Begin with the end in mind
Whether it's retirement, a mortgage, a job, getting married, buying a mutual fund or filing taxes, always consider the consequences of your financial commitments - the length, termination, dependencies, etc. Modern living is about instant gratification, but thinking out of the box with the end in mind can pay off massively in your wealth creation plans.
Penny wise and pound foolish
If you're going to make it big, you need to watch all parts of your wealth. Careful, however, of overly focusing on the small stuff. Spending hours to save $10 may not be your wisest way to build wealth; investing those hours in understanding investing or actually investing may be a much better idea.
Always consider your health carefully in your wealth creation. You cannot create when you are not healthy, and you also don't want to be sick once you have created your fortune. A balanced diet, some good exercise, sufficient sleep, getting sunshine, keeping groomed, and so on all lend themselves to being healthy. Include your healthy living plans within your wealth creation strategy.
Decide your fortune
When working on a wealth creation strategy, consider the minimum fortune you would be happy with and that everything over that is just cream. Be careful of always seeking more than you have when you may not need it. A hunger is good, but if your appetite is too big, you risk consequences you may not want to digest.
Caring for your stuff
It takes a lot of effort to earn and save money, so when you invest it in tangible or other goods, be sure to take good care of it. A home and car in good condition will command a much higher resale value. Being organized and healthy is also conduscive to wealth creation.
Predigous accumulation of wealth
There is no lottery ticket to instant wealth for most of us. Commit to a life of slow and steady wealth development. You may need to sacrifice the glitz and glamour to build things steadily. Some of the richest people in the world have accumulated wealth without flaunting it, including Warren Buffet.
Homes and mortgages
Your home is probably the largest purchase you will ever make. Most of us cannot afford to buy a home outright, so a mortgage is the only option. Consider the perils of home ownership versus renting - maintenance, taxes, and other fees can drain your account and time.
Consider a home versus a real estate investment - sometimes they can be both. Don't overly commit. This is a purchase where you absolutely want to begin with the end in mind - how long will you live in the home, how long will it take to pay off, can you afford interest rate swings, etc. Some of the wealthiest people in the world have made their fortunes through real estate, but consider you probably aren't hearing about the ones that have lost their fortunes through real estate. Generally speaking, a home can be one of the best investments you make.
Cottages and boats
Neither of these are typically good financial investments, but this is much more so in the case of boats. That said, one needs to consider that they may be good lifestyle investments.
Boats cost a lot - they are also known as financial holes in the water. Making the commitment to buy a reasonable boat, use it as much as you can for a few years, and then selling it, will provide a life experience that many won't have. It comes at a cost, but that's the cost of doing it or not doing it.
Holiday cottages and second homes can cost a fortune to maintain. One needs to consider owning versus renting someone else's vacation home. If you think you will be worried about the costs of maintaing a holiday cottage, then you should probably rent or stay in hotels instead. Some have been lucky with holiday homes in values rising tremendously during good markets, but also consider that many have lost plenty by having to get out of a holiday home at the wrong time. Look at how many places are for sale as a ratio to the total number of places, this will give you an indication as to whether you should buy in.
Taxes, deductions and refunds
The government wants as much of your wealth as they can take, but don't let that deter you from wise tax plannnig. There are many tax saving opportunities to you through deductions, tax credits, savings, deferrals and more. Grab a book or have an advisor take you through them. Many opportunities may be too complex to understand, and that's when you may need an advisor to help you understand the consequences of some decisions that may only arise after you retire. Understanding your tax savings and avoidance opportunities is very important - you will often hear that the wealthiest individuals and businesses pay the lowest tax relative to their incomes. Invest any savings or tax refunds wisely in growth vehicles. They're not simply a bonanza to spend, it is your hard earned income which should never have made it to the government in the first place.
If you aren't working at growing your net worth, then it may idle out. Be productive in everything you do, your career, your investment choices, researching your advisor, educating yourself, and so on. Every waking hour can be strategically invested into wealth creation. On the other hand, don't discount that entertainment and leisure is a necessary investment of your time - we all need downtime to recharge our batteries or get gas in our tank.
Live life fully, including taking time off for a vacation to recharge. Whether you hit the beaches in the South or you have a stay-cation at home, a vacation is a necessary time for your mind to change gears and think differently. It can be a good time to take a different perspective on your wealth creation to ensure everything fits together and you are on track. Many individuals decide to change career, get married, buy or sell a home while on vacation and looking at their life from afar.
