Summary
Becoming rich is beyond your control. But you can build wealth if you have a plan. Don’t get distracted by keeping up with the Joneses or taking too much risk with your investments.
When we start doing financial planning with clients, we ask what they want their money to do for them. Is it just to invest and make more or is there a more useful purpose to it? Almost always, people want more time and more freedom to do whatever they want. That’s what building wealth is all about.
A healthy financial life leads to more freedom over how you spend time in the future. It is very possible for you to become wealthy by following a plan and avoiding the pitfalls. That’s where our financial planning service comes in.
Getting rich takes some luck
Scott Fitzgerald is said to have once remarked to Ernest Hemmingway that “The rich are different from you and me”. “Yes,” Hemmingway replied, “they have more money”. Another way they are different is that mostly they were much luckier. Some were born with lots of money. Some were born with a natural talent for singing, acting or sports. Most do it through persistent hard work and sacrifice – coupled with luck. Maybe they also had a good mentor or they happened to be in the right place at the right time.
Bill Gates, for example, won the birth lottery. He was born to intelligent, wealthy parents and was lucky enough to attend a private prep school that received funds for a computer terminal from the school’s Mothers Club. He and Microsoft co-founder Paul Allen were classmates. Both were very intelligent kids who started to learn programming when they were in the eighth grade. That was in 1968 when most kids didn’t even have a simple calculator. Without that donation from the PTA, they would have still been intelligent but probably not super rich. The point is that the odds are stacked heavily against becoming rich and it’s beyond your control.
Wealth is what you don’t see
There is a difference however between being rich and being wealthy. We assume someone is rich because he lives an extravagant lifestyle. If he is living that lifestyle, he must be successful and therefore is worthy of our respect. The pursuit of a certain lifestyle image very often results in poor financial decisions. Rich people stand out. Wealth is what you don’t see. You won’t find this equation in an economics book: Wealth = Money – Ego.
It’s probably true that someone who drives an expensive car must have money or at least have a high enough income to pay for the lease. But when you see a fancy car on the road, do you think about the driver? Or do you just wonder what it would be like for you to be seen driving that car? The truth is that no one would notice you either.
The driver of that car could be struggling to keep up with the payments or he may have bought it for cash with his huge bonus. Either way, that’s his story and it has nothing to do with your life, your goals, or your money. Enjoy your own car and pursue your own goals. Becoming wealthy is very achievable because you can define what that means for you.
Being wealthy is not about having things or buying experiences. It is about being financially comfortable enough to have more time to do whatever you want. For some people, that may require enormous amounts for money; for others, only modest amounts. While becoming rich usually requires tremendous luck, becoming wealthy is much more under your control.
The importance of a financial plan
Knowing how much money you need in order to feel wealthy is the first step in the process. We can estimate that amount based on how much income you bring in and how much you save and spend. It’s important to realize that even with a good estimate, one must build in some extra savings to allow for those unexpected occurrences in life and in the markets. So, we encourage clients to save more than what they think they will need.
Everyone wants to be wealthy. Smart people plan for it.
Protecting and growing your savings is another key part of the process. If you live below your income level, save your money, and invest in a way that allows you to sleep at night, your wealth will grow. Is it really that simple? Yes. Is it easy to do? Not so much.
Human beings of course have egos and emotions that often must be held in check. The temptation to keep up with the Joneses causes people to abandon their savings plan. The fear of missing out in the market causes people to chase returns in an overvalued market and risk losing too much in a downturn. A financial planner doesn’t just help you to develop a plan. He/she also helps you stick with it during times when it is tempting to do what other people are doing.
And that’s why our investment advisory service starts – and is driven by – a client’s individual financial plan and not by the guy driving the fancy car or by the latest rant by a media personality.
We even go a step further and bring in tax planning. Market returns are risky and unknowable. But financial planning and tax planning, coupled with a risk appropriate investment plan, greatly improve the odds of becoming wealthy. Read more about our approach and what you can expect as a client.