What can individuals do during this downturn to thrive financially and build, or in many cases, rebuild wealth that has been lost in the past few weeks? By many measures, U.S. economic activity continues to grind to a halt on account of the COVID-19 containment efforts. This is evidenced in various data releases published this week. And it’s also a key reason why some Governors are eager to reopen their state economies.
But the reality is that returning to normal will take time, regardless of how quickly the economy fully reopens. Until then, the fact is that there are no quick fixes to undo the financial damage that has already been done. Yet, we believe that purpose driven individuals can, over time, rebuild wealth regardless of their current circumstances. This can be done by taking the first step in a disciplined, systematic process to create enduring wealth. So, how does this process work?
The Wealth Management Process: Creating Wealth
Let’s begin by level-setting our definition of wealth. To us, wealth means more than simply money taken home from a job or material possessions owned. Rather, wealth represents the financial resources we use today to make happen what matters most in our lives. Put differently, we view wealth as a means to an end rather than an end in and of itself.
Riches do not consist in the possession of treasures, but in the use made of them. –Napoleon Bonaparte
So, when we refer to rebuilding wealth, we are not talking about striving to get back lost income or material possessions. Our efforts, instead, are centered on adhering to a wealth process rather than focusing on a wealth outcome. The aim of this process is to help us generate productive assets that can be used to pursue our life’s passions and purpose.
Figure 1: The Wealth Management Process
To be sure, we believe that individuals from all walks of life can amass the financial resources they need to build enduring wealth. This wealth management process includes three ongoing phases: 1) being intentional and efficient with your time and resources, 2) making your money work for you and 3) by taking steps necessary to protect your hard earned wealth. In other words, creating, growing, and preserving financial wealth. We’ll come back to our second and third points in future reports. For now, let’s focus on the first step in our wealth management process: creating wealth.
Components of the Creation Process
Creating enduring wealth involves being intentional with your money, maximizing your value to others and optimizing your net worth. Let’s explore these points in more detail, beginning with intention. A simple way to explain the concept of being intentional with your money is to consider how two families, the Adams and Bakers, use their financial resources.
Assume for a moment that the Adams family earns a million dollars and they spend a million dollars per year without saving a dime. We could deduce that the Adams family’s intention is centered squarely around consumption. What about the Bakers? They earn a hundred thousand dollars per year, yet they only spend fifty thousand and the rest goes into savings. In this case, holding all things constant, the Bakers have amassed more wealth than the Adams. It can also be safely assumed that preparing for future needs might be a key priority for the Baker family.
Figure 2: Components of Creating Enduring Wealth
From this vantage point, we can see that the way in which money flows through your hands represents the physical manifestation of your closely held intentions. That’s pretty deep, right? Well, the point here is not to wax philosophical but to drive home a crucial point: creating wealth is ultimately rooted in the plan or purpose you lay out for your life. Consequently, you can limit your wealth creation ability when you spend or manage money in a manner that is not in alignment with your life priorities.
Intentional – Definition: done with a plan or purpose
That’s why we believe that the very first step in creating enduring financial wealth begins with being intentional – understanding the vision and purpose you have for your own life. With this understanding in hand, you can then evaluate the ways in which your financial habits align with your internal intentions. Opportunities to create wealth therefore occur when you find reasons to address misalignments between your financial habits and your life purpose. Put differently, you may be more apt to create wealth when your savings and spending plans reflect what matters most to you now and into the future.
The second way you can create wealth is by maximizing your value to others. We believe that you can build enduring wealth by using your innate talents to take your career or business to the next level. That is, adding value, or doing what you are best at for those who need it the most. Gay Hendricks, author of “The Big Leap”, describes this level of performance as the “Zone of Genius”.
And simply put, it’s the kind of work that you do that gets you up early in the morning, excited and in a state of flow. This step matters because it is one important way to increase your potential earning power and thereby build enduring wealth. Indeed, we find that the world tends to reward those individuals who are excellent in the things they do, the unique experiences they provide and how well they show up to help others.
Finally, we create wealth when we accumulate savings and quickly build equity in the assets that we own. Typically, we do this through increasing savings and optimizing net worth. Today, the opportunity to save money has never been easier. It’s true that few households have substantial emergency savings. In some cases, building an emergency savings fund is hard. However, we believe that intention and value maximization can increase nearly anyone’s ability to set aside a portion of their income. Savings is crucial to acquiring productive assets. And these assets can help you grow your wealth and make your money eventually work for you over time.
Equally important to acquiring assets is minimizing unnecessary liabilities. This is crucial because having too much of the wrong kind of debt can leave you in a position that creates wealth for your lender and not for yourself. In creating wealth, your focus should be on using good debt to acquire assets that are expected to hold their value, appreciate, or contribute positively to your future earnings potential.
Creating Wealth in the Current Environment
So how can you create wealth in this challenging economic environment? Well, we recommend that you take time to consider whether your financial priorities are in alignment with your life purpose. The stay-at-home orders have clearly given some of us time to think about what matters most in our lives. It has also forced us to reevaluate the things we can and cannot do without.
Therefore, now may be an opportune time to identify mismatches between your spending and savings habits and your life’s vision and purpose. The easiest way to start is by pulling up your last few bank statements. Then, look for patterns in your spending habits and ask yourself if those patterns align with what’s most important in your life right now. Any misalignment between priorities and purchases may be an opportunity for you to create wealth in your life.
Another thing that you can do to create wealth is to think about how you’re utilizing your talents right now and what you can do to create the most value for your employer or clients. With rising unemployment and business bankruptcies, the current economic environment will undoubtably increase your competition as business leaders and consumers have greater hiring and purchasing power.
Every man, even the most blessed, needs a little more than average luck to survive in this world. –Vance Bourjaily
There is no question that you will need to step up your game if you’re going to compete in the current environment and certainly, take your earnings game to the next level. Therefore, we believe that now is an opportune time to invest in yourself and your business with a goal for increasing your unique value offering. This may include looking at MOOCs or other certification processes to brush up on key skills and firm up your talents if you are a working professional. For business owners, the world has fundamentally changed and so finding ways to pivot your business model to efficiently serve clients in a changed world could help give you a competitive advantage and increase your wealth creation ability.
Figure 3: Building Enduring Wealth Begins with a Process
Finally, another way to create wealth is to put money away in savings and to pay down unproductive debt. If your employer offers a 401(k) or other matching retirement savings accounts, look for ways to max out your contributions. The tax, time and other employer benefits can lead to greater wealth creation (notably as financial asset prices have pulled back from recent highs) than compared to a simple savings account.
Also use this quiet period to evaluate how efficiently the assets you own are either helping or hindering your equity position. More specifically, pull up your credit report and take a look at how much good vs. bad debt are on the books. Before paying off any debt, however, it’s important to note during this time of economic uncertainty that cash and credit can both serve as important financial lifelines. For example, should you experience a loss of income you could tap your savings or line of credit to pay bills or meet immediate financial needs.
Therefore, take the time to evaluate your debt situation carefully. If you have experienced reduced or a loss of income, partner quickly with your lenders to find a way to accommodate your present situation. Otherwise, work on developing a debt payoff plan that produces an appropriate balance between quickly reducing debt while preserving an adequate cash buffer.
Get Started Today
We believe that purpose driven individuals can, over time, build wealth regardless of their current circumstances. This can be done by taking the first step in a disciplined, systematic process to create enduring wealth. The steps that we have outlined are simple. But make no mistake, they are not easy and will require constant discipline and consistency to achieve long-term success. Even so, the sooner you get started the closer you can get to achieving important financial goals and ultimately pursuing your life purpose.