
Calculate Your Cash Flow MonthlyCash flow is the amount of cash flowing in and out of your accounts. It can almost always be improved. You can calculate your cash flow on an app or with a spreadsheet. There are many popular apps to track the amount of money that flows in and out of your accounts each month. For right now, I am holding onto my simple spreadsheet by downloading from the financial firms we use. This wealth building step is pure gold. It provides the foundation for so many aspects of wealth building because it tells you how much income you’ll need to sustain your current standard of living each month. Plus, it provides the basis for prioritizing and evaluation.
Tweak Your Monthly Cash FlowThere is almost always ways to improve cash flow. Challenge yourself to lower your expenses by 20% with your goals and priorities in mind, for example. Challenge yourself to increase your income by 20%. (More on this later.) Think of how much this wealth building step will affect your ability to grow more wealth.
Buy Used Cars with CashThis is one of my favorite ways to increase cash flow and add to wealth with no work: Buy gently used cars. Over a few decades, the increased savings can compound to well over $200,000.
Buy Used High Ticket ItemsIs there any reason you need a new diamond, a new boat, or a new dining table? My used high end purchases have included a watch (it starts with an “R”, but I can’t mention the brand here for legal reasons), an antique French farm table, estate diamonds, handmade cowgirl boots, and several used boats. I enjoyed them even more since I knew I could sell them for close to what I paid for them, if not more.
Stretch the Amount of Money You Put Aside to GrowNow that you know your monthly cash flow, and have tweaked your cash flow, put aside as much as you can to grow. This may or may not mean that you automatically plop the money into a stock fund of some sort along with your other investments. It means that you have this additional money invest from a wide variety of options based on the best opportunity at the time. (More later.)
Consider DownsizingDownsizing is a great way to increase cash flow significantly. Considerations are lower electric bills, lower lawn bills, lower taxes and a lower mortgage. Many empty nesters and baby boomers are taking advantage of this wealth building step. Extra benefits are that there’s less upkeep and clutter in smaller homes.
Consider the Future Value of An ExpenseSpending another $10,000 on your car can become $25,000 in a few years after investing and compounding. Don’t think of how much something cost today. Instead, the of the amount of the future value of your money after compounding and growing.
Keep Your Credit Score HighA higher credit score lowers the cost of borrowing. It also lowers insurance costs. Challenge yourself to the next level up within three months. This wealth building step is often overlooked because it is associated with consumer debt which most smart wealth builders avoid, but a high credit score saves money.
Plan to ProsperAlmost every conversation around money is scarcity based. Earlier money mistakes haunt us for lifetimes. Ancestral money beliefs can sabotage us for life. Instead of hanging on to all this irrelevant negativity, plan to prosper. What if it all goes right? What if you learn what you need to learn, and take the steps to build wealth? Look around you at all the hugely successful people. While most people don’t succeed, many do. Given the availability of information via the internet, the ability to create small businesses without any capital, and low unemployment, the opportunities to build wealth have never been better.
Learn from Your Money MistakesIf the brains at Lehman Brothers made mistakes that caused the entire company to fold, and contribute to the worst recession ever, I figure I am going to probably make a few mistakes with my money too, and I sure have. We learn the most from our mistakes. They are simply learning opportunities.
- Bear markets teach us how to prepare and prosper form the next bear market.
- Not investing well teaches us how to invest well.
- Following the wrong investment advice teaches us how to find and follow the right investment advice.
Drop Victim MentalityWhose fault is it you’re not where you want to be financially right now? Is it your boss’s fault, the company’s fault, your ex-husband or wife’s fault, your last financial advisor’s fault or the government’s fault? Once you own responsibility for exactly where you are, you can get where you want to be. This is the first wealth building step.
Choose How to Use Your TimeImplementing many of these wealth building steps will require time. It takes time to track your money, research, choose investments, and manage investments. If having wealth is important to you, you’ll find time to manage it.
View Wealth Management as A PrivilegeManaging your money is both a responsibility and a privilege. Instead of seeing taxing financial chores, and intimidating investing data, see the privilege of having wealth to manage. It is that, indeed. Once accepted, you’re good to go.
Know the Value Of Your Time and Delegate AccordinglyDo you feel like you don’t have time to manage your wealth? What is the value of your money compared to other things are you doing? What can you delegate to free a few hours to create and manage wealth? What is the value of your time? Divide what you earn by the number of hours it takes. Consider delegating any tasks that can be outsourced for less than your hourly earnings power. Great things to delegate are errands, lawn work, housekeeping, and grocery shopping.
Create an Account for TaxesIf you’re an entrepreneur, like me, or have unpredictable earnings, create a special account for tax money you’ll owe within the year.
Brainstorm How To Build Wealth At Least Once A QuarterThis is one of the most powerful wealth building steps. It gets you out of limited thinking. Wealth brainstorming is the foundation for concrete plans that lead to wealth creation.
Keep One Or More Highly Marketable SkillsKeeping a marketable skills is one of the best wealth building steps because it keeps you prepared for unexpected loss of income. This reduces your overall financial risk. it also allows you to increase income after you’re retired from an official day job. Now, it’s easy to learn highly marketable skills now from online training or courses. For example, related things I’ve done online include getting an Accredited Financial Counselor® designation, online college courses, mastered selling covered calls, and improved my investing knowledge and skills significantly. Other things I have learned online have been how to build a website, how to plan, launch and run online businesses, how to launch and run an Amazon store, how to start a YouTube channel for business, and how to do online marketing. This adventure has led to job offers, an unsolicited funding offer, consulting, hosting paid workshops, and I share openly for the first time, millions of dollars of revenue over the years to support our family. I share this not to brag but to show you that you can do almost anything you want to do now. The opportunities are unprecedented. If I can do this after age 50, trust me, you can do this if you should choose.
Understand Recency BiasPeople remember what has happened lately and expect it to keep happening. This is such a common belief that it has a name, recency bias. Look back to probability and certainty instead of what’s happened lately. It’s easy to follow common logic. It’s everywhere, especially now, with 24/7 media. All those same minds that love overvalued stocks and real estate will hate both when they are cheap quality assets. Baron Rothschild said, “The time to buy is when there’s blood in the streets.” Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful” Step back and remember that things change eventually. While I have learned that trends last longer than you think they will, they go back to the norm. Just because something has happened lately doesn’t mean it will keep happening forever. Most of the tribe forgets this. Step outside the tribe. There are incredible opportunities in this insight.
Create Measurable Goals for Net WorthAgain, many people avoid this important wealth building step because they don’t know something for sure. Start with your long term life desires. Back into measurable time frames that you can work toward.
Wealth Building Steps Part One – SummaryThere have been three major elements of the wealth building steps in this post. 1. Everyone loves the excitement of stocks. Yet taking simple and often repetitive steps are an integral part of creating and keeping wealth. 2. Having the right mindset for anything is the first wealth building step. 3. An opportunity mindset can build wealth without a lot of effort beyond awareness. In my upcoming Wealth Building Steps Part Two post I will focus on investing lessons and strategies I have learned over the years.
The information on this website is for education only and is not to be construed as personal financial advice.