Written by: Deborah Cartisser
Over my multi-decade career, I have worked with clients who were wildly successful, building multi-generational wealth from nothing, and others, who made millions and spent it all, ignoring our guidance, and ending their lives worrying about having enough. I was with a new client yesterday, who has amassed multi-millions, from a professional career that paid her well but was not in a field that pays large salaries. Since we are her first financial advisor, I asked her what she learned from her family that helped her build her wealth. She told me her parents grew up in the depression and believed in saving and living modestly. I spent some time thinking about what makes our clients successful at building and retaining their wealth and here are the habits we can all benefit from adopting.
Save Early and Often
This is the habit that can have the greatest impact on your financial life. Save, save, and when you can, save some more. Develop a disciplined saving plan and have your money automatically transferred from your paycheck or checking account, into a savings account. Aim for saving at least 15%, split between retirement and non-retirement savings. Arrange to have your retirement savings taken out of your paycheck and directed to your corporate retirement plan. At a minimum, be sure that you are saving enough to get the full company match if there is one. For non-retirement savings, ensure you have an emergency fund that holds at least 3-6 months of expenses. Then set aside money for things like a home downpayment and college funding. When you get a raise or bonus, revisit your savings plan to increase what you are saving regularly. A disciplined savings plan involves taking a portion out of all the money that comes your way, whether through salary, bonus, inheritance, lottery tickets, etc. You can teach your kids this essential habit by having them set aside a portion of their regular allowance as a disciplined habit.
Make a Plan and Revisit it Often
The most important thread in all of this is to make a plan and revisit it often, annually at a minimum, and when life events dictate. Setting long and short-term goals helps formulate all of the steps that come next. Your long-term goals should guide your short-term behavior. Segment your plans into short, medium, and long-term goals and then back into the habits you need to set to get you there. Your savings and investing behavior should be informed by your goals. You will need to revise your plan along the way to adapt to the surprises life deals us.
Know Where Your Money Goes
The word budget can evoke all sorts of negative emotions, so rather than discussing creating a budget, we will talk about understanding your spending habits. If you were to draw a chart showing the different components of your monthly spending, how accurate would you be? If you don’t have a good sense of this amount, spend some time figuring it out. Understanding where your money is going can help you determine if your spending is aligned with your goals. It can help inform you of where the obvious places are for changes to your lifestyle or behavior. Our monthly spending tends to expand over time, without active decision-making on our part. Since this understanding is an important aspect of financial well-being, spend some time categorizing your expenses to see if they align with your future plans and your values. Is your shoe buying habit more important than socking away money for a second home downpayment? These are the deliberate decisions you can make when you are aware of where your cash is going. Our goals are moving targets, influenced by the changes that life deals us, and consistent long-term planning will help you pivot when you need to. Money is a tool for achieving goals. Align your spending with your goals and check in on this at least annually to stay on track.
Invest and Diversify
Is the money you are diligently saving invested so that it is working for you? You want to keep your purchasing power ahead of inflation. Make sure your wealth is not reliant on success in only one type of investment, or industry, no matter how safe it seems, because not diversifying can leave you more vulnerable to a market downturn. Diversification across the sectors of the economy and among investment types is best for long-term success and is more likely to protect you from risk. Having exposure to stocks, bonds, real estate, real assets, and other countries will help your investments weather the storms that are inevitable, and is more likely to ensure balanced growth over time. Segregate your savings based on time horizon, when they will be used. You don’t want your home downpayment money invested the same way as your retirement savings, since one is short-term and the other is long-term. People often fall into traps of expectation, thinking, “I only invest in commercial real estate because that grows faster than other sectors of the economy.” Or, “My company is growing so quickly that I want to put all my extra savings into buying company stock.” Different asset classes tend to perform in an uncorrelated manner during market cycles. When one asset class is performing well, another could be doing poorly. This non-correlation tends to smooth your investment returns over time, preventing you from hitting the low of the cycle and possibly preventing the meteoric highs as well. As your wealth grows, enlist the help of a professional and review your progress regularly.
Create the Income Side Hustle
As you build your savings, look for opportunities to create wealth in addition to your salary. This happens through investing. There are other passive income streams that can help you advance your financial freedom, flexibility, and security in your life. From content-based subscription fees to real estate rental income, there are a myriad of ways to increase your income. Whether this is your career focus, a side hustle, or a hobby, invest some time devising ways to expand your income streams. It’s never been easier to have an online presence and monetize your expertise. From plugging into the power of content creation to e-commerce and innovative ideas, smart investments of your time and resources can yield results. It’s not about getting rich quickly, it’s more about creating sustainable income streams that work for you.
Avoid Risk
Understanding where you have risk and what can be done to reduce your exposure to that risk is a key component to safeguarding your wealth. Avoiding risk is about using insurance, not exposing your wealth to lawsuit claims, and understanding where there is vulnerability in your life. Protecting the income you provide against your untimely death calls for life insurance. Short-term insurance to cover your working years, or to pay off your house so your partner will have enough without you calls for term life insurance. A tax-free transfer of wealth can be created by permanent life insurance. Disability insurance can partially cover you & your family if you are alive but unable to work. Do you have assets that are at risk? Think about a family member whose behavior subjects you to risk because they drive your cars or live in your house. You can lower the exposure by changing how vehicles are insured or homes are titled. A large umbrella policy or liability policy is something that can add additional protection. Do you have a vacation home that you loan out to friends or use as a rental property? Protect your wealth by transferring that property to a limited liability company (LLC) to segregate your assets so a lawsuit can’t attach to the bulk of your personal assets. Think about inheritances and whether you or your partner has access to family wealth. If something were to happen to your partner, what happens to their inheritance? Often it goes to his/her children and bypasses the spouse. In cases like this, your partner should have a life insurance policy to provide for you in case they pre-decease their parents. Once you have an understanding of where you have risk, you can devise plans to mitigate the risk. If you need help in this area, contact a wealth advisor.
Create Your Estate Plan
Take care of your family by creating an estate plan. At a minimum, you should have a will, a durable power of attorney, a health care proxy and we often recommend trusts as well. Work with your financial advisor and your estate planning attorney to create a plan that addresses your assets, your tax situation, and your unique family members. Revisit your plan every few years to be sure the people you appointed and the plan itself continue to meet your needs. Tax laws and regulations change over the years and you need to be confident that your documents fit with the current landscape. Educate your family and the people you have appointed in your documents so they know what is expected of them. Annually update all your information so your family knows what assets you have, where they are, and how to access them.
Educate The Next Generation
Now that you know what to do for yourself, you can work on teaching the next generation how to handle their finances and the habits they need to create. Teach your children, nieces & nephews, or grandchildren how you think about money, how to save, and how to be responsible in creating your future with money. If you don’t know where to start, go to our website and look at the resources tab to see webinars on this topic, or reach out to one of our advisors today!
Following these behaviors will help you to build, grow, and protect your wealth. Following consistent good financial habits will go a long way towards helping you attain your goals.
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