Wealth Building From a Financial Planner's View
In this article I’ll break down what I believe to be the 10 fundamentals of wealth building as a financial planner. I’ve distilled these lessons from meeting and working with individuals who most people would consider either wealthy or actively building wealth. I’ve compiled some of the most common principles I’ve seen from them, of course some of these lessons are from learning from my mistakes.
Do any of these 10 signs apply to you? It may mean that you are well on your way to becoming a successful wealth builder.
- Wealth builders define what wealth means to them.
- Wealth builders focus on what you can control and what matters the most to you.
- Wealth builders understand the difference between saving and investing.
- Wealth builders understand inflation and how it makes people poorer.
- Wealth builders understand compounding to and make it work for their benefit instead of against them.
- Wealth builders understand and manage their behavior when dealing with finances.
- Wealth builders understand and manage risk.
- Wealth builders are owners.
- Wealth builders diversify.
- Wealth Builders take an integrated and holistic approach.
1. Wealth builders define what wealth means to them.
The First thing you need to do when building wealth is create your own definition of wealth. Wealth is not about stocks or bonds or RRSPs and TFSAs.
Wealth building is, for the most part, a long term process…so it’s super easy to lose track and feel discouraged and drift away from your goals if you don’t have a clear scoring system.
Defining what wealth means to you will give you a personal compass. What I can tell you is that when we take the time to really dig deep into our own situation we all have different ways of defining wealth. We all have different moments where we can say “look ma I made it” We also have different starting points.
2. Wealth builders focus on what you can control and what matters the most to you.
You need to focus when you’re managing your finances trying to grow your wealth. There are going to be so many shiny objects and great opportunities that would distract you.
There will also be inherent challenges, maybe even mistakes along the way, but you have to exercise focus on the right things. Carl Richards made this famous Venn diagram.
That when building wealth, there is a small intersection between the things that matter to us and the things that we can control. Outside of those things, it just becomes a cause of worry and anxiety. You can’t really control the government or the stock market but, you can control how much you spend, and how much you save and invest every month. You can control who you listen to whether you drown yourself in fear because of the financial media or learn to analyze information yourself. You can control your costs to invest. You have some influence on how your investments are taxed by choosing the right accounts, but you can’t change who’s in power and what their tax agenda is.
3. Wealth builders understand the difference between saving and investing.
You need to understand the difference between savings and investing. Yes there is a difference, the act of saving, allows you to have money to invest. But beyond that there are also major differences in why you would save vs invest. I’ve heard countless gurus scream “cash is trash” you shouldn’t be saving, because you’re missing out on the gains. Real estate is the best, bitcoin, options, gold, forex is the best investment, you don’t need to have cash. But, if you just remember that savings is for protection and opportunity while investing is for growth you’ll know when to save and when to invest.
4. Wealth builders understand inflation and how it makes people poorer.
Understand that inflation is making all of us poorer every day. Inflation is the slow erosion of your money’s value over time.
When you just save and stash cash, inflation is taking little nibbles on your money. The best example for this is the toonie Tuesday meals when I was in high school changed to the 5 dollar fill-up. Even if I saved the same 3 dollars from 10 years ago, I would not be able to buy the same meal because things got more expensive.
So saving cash, and not letting it grow, results in you getting poorer because you can buy less and less with the same amount of money. Inflation has been at 2-3% every year historically, so if you got a 2% return on a savings account, you’re actually just breaking even.
5. Wealth builders understand compounding to and make it work for their benefit instead of against them.
You must understand compounding!
There’s a legend that says Albert Einstein called Compound interest both the 8th wonder of the world and mankind’s, greatest invention.
While there is little evidence proving that, compounding is truly a powerful ally and a terrible enemy when it goes against you. Compounding is your money, making money and that new money makes you more money. again and again. When you rack up debts, it’s the opposite, the money you owe, requires more payments, and that additional payment requires more payments.
The part that confuses most people is that it takes a long time for compounding to look significant enough to warrant attention. Your investments slowly grow. Just as your debt slowly accumulates and doesn’t look like there is much to worry about.
6. Wealth builders understand and manage their behavior when dealing with finances.
You need to learn to be in control of your behaviour! You are your biggest asset and liability. Behavioural economics has grown in recognition recently, it’s the area of finance that admits we are not perfectly logical decision makers.
Richard Thaler, one of the founders of behavioural economics won a nobel prize for his work on merging the science of psychology and how we make financial decisions. To put it simply, it’s money management for actual human beings.