Stay in control
It's up to you to create your wealth. You must care about it, and maintain full control of it. No one will care for your wealth like you do. Be careful of overly commiting your wealth in a particular direction, you will want to ensure you have some safety in your plans and that you understand the end. Consider, for example, how you may end your engagement with your financial advisor without catastrophic consequences.
Inheriting from family and friends is sometimes the quickest avenue to wealth creation that many of us may have. Consider whether you may receive an inheritance or leave one when you pass on - both can be incorporated into your wealth development planning. If you are on the receiving end, be cautious of relying too heavily on an inheritance, you may be disappointed. It may be wiser to plan without it, but consider the bonus it may create if you receive one. Tax planning for the recipient and giver is a must - failing to plan wisely may result in the government taking the lion's share. Also consider your children's ages and how quickly you may want them inheriting your wealth. A phased transfer via a trust may be wisest.
Live your life fully
Many of us commit to building wealth over our life times, but we must balance this with living our lives fully. We don't want to wake up when we are 60 with millions in the bank, but having missed out on our active and mobile years. Enjoy your family, your job, good cooking, fine wine, vacations, purchases and activity all through your life.
Goals and bucket lists
Consider setting out short term and long term goals to help measure your success. Don't, however, spend your life rehashing goals at the expense of achieving them. Set financial wealth goals and also lifestyle goals together in the same list. Keep the goals achievable, or risk losing drive and ambition. Look at your goals often, and remind yourself of what you have achieved and not only what you have not.
A simple bucket list of lifestyle achievements is also a good idea. Break the list into your 20s, 30s, 40s, etc. to ensure the achievements correspond with your wealth creation and activity levels. Whether you want to visit Italy, hit a Daytona 500, take a cruise, jump out of an aircraft, or go on a safari, if you don't plan for it, you likely won't experience it.
Wealth creation must be a long term commitment. Like a healthy diet, it must become something ingrained, rather than a flash in the pan. A well balanced and good tasting financial diet is where you want to be. Avoid a feast or famine diet as they typically are not sustainable. Financial wealth creation can start when you are 5 and follow through to retirement and death. You will want to invest and build wealth for the long term. This does not imply making an investment and hoping it will grow miraculously on its own. Like a home, car, your kids, or pets, you need to care for your investments, measure them, feed them, adjust them and more.
Know your worth
Understanding your current net worth and the avenues available to create additional wealth is very important. One needs to know what is achieved and what is feasibly possible within one's means to do intelligent wealth planning. Knowing what you are worth requires a multi faceted understanding of your finances and the things that effect your finances. Once you have this understanding, you can look at how affecting certain parameters can change your wealth creation - changing to a higher paying job, for example, should result in greater wealth creation if it is accompanied by saving and investing.
It would be difficult to build wealth without saving something each month. Determine your commitment to save 10 to 30% of your after tax income. Pay yourself first so that you can focus on the remaining amount to cover expenses. Saving is not just about putting your money in a savings account, it is about putting that money to work in investment vehicles that may return up to double digits in growth over the long term. Compounding savings from your early 20s will result in growth opportunities which are near impossible to achieve beyond your 40s.
Many of the richest people in the world have started their own businesses. For the higher risk of starting your own business, you may find great reward. Consider, however, that many businesses fail, the increased commitment that having your own business may take, and what other opportunities may be more suiting to your personality. Sometimes a small home business on the side may be a good idea to top up your monthly income - it may be something your home maker partner does between taking care of the kids. A home business can also have some tax efficiencies, including a means to split income with your partner and reduce your income tax.
There is plenty of software to help you track your finances and run your personal accounting like a business. This can be a good opportunity to understand finances and accounting - your cash flow, your income, your balance sheet, etc. Spreadsheets also work well and allow you to commit less time to the tracking effort. For those in financial dire straits or struggling to control their finances, counting each receipt and reconciling expenses may be the way to go. For others, tracking things at a higher level once a month will require a lesser time commitment and allow for the extra time to be invested in wealth creation. Building wealth is controlling costs and developing income and asset worth.
Invest your time and money wisely. Everything you do is an investment. Buying and preparing food is an investment of time and health. Consider all types of investment and whether you are well poised to build your wealth and weather any rough times you may encounter. Diversifying your investments will help, but don't overly diversify as you may risk the opportunity of reward. Remember that no risk equals no reward, and so a very safe diversification will likely result in your wealth being preserved but not developed.
There are a tremendous number of choices where to invest, including your home, mutual funds, ETFs (electronically traded funds), stocks and your own business. Many investment opportunities come with tax efficient opportunities, including registered retirement accounts, tax free savings accounts, tax deductible mortgages and more. Depending on your age, you will want to vary how you invest - you will typically have more in income investments and less in growth investments the older you are. Also consider that insurance is an investment in your wealth creation. Know all of these and decide how involved you want to be in your investments.
