Four Components of a Wealthy Life — Part 2 — Finances

The word “Wealth” to most people implies something to do with money. When we add the modifier and say, “Wealthy Life”, suddenly additional dimensions come into play. In the previous article, we looked at how health is probably the most important component of a wealthy life. This article will look at some of the simple, but powerful practices that can greatly improve your financial wealth.

Be in Command of Your Finances — Put Your Money to Work

“What do you want to be when you grow up?” It was a common question five decades ago as I was entering elementary school. The model that was the basis of the education system I came through was to figure out what you wanted to do as a career, compare that to what you might have aptitudes for, and hopefully find a match. Gear your education along that line, and voila, you have chosen your career path. Get your education and go to work.

That model is becoming less and less common, but whether you are living the model of get a job, work until your 65 and then retire, or taking a more circuitous employment path, these principles remain true:

  1. Create and grow your income.
  2. Spend less than you make
  3. Invest a portion of all you earn
  4. Track your net worth

Create and grow your income

The need or desire for an income is usually the motivation for most of us to get a job. What many people don’t do is seek to diversify their income over time. Ideally you want multiple streams of income, but if you’re just starting out, that may be a future step for you. Note that two jobs does qualify as multiple streams of income, but a better model is to get to a point of passive income supplementing, and ideally in the long run, replacing the earned income. W-2 employment provides security and regularity in payment, but it generally always has a ceiling. You will usually never earn more than your salary, with perhaps a few incentive bonus options thrown in the mix.

Passive income, on the other hand is something you invest in up front, and it provides residual income to you over time without additional ongoing effort. Owning a rental property is an example of passive income. Once you acquire the property, do whatever repairs are necessary to fix it up and get it rented, it can then begin providing a passive stream of income. Other examples include certain investments, such as annuities or other dividend producing investments. These can be provide additional sources of passive income, however you may need to earn a significant amount of capital (money) to invest to realize significant income from financial investments.

Spend Less Than You Make

The best way to ensure that you spend less than you make is to have a monthly spending plan or budget. A survey from 2013 found that about 33% of Americans had a monthly financial budget. A 2015 study showed that number increased to 40%. That’s good news as far as trending, but still indicates more than half of Americans are missing out on one of the most fundamental financial skills that will help them to grow wealth.

To truly be a powerful tool to grow wealth a spending plan needs to follow what I call a baseline model. Among others, Jim Rohn taught that we should live on 70% of our income. His model was this:

  • Give 10% to Charity
  • Passively invest 10%
  • Actively invest 10%
  • Live on the rest (70%)

By truly following this model, your wealth will grow over time significantly by virtue of the 20% you are investing. Passive investing includes things like a 401(k) or bank savings or money market accounts. Active investments would include things such as the aforementioned rental home, or a home-based business that can begin generating another income stream with greater returns than a mutual fund, for example.

For the practice of budgeting, or as I like to call it, creating a monthly spending plan, you follow these steps:

  1. Forecast your monthly income for the coming, or current month
  2. Plan your spending to whatever level of detail is most appropriate for you, following the 10/10/10/70 model
  3. Track your spending every week against your plan
  4. Do it again the next month.

Like counting calories to lose weight, tracking your actual spending can be very enlightening about where your money is actually going and in what percentages. It’s key that your budgeting system automates as much as possible the process. The more work it is to do this, the less likely you are to stick with it. I have used Mint.com for years, which is free and largely automates the process, though there are other budgeting apps and programs that have similar functions.

Invest a Portion of All You Earn

By exercising mature restraint over your “gotta have it now” impulses, you will be able to build up a meaningful amount of money over a relatively short period of time. If you do so, it then becomes of interest to you to have that money work harder for you. If all you do is invest it in a 401(k) or worse yet, a bank savings or money market account, you could be losing value, depending on the rate of return. A regular bank savings account is paying anywhere from 0.10% to 0.65% interest depending on the balance. Inflation is currently around 1.9% meaning your money is actually losing value in that scenario.

As we would sit with financial advisors and ask where their compensation came from, I never got clear answers. As I learned over time, most portfolio managers take 1–3% of the total account value annually as reimbursement for their services. Jim Rohn would teach that if you turn your retirement over to someone else, you have to divide by 5. If you take responsibility for it yourself, you can multiply by 5 or by 10.

Some examples of ways to broaden your investment opportunities for qualified retirement funds are to open a self-directed IRA which allows you many more investment alternatives. I am not recommending that you make uneducated investments with your retirement money, however with a little education, you can learn to pick a variety of individual stocks, building a mini-mutual fund of your own, that won’t have the fees of a mutual fund (or a paid financial advisor), and that is likely to grow much greater than it would be in a traditional fund or bank account. You can open an account with a brokerage for no cost, fund the account, and then invest in the securities you desire, without having to pay someone else to do it.

By consistently investing 20% of your monthly income you will see your wealth grow significantly over time. Buckle up for the down turns, and the bad investments you may make along the way. Learn from them, so that you can invest more wisely in the future.

Track Your Net Worth

Net worth is simply the difference between your assets and your liabilities. What you have in the bank, versus what you have on your credit card, so to speak. If you’re not currently tracking your net worth, you should start doing it now. This is not just so that you know how much you’re worth, but the practice of knowing and tracking your net worth will change the way you relate to your money. You will see how your money decisions impact your true “Bottom line.” You will more naturally make wiser decisions with how you utilize your money.

It is important not to do this just once, or only once a year. I recommend at least quarterly, but as often as monthly if your finances are dynamic.

In all of these recommendations, remember the quote from Billy Graham,

There is nothing wrong with men possessing riches. The wrong comes when riches possess men.”

To see how you’re doing overall with your financial health, take this 10–question quiz.