For the most part, the studies prove that we are naturally sucky investors, so if you made some bad calls in the past, I give you permission to blame it on evolution. But I can’t give you a free pass if you didn’t learn from that and continue to make the same mistakes.
Managing your behaviour isn’t removing emotions, because that’s not possible without brain surgery. It’s understanding that we are prone to make some poor decisions and create plans around them. Like removing snacks from your office, when you’re shooting videos for youtube because you just can’t help yourself. Or leaving your car at home before going to a party so you’re not tempted to drink and drive.
There are behavioural tricks that could nudge you to make better choices for your money, and it all starts knowing more about how we all tend to misbehave.
7. Wealth builders understand and manage risk
Minimize Your Risk. No discussion about wealth building or investing is complete without bringing up risk.
We often hear “risk is part of the reward” or “the higher the risk, the higher the reward”. While there is some truth to that, you hear it so much that it feels jaded. In financial terms, risk is the probability that the outcome is different from the expected result. It’s a terrible definition because technically jumping out of a plane mid-flight without a parachute is a low-risk activity, since we are fairly certain of the outcome.
Most people only think of risk as the portfolio balance going down, let’s refine how we see risk.
Risk is the effect of uncertainty on objectives.
So we have to look at how an event would cause us to fail on our financial goals. Some things you worry about and see as risky may not actually have any impact on your wealth because you are still going to hit your goal. Short term stock market volatility may cause uncertainty, but if your financial plan allows for that, it may not have any impact on your financial goals and wealth building.
Because it’s unproductive to remove all risks, not to mention impossible. Understanding what risks you have the capacity to take on and the risks you can’t sustain and would blow up your finances would be the first step, managing the things that would be catastrophic to your life would be the first on the list.
Consider be the risk of disability and being unable to work, the risk of an early death or severe illness or the risk of unemployment, majority of these would have a deeper impact on your personal life than a 10% decline to the market.
8. Wealth builders are owners.
You need to have equity, owners get paid more than lenders. Early in my career I only saw equity as stocks and funds, but the more serious I got about building wealth and meeting others like me, that definition expanded.
In fact, if you think about it most of the rich people you know, probably have some business stake or some real estate holding. In fact, I believe that one of the quickest ways to build wealth is by owning a successful business.
Think of Dave Ramsey, I look up to Dave, highly intelligent and gives practical advice. BUT he didn’t build his wealth from saving and paying off all debts. He got truly wealthy because he runs Ramsey Solutions, it’s an educational and media company.
If you have no entrepreneurial aspirations then you can still be an owner by purchasing shares in companies, you become a part-owner. As an owner, you benefit when the value of the things you own increases over time. Yes this means more uncertainty than saving with GICs or your bank account but it’s less risky because it has the highest probability of you achieving your long term goals such as retirement.
9. Wealth builders diversify.
You must diversify. There is no such thing as the best investment. There is no magic bullet. We can never know the top-performing asset any given year, some years, cash could be the top performer.
Holding all of your investments in one stock or one share could theoretically lead to high returns but, more often than not, a terrible idea. Yes, there are the Teslas, the Ubers, The Googles and the Apples. There will always be “can you imagine how much you’d have if you bought when the company was just getting started?”
But there are also the Enrons, the Research In Motions and the WeWork’s. So you must understand that even if you get lucky, putting all your eggs in one basket is a terrible idea, because it’s highly unlikely that you would be able to sustain the volatility of a highly concentrated investment position.
10. Wealth Builders take an integrated and holistic approach.
You must integrate your life goals and financial goals with your decisions. You can’t simply focus on reducing your spending so you can save and forget to invest it or to manage your risks when you are investing.
If extreme savings deprives your life today, that may not be sustainable. So even if you have a quick win, you may find yourself yo-yoing back to where you were in your financial affairs. The way around this is by creating a plan that allows you to put what you value in the center and building around that.
All of these previous points must be integrated together; this is when a financial plan comes in handy. By creating a comprehensive financial plan, you can see how the decisions you make on one aspect of your life impacts the others.
So that’s my top ten fundamental points that wealth builders tend to share.
Notice that there were no specific strategies like RRSP’s vs TFSAs or Paying Debt Vs. Investing. That’s’ because I wanted to lay the foundation instead of getting into specific technical areas.
Feel free to explore other articles for more technical “how-tos” and overall information.