Financial advisors & accountants
Look for a financial advisor that will consider all aspects of your wealth creation, including your investments, career, business, home, family, will, etc. Your investments are not mutually exclusive to the other facets of your life. Compensate your advisor wisely. An hour of consultation may look expensive, but consider over your lifetime that an insight from the meeting may create thousands of dollars of wealth. If your advisor is handling some of your investments, then be sure to fully understand how they are compensated and what your exit options are. Your advisor can recommend an accountant (or sometimes cover both). As appealing as it is to do your own taxes, you may not be in a position to recognize some of the tax efficiencies available to you. Like a doctor, you want an advisor and accountant that take an holistic approach to your wealth creation.
Tax efficient accounts
Understand what tax efficient savings opportunities are available to you. Whether a 401k in the U.S. or an RSP in Canada, these opportunities need to be considered in your wealth creation. Consider your retirement plans when investing in these tax defferred accounts. You don't want to put all your apples in a single basket. There may also be limited tax free savings account opportunities. It's only by considering these accounts with creation of wealth through regular channels, that one can fully understand and model the best opportunities.
It's unlikely that you won't need to borrow funds at some time in your life. Even the wealthiest people and businesses borrow funds to create further wealth. And so if you are going to borrow, you need to ensure you have a good credit rating. Don't wait until you need to borrow to check your credit score, do it when you don't need to borrow. Depending on what your score is, you can then adjust your plans to better or maintain it.
Government pensions and securities
Whether you are young or old, ensure you understand what subsidies may be available to you when you retire. These can make a tremendous difference to how you save, what you save, and what your spending during your retirement years may be. The younger you are, the more cautious you should be of relying on what is offered today. It may even be safest to assume there will be no subsidies by the time you retire. Also consider that subsidies typically reduce and end depending on your income during retirement years.
If you have any significant wealth, then you should consider who you may want to have it should something happen to you. You will want to protect your immediate and extended family from transfer issues that may arrise if you don't have a will. Although you can consider doing your own will via templates off the web, we would advise on trying to get a will put together by a lawyer, advisor and accountant that can ensure it fits in with your overall wealth creation plans. Many wills are contested irregardless of who puts them together, but to mitigate issues, we still strongly advise on having a will prepared.
You have to spend to live
Living and creating wealth both require spending. Spending can be a financial or time commitment. Spend wisely to ensure the return on the expense will return the most it can - a high yield and good return on investment. Spending on junk will likely yield junk or ill health. This aplies to food, cars, investments, homes, and nearly everything we can think of.
Saving versus craving
Modern marketing is designed to have you crave what you may not need. Spending $5 on a coffee when you can make one at home for under a dollar, may be a crave where you would rather save. Car advertising speaks of a 3 year itch, but with the quality of cars the way they are, you could save and rather drive a good car for 10 years. With any purchase, ask whether you truly need it, or whether someone else is craving what you would otherwise be saving.
Marriage and common law
A union of two individuals can increase or decrease individual wealth. While we are not advocating putting wealth in front of your commitment, we are suggesting that you consider your wealth pre, during and post union. If you need a pre nuptual agreement, consider this as early as possible. Living together for more than a year may be considered a common law union where you live. A union can allow you and your partner to build tremendous wealth - your planning should be considerate of both partie. Decide whether you will have a family, who will work, your professions, your familial ties, inerhitances, liabilities, and so on. Also consider that divorce may be something you need to face, and that death is definitely something that will arise. In the case of the latter, you will want to move your wealth efficiently to your partner or family. Stay involved with the wealth creation.
Setting a budget is similar to setting a goal - a budget can help you keep your spending on the rails. Consider time and financial budgets. Depending on your financial position, you may want to have a tight or loose budget. A loose budget is a good idea for those that are in a good position, but still want to keep tabs on spending. A budget can also help for bigger financial commitments like a vacation by facilitating making the final decision rather than feeling like you can't afford it.
Borrow when times are good
There's a good old saying that when you need money, no one will lend it to you. When you are in a good position, consider extending your line of credit and ensuring your credit score is well poised for a downturn. This doesn't mean you should use it, but rather that you are protected should you need it.
Whether from a bank or store, credit cards are generally an evil that you should stay away from. It just doesn't feel the same when you are buying something with a card versus paying cash or using your debit card - there's a good reason for that, and the vendors know it. If you do use a card, pay it down fully each month. If you're caught running a balance, visit your bank to see if they can move it to a line of credit with a lower interest rate.
