How to Build Wealth in Your 20s, 30s, and 40s
Four Proven Strategies used by the wealthy and wealth managers
The mistake we make as individuals is thinking that we invest towards a specific purchase, when all investing really is is a way to improve ones earning power from wages/salaried-based income to dividend based income. And we can only do that through building a portfolio of investments. “One of the reasons that millionaires are economically successful is that they think differently.”~Thomas J. Stanley, Ph.D [Co-Author, The Millionaire Next Door].
Most importantly is that they [the wealthy] all mastered the basics of personal financial management. What I have also noticed is that the Financial Advisory and Intermediary Services (FAIS) industry has made people believe that they are incapable of managing their own finances. I believe it is done deliberately so that people do not rattle the industry by choosing to manage their finances and cause an implosion in the market. It is also commonly known that the wealthy have an exceptional command of their own personal finance. A research done by the Ramsey Solutions [a company started by Dave Ramsey] showed that at least 69% of Millionaires have never had $100 000 in annual income. I have also come to understand that the people we call Hedge Fund Managers are simply people who have an incredible command for Capital allocation which is exactly what personal finance is, but on a massive scale. Dave is very vocal about the importance of not giving away your hard earned money to consumer debt. Him and Eric Tyson [MBA, Personal Finance] are in agreement on that.
The source of all wealth creation is ones own income however meagre it may be. The person who puts one part (1/10) of all that they earn in an interest bearing account and enjoy at least 12% returns on their money. Would retire comfortable as long as they do not in turn go and give someone else 23.5% interest on consumer credit. The problem is that the people (those under the age of 25) who have the most advantage seem to be unbothered to take the advantage of time.
“The fact is that all of us, no matter what our income and bank balance, need money management skills and knowledge, and younger people need it more than anyone else.”~Peter Najarian [founder of Investitute & contributor to CNBCʼs Fast Money]. The quote is found in Dasarte Yarnwayʼs book, Young Money. Peter wrote that in the Foreword of the book.
There are four (4) strategies or actions which the wealthy or wealth managers implement to build their own wealth and turn new money into old money. Dasarte Yarnway, founder and Managing Director of Berknell Financial Group talks about Mastering the mindset. And he is in consensus with Rameti Sethi founder and writer of iwillteachyoutoberich.com, where Dasarte preaches for a long-term outlook on investment horizon; Rameti preaches for a solid foundation for an investment infrastructure.
1. Master The Mindset
The hardest thing for people to do is restraining ourselves from acting on impulses. Wealth builders have self-restraint which is one advantage they have over every one else. It was a mindset which helped Warren Buffett decide he would not pay a dividend on the investments his partners have with Berkshire Hathaway. Developing a mindset committed to helping you harness the power to have a positive and long-term outlook investments sets the wealth builders apart from the person who chooses not to focus on accumulating wealth.
2. Master The Plan
Once a mindset is developed, the next point is to set a plan in motion which will help you to follow a map into the exact place you want to be financially. Rameti Sethi alludes to the fact that your plan should begin with having a clean (good) credit report. His argument is that if you have a good credit report, it is cheaper for you to have credit. “One of the key differences between rich people and everyone else is that rich people plan before they need to plan.”~Rameti Sethi
Think for instance about the person who buys a sofa for R10 000, but they do not buy it cash - they use credit and pay no more than 25% interest ( normally 23.5%) annually. That works out to R731 every month for 24 months, vat included. The wealth builder notices that with those numbers, they would pay Seven and a half thousand Rands more for the unit. Most importantly, they calculate the cost of the opportunity. Where they realise that if they would have gone to the retailer with cash they would have negotiated the price to say R8000. Or they would even stretch it and disintermediate [I discuss Disintermediation on my Patreon page] and go direct, where they would probably save up 90%. This bit involves a lot of work that is why most people do not consider it. And those who do make a handsome amount of money. The wealth builders work relentlessly in order for them to have excess capital for the purpose of building their wealth. Above everything else, wealth builders know they are the only ones who can decide on their goals and own financial game plans. Wealth builders also know that it is financial suicide to make financial decisions without counsel from financial professionals. They make use of counsel to help them avoid the four financial pitfalls:
• I do not have enough money
• Peer Comparison
• I will do it myself
• Impatience
3. Forecasting
“Every day that you can stick to your plan is a day that you become closer to touching the wealth that you are working towards. Your ultimate victory lies in your ability to win the day.”~Dasarte Yarnway
This is where the real work begins, looking into your budget. Like they say, the devil is in the details. That is why the 1st two steps are important, you cannot look at your income statement bank statement and your salary advice without emotional baises. Once a mindset is firmly in place and a proper plan is developed, then oneʼs income statement can be looked at with complete objectivity. Today a lot of people use websites and applications to set up push notifications for their budgets. Those are usually impersonal. But, I would recommend that you get yourself a journal where you jot down everything that is about your financial life. From Retirement all the way to Taxes and Estate Planning. You could include the following in your forecasting:
• Income Information
• Assets
• Liabilities
• Cash Flow
• Goals
You need to be completely honest with the information you write on those points. Once you have those in place, you may need to consult with a Financial Planner or Financial Consultant to hold you accountable from the first decision to the moment you reach your goal. Once you have taken stock of all your current financial position, then you can adjust accordingly from being an inherent consumer to a wealth builder.
4. Master the Income
“Everyone has a plan, until they are punched in the face.”~Mike Tyson [Official weigh-in Press conference: Tyson v Holyfield]
Goal-based investing is what sets apart those who have amassed ridiculous amounts of wealth and the rest of the population. Many people define investment many different ways, but ultimately an investment should make you money either through dividends or appreciation of your capital. Sometime back I was asked if I won R20 Million through the lottery what would I do with it? I said to the inquisitor, as a financial consultant I would not play the lottery. But I would do the same thing I am currently doing, which is finding opportunities to allocate my capital to - this case Berkshire Hathaway Inc. even though they are not paying dividends, they are still a solid investment, growing at more than 0.71% a day. Someone who had put $1 in the company in 1964, today that dollar would be worth $36 000 more. That is the power of compounding interest. In 60s Berkshire Hathaway share price was $5 and today the company has broken the stock into Three class categories. The lowest class at $345/share and the highest class at $550 000/share. The market has a lot of examples who may not have the results Berkshire Hathaway has but are also good in their own respect, the Apples and Teslas of this world. To master your income you need to be able to allocate your capital into opportunities that appreciate in value and pay dividends. History indicates that no man or woman has ever build massive wealth without having a solid investment portfolio. From Andrew Carnegie to Jeff Bezos and Elon Musk. Write your name in the stars and be that odd one in the family that builds wealth as his or her legacy.