Building foundations for wealth
Wealth is created in a limited number of ways, and great wealth – as everyone knows – is very limited indeed.
Typically, great wealth is derived from 1) ownership of large amounts of land and/or other valuable assets 2) inheritance of land and/or other assets 3) entrepreneurship. In recent years, great wealth is also created – quite simply – by obtaining a c-suite position in virtually any industry or service sector in the world. And of course enjoying long tenure in the lucrative financial industry.
Jamie Dimon, the CEO of JP Morgan, is the first career financier to earn US$1 billion over the course of his career, equivalent to more than the GDP of a small country such as Vanuatu.
So for those (a) not currently in possession of a lot of land or other property, (b) not likely to inherit a fortune, and (c) not about to hold a c-suite position, how does wealth creation begin?
Clearly the option for becoming an entrepreneur is always there – and virtually at any age. In so many ways, entrepreneurship is the best route to take because it creates jobs, and creates a great product or service. It is financially rewarding, and the entrepreneur is often given huge tax advantages. Almost without exception, it contributes positively to society, and is a boost to innovation. But not everyone is suited for entrepreneurship, which requires a good idea, and the determination to monetize that idea.
If you are not the entrepreneurial type, what can you do to create and preserve wealth for you, and for your family? Before the Great Financial Crisis, interest rates were in a more ‘normal’ cycle. This meant that most people could save relatively easily for a deposit on a home, a college education, and retirees and pensioners could could count on their savings generating more money.
Interest rates are now at extremely low levels, ranging from negative (in Japan and Switzerland for example) to a mere single-digits (in New Zealand). Nevertheless, savings plays an absolutely crucial role in the basics of wealth creation.
It may seem very old-fashioned in the high speed world we now live in: setting goals, putting together a budget, and then carrying out a disciplined approach to achieving the goals through the budget. But this is still one of the most reliable ways to begin creating wealth.
Here are some steps that we recommend you take to start your wealth creation journey:
1. Goal setting
Step 1: Decide what lifestyle you want
Step 2: Research the costs to maintain that lifestyle
Step 3: Identify all sources of income
Step 4: Identify categories of expenses such as rent/mortgage, food, subscriptions (including cable and internet), entertainment, auto, utilities, etc.
Step 5: Ask whether it is possible to save at least 20% of your gross monthly or annual income. If it is not possible to sustain the lifestyle you want on your income, set your priorities, and reconfigure accordingly
Step 6: Establish a procedure for collecting and saving all receipts for all purchases. If you use credit or debit cards, try to use one debit and/or card for all living expenses and another credit card for all other expenses. Credit cards should be used for as many payments as possible on the condition that the balances are paid-off in full each month before any interest becomes payable.
Likewise, it is a good idea to use a separate debit or credit card for all business related expenses.
At least twice each month, enter expenses into some tracking software or spreadsheet. Stay within the financial confines of your budget.
Step 7: When your income for the month is at its maximum, which is usually immediately after you get your paycheck or fee income, 20% must be automatically transferred to a separate savings account. This “expense” must be prioritized right after rent, food and health expenditures. All other expenses can be reduced in order to ensure that 20% savings fits into the budget. Learn to make intelligent substitutions, and continuously eliminate less important expenditures.
Step 8: A review of the budget should be carried out regularly twice a month to make any adjustments for reducing expenditure. If there is any surplus cash because you stayed well within the budget, treat yourself to something extra as a reward to help reinforce the discipline.
Step 9: Once savings have reached a certain level, it might be useful to seek out a financial planner, and to establish a long term investment strategy. Any qualified retirement plan should form the core of your investments since most countries give preferential tax treatment to pension or retirement plans.
Never make withdrawals from your savings, unless it is for a deposit on property, education, or some other financially rewarding investment. And always re-invest all gains and/or dividends back into your savings investments.
Step 10: Where possible, establish a payroll deduction plan for your pension. Otherwise, simply make regular contributions to your pension. This will take advantage of dollar cost averaging, and will allow you to get the best prices over time
These steps are not necessarily easy, but they are all simple, and it is rare to find basic wealth creation without them.