Introduction: What is Wealth?
The traditional definition of “Wealth” is the quality of life that a person can enjoy, which can be measured in terms of material possessions and financial stability. But the InSight definition is more inclusive. We think “Wealth” is the lasting capacity for something to generate value. This means cash-flow-producing assets. This means your health, investments, age, and behaviors that are accretive to income creation are all part of “Wealth Building.” Leveraging as many of those different channels, at a high level, for as long as possible.
Wealth is a term that is often used to describe the accumulation of assets, such as money and property. Wealth is also often used to describe people who have achieved significant success in their careers or other aspects of their life. What is missing in the traditional concept of wealth, and something our clients understand is that Wealth is not a snapshot of your assets, it is the expectation that those current assets have the potential to create future incomes that support your goals.
Themes and Topics for Building Wealth
In this section, we will explore various topics that one needs to know in order to build wealth.
The first step is to have a plan for what you want your money for. It could be for a car, a home, or retirement. You will need to have an idea of what you want your money to do for you in order to make it work.
Next, you need to set goals and track your progress with specific steps toward achieving those goals. For example, if your goal is $1 million dollars by the age of 30, then you need to set milestones on how much you should save each month and how much interest it should earn each month in order to reach that goal by the desired date.
Finally, there are many ways that one can invest their money such as stocks and bonds, but there are also other options such as real estate investing or starting a business. You may be interested in exploring these avenues depending on what type of Wealth you are looking to create. The key to all of this is the understanding that these investments (of time and money) should have the ability to generate cash flow at the desired rate.
Once you have created the “model” for how you plan to build wealth, it’s time to move on to the tool for executing your plan.
Understanding Your Worth and Creating an Annual Budget
A budget is a plan for the future that helps you to know what your income and expenses will be and how much money you have available at any given time. For many, it can be a very useful tool for making sure that your spending matches up with what you earn. But the limitation is that budget “drafts” rarely become lived out in a family’s financial habits. Budgets are a fine start, but it’s a traditional approach to finance that simply fails over time because the equation is wrong:
Income – Budget = Savings
We try to coach clients to pivot inversely. Instead of crafting a budget to find savings, craft a savings plan that results in a budget. This puts the most important wealth-generating number (savings) early in the equation. Because we shift that focus and take care of first things first – the budget – which might still be important, is less mission-critical to the success of the financial plan. Our clients think:
Income – Savings = Budget
Creating an annual budget is a good way to keep track of your spending, set goals, and make sure that your spending is deliberate. But it’s not a good way to drive your worth and execute a financial plan. A change in the budget mindset is key to long-term success.
Achieving Financial Goals For Yourself
Setting financial goals is an important step in achieving your goals. We think clients should “dream big” and “be honest.” We don’t think those are opposites because we have seen that through planning a financial goal setting they can work cooperatively.
- What are your current financial goals?
- What are your long-term financial goals?
- How much money do you want to make in a year?
- What is your desired lifestyle?
It is pivotal that these expectations for your long-term wealth are established early. A financial goal can be a great way to start living the life you want. Financial goals are not just about getting rich, they are about having the freedom to do what you want.
A pair of long-term habits to master are 1) reinvestment and 2) automation – we coach our clients to get comfortable with these concepts:
Understanding Money Management Basics and How To Save and Invest Wisely
Before you can master your financial goals, it is important to understand how compounding interest works.
Reinvestment – Compounding interest is when the interest that has been earned in a period of time gets added to the principal sum, and then earns more interest on that sum. It’s when your money starts making money for you! This is the same as reinvestment. We focus on coaching clients to view their portfolios as a collection of assets that generate cash flow. That cash flow is then reinvested routinely and programmatically. This means that when markets are “down” they are buying new “cashflow” cheaper – then as the market rises, they are selling “cashflow” when it’s overpriced.
Automation – Financial goals are important to set. You need to know what you want to save for and how much you need to save on a monthly basis. There are many ways you can automate your savings and make sure that your money is going toward the things you want it to go towards.
One way is through your corporate payroll. Your payroll system will automatically withdraw a certain amount of money from your paycheck every month and put it in the brokerage account so that it can be invested. It’s one of the easiest ways to automate savings because it doesn’t require any work on your part after setting up the account.
Saving For Emergencies and Retirement Planning
When you are saving for emergencies, you should be thinking about how much money you need to get by over a given amount of time. More conservative people or those with high unemployment risk will set aside 6-12 months of core expenses to prepare for this financial risk.
Less risk-averse and those with little to no unemployment risk can lower both the amount and time for which they are prepared. All financially prepared families have an emergency fund.
Having an emergency fund is risk management. Both for the financial event that you need those funds for, like unemployment or illness, but also for the broader portfolio. Assuming your retirement “nest egg” is also your emergency fund is a mistake – because this creates the conditions for an unforeseen financial disaster to spread into your retirement or financial plan. The emergency fund should be viewed as a triage for that setback and space to absorb the impact.