An older businessman once asked a young associate what the term “financial independence” meant to him. The young man thought a moment, then replied, “It’s when your paycheck is always enough to take care of your expenses.” The older man smiled and shook his head. “Financial independence,” he said, “is when it doesn’t matter whether you get a paycheck or not.”
In a consumer-driven culture such as ours, it is easy to confuse the ability to pay for things with being wealthy. The problem is, too many people focus on the appearance of wealth rather than what truly makes for building significant, generational wealth. However, there are certain principles that are known and practiced by the truly wealthy that can help someone who is really determined get on the path to build wealth.
Start with a “wealth mindset.”
Every person who has built significant wealth started with a plan. They created goals, identified the steps needed to achieve the goals, and put the plan into action. They also developed discipline around their finances; resisting the urge for instant gratification, they instead trained themselves to prioritize longer-term goals. They also exercised wise choices consistently over time rather than impulsively chasing get-rich-quick fads or trends that weren’t synchronized with their fundamental strategy.
Saving is necessary—but not enough.
It seems obvious that in order to begin accumulating wealth, one must learn to spend less than one earns. And it is certainly true that most wealthy people have developed the habit of thrift and sticking to a budget. But just putting money away in savings will not, by itself, lead to the accumulation of wealth. For one thing, funds in a typical savings account will not earn enough interest to keep pace with inflation—much less outperform it—over the long haul. So, while socking away a part of your income in savings each month is a good idea, you’ll need to take some next steps in order to build wealth.
Building wealth requires a commitment to invest.
At a certain point, every person who has built significant wealth had to make a decision to devote resources aimed at generating a significant result. These could be financial resources, such as those invested in a company to get an idea off the ground. It could be intellectual resources, such as that required to put in place an innovative idea or product. Most often, building wealth requires a combination of both of the above types of resources, along with the resolve to see the effort through to completion.
Gain an income stream independent of your employment.
Eventually, in order to build real wealth, you will need an income stream that is not dependent on your direct effort. This principle goes back to the quote from the older businessman at the beginning of the article. Ultimately, the wealthy are not dependent on a monthly paycheck for their financial well being. Rather, they have deployed the money they have earned in order to secure income-producing assets that can then begin generating additional revenue. Whether with passive income from real estate, dividends and capital gains from equity holdings, or some other method, true wealth generation requires self-sustaining assets that can grow over time and produce additional income for the owner. Over the years, this type of accumulation can become something that can outlive the original owner and provide a secure financial foundation for future generations. And by the way, the commitment mentioned in item #3 is an integral driver for securing and maintaining this type of “second-stream” income.
Keep a tight rein on debt.
The number-one obstacle most Americans face in reaching financial security is carrying too much debt—or, perhaps more accurately, too much of the wrong kind of debt. Some types of debt—the mortgage on your home, for example—can actually be beneficial, because they allow you to control an asset that will often increase in value faster than the increase in the debt. But other types of debt—especially credit cards—typically do little more than sap your cash flow and limit your ability to allocate your money more advantageously. The wealthy are careful in their use of debt, and most avoid it whenever possible.
The truly wealthy consider the tax consequences of most financial decisions. They have learned that taxation has the potential to be a constant drag on their wealth-building progress. They understand their tax exposure in matters like capital gains from selling successful investments, income taxes on wages, estate taxes on transfers of wealth to heirs, and all the other ways in which taxes can affect their wealth. They utilize tax-efficient strategies when they invest, when they sell, and in all their strategic planning.
One of the most helpful things anyone can do if they want to adopt a “wealth mindset” is obtain the services of a qualified, professional, fiduciary financial planner and wealth manager. At The Planning Center, we apply our knowledge, experience, and research to each client’s specific situation in order to develop a customized plan for building, growing, maintaining, and managing wealth. To learn more, visit our website to read our article, “When Should You Review Your Estate Plan? Six Examples.”