Creating Wealth

Sometimes it is time to go back to basics. I have been working with families for over twenty five years now and deal with some complicated planning issues. Reflecting on what the key components are to clients’ success in achieving their financial goals, I find that some very basic principles apply. I’d like to share those with the readers of our blog.

Lifestyle Choices

You might think that my largest and most successful clients have fancy jobs and high incomes. Some do, that is certain. But whether they are high or mid income earners, one of the key components in their financial success lies in their willingness to live within their means. They have a plan which includes a balanced use of their earnings. These include affordable current living expenses, debt reduction and eventual elimination, maintaining an emergency fund, having insurance in case of catastrophic events, and investing regularly in long term investments.
Financially successful people stick to their plan. They have far less tendency to impulse buy all sorts of consumer items that they don’t really need. And they would never buy a consumer item on credit that they couldn’t pay off immediately. They wouldn’t pay 29% interest on a credit card to save 10% or 20% on a sale item. They are also far more likely to save for their purchases than borrow.

Mandatory Savings

Regular monthly savings plans are not optional to people who want to be financially successful. Savings is a non-negotiable monthly habit. For some people the first thing to suffer in the event of an unforeseen expense, is to stop their savings plans. The financially successful make sure that savings is one monthly expense that never gets cut. They would rather forego or postpone a purchase than disrupt their long term goals.

Magic of Compounding

Even though a lot has been written about the Magic of Compounding, it is such a powerful driver of real wealth, I want to revisit it here. The secret is to start saving as early as you can. The longer your investments compound the bigger the payoff. Show your kids or grandkids this so that they understand the huge power of this magic. Please click this link to read an excellent article on how Compounding creates real wealth. Magic of Compounding
Here is an excerpt from the article that illustrates the power of just letting your money work for you. The key – don’t touch it. Let it work it’s magic.
“Say you start investing when you’re 20 all the way up until you retire at 65. You put away $5,000 every year and make an 8% annualized return. At the end of 45 years, you’ll have $2.2 million, some 90% of which is a result of compounded returns. So yes, in the long run it’s the compounding that causes the upsurge in your account balance and comprises the bulk of the total amount you’ve accumulated.” *
Remember that compounding also works in reverse. Debt can compound too, and severely impair your financial health. Success rests with paying down and eliminating non-deductible debt.

There are lots of methods for people to build wealth. There is no replacement for hard work, continuing education, perhaps taking the risk of starting a business. But for most people the three behaviours I have outlined above are by far the most important. And the good news is; they are completely in your power to control, and are accessible to all.

*Quote printed with permission from EdgePoint Wealth Management Inc.