What does it take to build and sustain wealth today? To answer this question, you must first define what exactly wealth means to you? What role does it play as you look forward to tomorrow? There are no right or wrong answers, each investor may have their own unique definition on what wealth means to them. Setting aside time to consider this question and thinking of all possibilities is the first step. This leads to clarity of purpose with the resources you have and what you desire to grow.
So, what does wealth look like? It may include company stock, retirement accounts, equity in a business, or cash in the bank. Others view wealth as their personal residence, a vacation home, or perhaps collectables. Some investors work and save for wealth while others may inherit it from a loved one. Wealth may be visible or invisible. Some wealth may be given away to do good for others. Other wealth might be retained so it may accrete over time. Wealth may be what you want it to be.
Wealth is not income though, the two are often confused with one another. Income may act as a catalyst to increase wealth if a plan is present and there is enough “left over” after essential spending. Incomes at all levels are easily consumed today partly due to the difficulty in picturing what tomorrow may look like. Setting aside a portion of your income in advance, often though automation, may allow wealth to take shape. It’s no surprise that many individuals and families have accumulated a majority of their wealth in two areas by using automation. This includes employer retirement plans and a home. Pre-tax or Roth contributions to your 401k or Thrift Savings plan take place first before your paycheck arrives in your checking account. A mortgage payment is required every month, shrinking the debt until it’s paid off. Both approaches require income to make contributions or monthly payments as this forced savings tends to increase one’s wealth over time.
What other inputs in your control may assist with building wealth as you define it?
Allocating enough time for your wealth to grow makes an impact. It’s human nature to be impatient as we often seek results faster than they arrive. This may be witnessed by all the investment trading taking place daily. Then it’s easy to believe that jumping in or out of investments is necessary to grow wealth. It may be difficult at times to sit still instead of attempting to influence outcomes largely out of our control. Sustainable wealth takes patience, a plan, and a repeatable process. This systematic approach should be revisited annually to gauge progress and make adjustments. Redefining expectations on time from quarterly or annual periods to decades is not simple. What happens today will not likely impact your wealth as much as what happens in the next ten years or beyond. Uninterrupted time is best as it allows wealth to compound.
Another controllable to some extent is avoiding losses if possible. Having ample resources so you are not forced to sell or liquidate at a loss is critical to sustaining wealth. We can’t control what happens today or tomorrow, but we may position our wealth in a manner that allows us to avoid reacting at the wrong time. One reaction may erase years of capital. The best way to avoid reacting is to continuously act on a plan. This plan may provide direction and purpose in what you are building. The act of planning may also allow you to you pause, just long enough to take a breath and think before reacting to what’s happening now.
Maintaining flexibility in your approach to building wealth is critical. Rarely does wealth move in a straight line as it contracts and expands. Loosening your grip and surrendering some control may allow wealth to take different shapes as time passes.
Defining what “enough” wealth means to you is important and in your control. Without the above plan the default setting of “more” may take over. More is dangerous as it may lead to taking unnecessary risk or concentrating on one idea to increase wealth. When the spotlight shines on a singular approach or transaction things begin to look like a bet. This speculation is not investing and rarely ends well. All of this may be avoided by quantifying what enough wealth means today and what it may look like in the future.
Creating your definition of wealth is the first step. How your definition fits into a plan around what you want takes ongoing planning. If you’d like to learn more or seek a second opinion, we’d be happy to chat with you.