Having spent the year so far encouraging you to observe and control your earning, spending and saving, it is only fair now to ask you the direct question – are you building wealth?
Although everyone may not become a millionaire, everyone has the capacity to become wealthy. Wealthy in this case is defined as having accumulated enough savings and investments that there is no longer the need to earn through work in order to maintain the normal lifestyle.
For example, you may be a millionaire and yet not be assessed as wealthy, based on this same benchmark. In such cases, the million you do have cannot support you in the long term at the level of consumption in the lifestyle to which you have grown accustomed. Simply put, a rich man (a man with lots of assets) is not necessarily a wealthy man.
Successful celebrities who crash and burn financially during their lifetimes are prime examples. How is it possible that one can earn multimillions during the heyday of one’s careers and end up in debt and poverty during their lifetime? It is virtually impossible to imagine . . . but it is a too-familiar report in the tabloids.
You may ask: Why are you not well off and comfortable in spite of earning an “adequate” income? Maybe you are spending too much, rather than saving and investing. Material goods are depreciating assets. Financial assets are generally appreciating assets.
When next you are tempted to buy that shiny new convertible car or SUV, consider that you are about to exchange your financial assets with the dealer for a depreciating asset.
Using the analogy of seeing your earnings as being poured into a glass and of you controlling how this liquid flows in and out of the glass, you are pouring your wealth from your glass into the dealer’s glass.
By spending for consumption, the liquid/cash escapes from your glass and by saving you keep your liquid/cash in your glass.
It is not surprising that the research shows auctioneers in the United States have a higher number of millionaires in their grouping than any other working group. Auctioneers truly appreciate the liquidation value of depreciable assets and tend to place their funds in more sound investments. Placing more of your savings and investments in appreciating assets, and so reducing your consumption of what you earn, is recommended.
A relatively sure-fire way of building wealth is to save/invest no less than 10 per cent of your before-tax monthly income every month. Such savings need to be in relatively low-risk investments that offer a yield of at least 4 per cent over the investment period and need not be all in cash. For example, Paying Yourself First is a potent spending system that forces you to live on what is left.
The 10 per cent saved on this basis may be used to build equity in a mortgage, increase the investment in a retirement plan, build up the value in an endowment insurance policy as well as saved as cash deposits. Once wealth is build up in this way, the beauty is that it is possible to live off the earnings of your investment and yet be in a position to leave a reasonable legacy with the same capital base.
Another important key to wealth building is to spend more time planning, budgeting and assessing one’s overall finances along the way. The more detailed the plan and budget, the better.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
