What makes a person “wealthy”? Is it a 6-figure income? Is it $1,000,000 in investments? Those are both great accomplishments, but they certainly do not tell the whole story.
What if you made $200,000 a year, but spent $250,000? What if you had $1,000,000 in investments but had a negative net worth due to debts. Are you still wealthy in these cases?
Let’s talk about wealth in a different way!
What if all your bills were paid, you lived debt-free and could travel when you wanted. You had endless financial options and never had to worry about not having enough money.
That sounds like a wealthier lifestyle worth pursuing.
Notice in the second scenario no dollar amount was mentioned.
That’s because wealth is not a number in the bank. Wealth is about creating flexibility, financial options, and being independent from debt that doesn’t serve you. You can’t achieve financial independence when you have creditors, regardless of what’s in the bank. Income to debt ratio is much more important in calculating wealth than a simple number in a bank. If that’s all that mattered, creditors would only look at what we made and never bother with a credit report.
Working with people from various economic backgrounds I have seen a wide array of situations. Some have an impressive investment portfolio when we begin. Some are just starting out on their financial journey. But what they all understand is that by delaying gratification—not purchasing everything you want, the moment you want it—you can build wealth for your future.
- Set up good spending habits and don’t spend more than you earn
- Create financial goals for yourself
- Invest smartly in diversified investments that fit your age and risk tolerance
- Prioritize savings
- Examine your progress toward your goals and readjust accordingly
Then you too CAN achieve wealth!
Establish Good Spending Habits (aka don’t spend more than you earn)
This is the first step to creating wealth and it’s a simple one. Notice we didn’t use the word easy. The concept is simple, but delaying gratification isn’t easy for everyone. The level of difficulty in doing so depends on your personality, level of discipline, and attitude toward money.
No matter what your salary, you will never build wealth if you spend more than you make. Wealth is an equation partially based on what comes in and what goes out.
If you buy everything you want, when you want it, it will be difficult to build wealth unless you have penny tastes and a caviar spending account. Still, spending adds up. Prioritize your spending and never spend more than you make.
Create Financial Goals for Yourself
If you’re going on vacation—and there’s somewhere specific you want to go, like Disneyland—you’ll figure out how to get there. You’ll map it out or use your phone/GPS. That way you can track how far away you are. If this vacation is important to you, you would not leave directions to chance. You wouldn’t expect to simply stumble across Disney by driving in a southerly direction.
Yet so many people make that mistake when saving for retirement or other financial goals. Without a specific goal, you can’t figure out if you’re on track to get there. Also, “saving for retirement” is not a specific goal. Saving $500,000 for retirement over the next 20 years is. You need a goal that is measurable and defined in time.
Most people need short-term and long-term financial goals. Each of these goals should be personalized to your life.
Invest Smartly in Diversified Investments That Fit Your Age and Risk Tolerance
The old saying “Don’t put all your eggs in one basket,” could’ve been coined by a financial advisor. A healthy investment portfolio is one that is diversified. That way if a company or industry has a financial setback you won’t feel an unequal financial burden and lose everything you’ve invested.
You should also diversify based on your age or the nearness of the financial goal you are trying to achieve. For instance, if you are 25 and want to save for retirement at age 65, you have 40 years to save. You can afford to make more risky investments initially. If your financial goal is saving for your children’s college education and they are on the brink of high school, you don’t want to risk everything in volatile (albeit often lucrative) investments because you will need the money in a few years. A financial advisor will help you with that balance according to your goals and your deadlines.
Your expenses and spending when subtracted from your salary (and other income) should allow for at least 20% of your income to go toward savings. I suggest creating savings accounts for (emergencies) now and retirement so 20% is just a beginning number.
First, put money away in an accessible savings account for emergencies. Some financial advisors will suggest between $5,000-$10,000 in your savings account. Others say three months of household operating expenses. Determining the appropriate level is partly a financial consideration and another part personal preference and comfort.
The best thing when it comes to savings is to start saving something. $1,000 may not keep you in your home but it will keep food on the table. Start saving now even if it’s just a few dollars. An advisor can help you come up with a comfortable number later to achieve your goals but for now, start.
Some people refer to this type of savings as a rainy-day savings account. But you want to be disciplined enough to know the difference between sprinkling and torrential rain. Your rainy-day emergency fund should not cover the “emergency” of wanting to go out to dinner. This account is for emergencies that you had no way of saving for such as an emergency medical test or accident.
The other type of savings account you want is for your savings goals, long-term or short-term. These could include saving for a vacation home, retirement, a wedding, or any number of life events or goals you know about ahead of time. They could be short in duration like a family vacation or long-term like retirement. These savings accounts and the vehicles needed to get you there will depend largely on the amounts and the time you have before you want to use them.
Many people think about a dream vacation and purchase first, worrying about paying for it later. Building wealth means keeping your debt low. It requires forward-thinking and planning, not reactive dealing with a built up debt situation. While this type of financial discipline can feel uncomfortable at first, it requires no more willpower than making healthy food choices. It all comes down to how much you want to feel the positive impacts of good decisions.
Building wealth is about implementing little sacrifices today so that you can enjoy big rewards later.
Prioritizing savings is one of the ways that you can do that.
Examine Your Progress Towards Your Goals and Readjust Accordingly
If you’ve ever invested, you know the market can be volatile in the short run. Even real estate can go up and down over the course of a few months. That’s why a financial plan is never a “set it and forget it” activity. You must monitor your investments and adjust accordingly based on your changing goals and investment vehicles/returns. For instance, you may have been saving for a vacation home with a certain percentage down in mind. Now real estate has skyrocketed in your desired area. You will need to revisit your savings and investment strategy or readjust your timeline or purchase area. If you are saving for retirement, you will adjust your risk level as you age and get closer to needing that money.
Watching and readjusting can take a considerable amount of time and dedication. That’s one reason why some people prefer to work with a financial advisor, leaving the monitoring and adjusting to a professional.
Building Wealth One Step at a Time
Those are just a few of the steps to making progress toward a future where you can enjoy financial options. As the old saying goes, the best time to plant a tree was yesterday. The second best is today. While it’s best to start building a wealth plan when you’re young, don’t tell yourself it’s too late. Starting later just means a little more sacrifice and hustle are required.
What do you do when you want to get in shape and it’s difficult? You speak with someone who can assess your current situation and recommend a plan to get you to your goal.
If you want to build wealth, seeing a professional is the easiest and quickest way to find a path to success. Sure, it can be done on your own, but it requires a lot of research on planning and investment strategies. Your time is a valuable resource. Do you want to pay yourself (in time that you could be doing something else) to learn about how to build your wealth or work with a professional who can guide you from day one.
When finances are limited, so are your options. A few good habits and simple goal setting now can give you financial freedom in the future. Wealth, or true financial independence, is within everyone’s ultimate goal. You just need someone to show you how to get there and help you to commit to the process.
Contact Crest Wealth Advisors today to learn how you can put yourself on the path to achieving a wealthy life. Schedule A Call.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.