Death and beyond
Your wealth creation planning should extend beyond your years. Consider your family, wills, death taxes, and other. You don't want to spend your life creating a fortune without knowing what will happen to it once you pass on. And you certainly don't want it falling into the wrong hands when you're gone.
There are many forms of insurance, including home, life, health, disability, unemployment, car, boat, vacation and more. You need to consider all of these carefully depending on your financial position. Always fully understand the insurance you are purchasing to ensure there are no exclusions that you think are included. Insurance companies only work if on average they do not pay your insurance. Don't be surprised when you need a payment, that it isn't forthcoming. This is not to suggest not having insurance of different kinds, but rather to be wise about it. Health insurance is one of the most important insurances in today's world as modern medicine can cost a fortune.
Education and learning
A tertiary education can be one of the biggest expenses in your life that can take years to pay off. Consider government funding, bursaries and other to make it easier on yourself. Before signing up for a multi year degree, do consider the job opportunities available in that domain, and that the opportunities can be cyclical. Choosing a well paying career path is one of the wisest wealth creating decisions you can make.
Be sure you are learning new things all through your life and that you are applying those new skills to your wealth creation. This doesn't imply you have to be going to a university, it could be simply picking up a book on investing or learnign to use your new computer. If you are learning at an institution, look for tax deductions and credits. Often employers will pay for some form of education.
Career and income
Your employment income will likely be your largest and most stable source of funds to cover your day to day expenses and wealth creation investments. Choose your career wisely, for some jobs pay much better than others. Compensation may come in the form of salary, bonuses, options, stock, pensions, investment matching or other. These all need to be considered to give you the full understanding of what your career is worth over 5, 10 or even 25 years.
Home, car, education, food, entertainment, medical and other bills can add up very quickly - whether you watch them or not. Be sure you are living within your means. Consider your necessary expenses versus your discretionary expenses - the latter being entertainment, eating out, etc. If you are not livng within your means, then cut your expenses or boost your income. The worst position you can be in is one of no cash and high expenses. Make changes while you are still well funded. Also consider whether you could rather be investing what you are spending on discretionary items - every little bit helps in building wealth, especially in your 20s and 30s.
You will experience an emergency in your life time, so be prepared. You may lose your job and need to cover living expenses from your savings for a few months. Know what expenses you can cut in a time of emergency and what contingencies may exist for the large expenses.
You may be caught in a natural disaster with a need to cover food, living and other items for a few days on your own. Depending on where you live, look at your local resources to see what preparation they suggest. We always suggest having cash hidden in your home and gas in your tank. Your wealth creation plan is only as good as your ability to survive.
Charities and donations
There's a good old saying of givers gain. Consider giving wisely, but not necessarily with the intention of gaining something in return. Give only to charities that use your money wisely and contribute most of your givings to the end cause. Flashy charities are typically not the ones passing most of your dollar to the end cause. Also consider your givings in the context of the taxes you pay and how your taxes may already be intended for the cause. Donations can be tax deductible - so depending on your marginal tax rate, you may give a dollar for less than a dollar out of your pocket.
Lotteries and gambling
The lure of the lottery and gambling is strong - perhaps much stronger than should be allowed. The thought of a windfall in the millions is more than tempting for the exchange of a few dollars, but consider that your chances of winning are pretty much none. The media does an exceptional job of making you feel like winning the lottery is something your neighbor does regularly. Depending on your skill level, card playing gambling can be less or more of a risk, but at the end of the day, the house must win in order to stay in business. This doesn't imply that you cannot win, but creating wealth from gambling should not be at the top of everyone's list. Consider that gamblings are taxable in the U.S. when over a certain amount, but not in Canada. A little lottery and gambling for entertainment won't hurt, just don't bet the house on it.
Cars are expensive. Some think leasing a car for $800 a month is cheap, others think insurance of $80 is expensive. Cars are not wealth creating assets, but are perhaps accelerators and facilitators of wealth creation through other means. Consider all the costs carefully over the period of car ownership. Take it down to a per day cost and consider whether you could do something better with the investment. Most of us do need at least one car, but caution on having cars that don't get used regularly. You may find you are paying up to $100 a drive if you average out an infrequently used car, including payments, depreciation, insurance, maintenance, etc. Leasing is also an option - looking at a purchase and lease over a period of years will help you make a decision. Consider residual car values - some depreciate much faster than others. Mazdas, for example, depreciate faster than Hondas and Toyotas, but they are also good quality, therefore making them excellent used purchases.