“Saving is a very fine thing. Especially when your parents have done it for you.”
-- Winston Churchill
The two fastest ways to acquire personal wealth are to: 1) inherit it; or 2) win the lottery.
But for most people, the road to wealth is longer and requires a combination of work, time, discipline and planning. Whatever you personal definition of “wealth” may be, you can take the first step toward achieving it by understanding basic concepts of personal wealth creation. In this article, we will summarize four “cornerstone ideas” that have been consistently followed by many Millionaires Next Door and even some billionaires. Whether or not these ideas make you truly rich, they can increase your personal confidence now and financial security later.
1. Create a Personal Balance Sheet – What are you worth today, as an individual or household? One way to know for sure is to create a personal balance sheet and update it at least annually. This document, which can be created by hand on one sheet of paper, inventories your financial assets and debts.
o Under assets, include stocks, bonds, mutual funds, bank accounts, life insurance cash value, and retirement plan balances.
o Under debts, add up your credit card balances, consumer loans, student loans and other obligations.
o It generally works best to keep real estate and autos separate, due to difficulties in accurately estimating their values. The bottom line of your balance sheet (assets – liabilities) is your personal net worth.
You can achieve increases in your net worth by: 1) adding money to savings, investment or retirement plan accounts; 2) growing the value of these accounts through compound earnings; and 3) paying down debts. Try to make progress in all three ways every year.
2. Understand the Rule of 72 – This rule estimates how fast your savings or investments can grow through compound earnings. To use it, start with 72 and divide by the interest rate or investment return you expect to achieve after-tax. The result is the number of years it will take your wealth to double in value.
For example, if you hypothetically could earn 6% in a tax-deferred annuity, it would take about 12 years for an initial deposit to double in value (72 / 6 = 12). Retirement plans, annuities and cash value life insurance can help you put the Rule of 72 into action, because earnings in these accounts compound without current tax consequences.
3. Increase your personal savings rate – In your grandparents’ generation, the average American saved more than 10% of total salary on average. Today, according to the U.S. Department of Commerce, the U.S. national savings rate has declined to about zero.[1] The most common sources of new savings include: 1) your own retirement plan contributions; 2) employer contributions to your retirement plan; 3) new savings and investments. Total all amounts added to these accounts over the past year and divide by your total income – and the result is your personal savings rate. Then, set a goal to gradually increase this rate in the future. An effective way to achieve this goal is to use automatic savings disciplines such as life insurance premiums, dollar cost averaging, and payroll deduction retirement plan contributions. Make sure to take advantage of retirement plans with employer matching features – because employer contributions build your net worth, too.
4. Protect and grow capital within your risk tolerance – Most wealthy people have learned how to preserve principal while making their capital work for them. A financial professional can help you determine your “risk tolerance,” which defines the amount of investment risk you can comfortably afford to take, and then develop a diversified investment strategy. Patient and disciplined investing usually produces more wealth than get-rich-quick ideas.
In summary, wealth is defined not only by how much money you have but also by how confident you feel. When you make a commitment to build wealth on the four cornerstones discussed in this article, your foundation will be strong and steady progress toward your goals will build confidence over time.
John “Jake” Akoury, MBA, CLTC, AAMS, and John G. Balzer, JD, CLTC, RFC, are Registered Representatives of Park Avenue Securities LLC (PAS), 140 Kendrick Street, Needham, MA , 02494. Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. The Bulfinch Group is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC, is not licensed to sell insurance. PAS and the representative do not provide legal advice or services.
The Bulfinch Group
781-876-5880 x222 / x224
JAkoury@bulfinchgroup.com
JGBalzer@bulfinchgroup.com
PAS is a member of FINRA, SIPC.
[1] U.S. Department of Commerce, Bureau of Economic Analysis, 2007. As reported at http://research.stlouisfed.org/fred2/series/PSAVE
