Keep Your Money Growing with Two Simple Steps
Growing financial wealth in today’s environment has been a struggle. Whether it’s the wide swings in asset prices that make it hard to decide whether to stay in or get out the markets to the dour economic conditions that have negatively affected business earnings. Finding the right strategy to grow your wealth in a world locked down truly has been a challenge.
So, what can households and investors do to make the right decisions to grow wealth given today’s challenges? Well, we believe that when individuals focus on a process and not an outcome they can create, grow and preserve financial wealth even in this difficult market and economic environment. More to the point, we believe that individuals can still grow their money today by utilizing and staying committed to a systematic wealth management process.
Figure 1: The Wealth Management Process
Growing Wealth Through a Systematic Process
In our report last week, we described how a wealth management process works and how it can help individuals build wealth that can endure the test of time. To recap, our wealth management process focuses on three key points to building enduring wealth:
- Being intentional and efficient with your time and resources
- Making your money work for you and
- Taking steps necessary to protect your hard-earned wealth.
In other words, a process focused on creating, growing, and preserving financial wealth. So why is the process important? Well, we believe it’s important because a process enables us to be consistent in the way that we align our wealth habits with our life’s passions and purpose. A process also provides discipline and being disciplined can help generate the productive assets that we need to pursue the more important things in our lives.
Create Before You Grow
Where to begin? Well, we recommend starting with creating wealth before trying to grow wealth. More specifically, we suggest beginning with the first step in our Wealth Management process. To us, Creating Wealth means:
- Being intentional with your money and identifying your life’s vision and purpose
- Maximizing your value to others to increase your earnings potential and
- Optimizing your net worth so that you have a base of money from which to grow wealth
To be sure, a key reason we stress the importance of the creation process is because it sets the base for generating productive assets that you can use to make money work for you. Crucially, this process enables you to pursue the more important things in your life and in a relatively shorter period of time than you could otherwise.
Figure 2: The Components of Creating Wealth
So, let’s quickly revisit some of the key components of creating wealth that we covered in our report last week, beginning with intention. When we talk about intention what we mean is the way that you align your financial resources with the vision and purpose that you have set out for your life. In other words, intention gives your money a reason for existence. It also means that you may be more inclined to create wealth when your savings and spending plans reflect what matters most to you now and into the future.
Maximizing value is the second wealth creation component that we wrote about last week. That is, using your innate talents to take your career or business to the next level. This means doing the kind of work that gets you up early in the morning, energized and puts you in a state of flow. This is important because, the world tends to exceedingly reward those individuals who are excellent in the things they do and the way they show up to help other.
The third way you can create wealth is by optimizing your net worth. This is done by allocating more of your attention to saving money and by reducing bad debt. Put differently, it means using debt to acquire assets that will appreciate over time or enable you to maximize the value that you provide to others.
Taken together, we believe that these three wealth creation components are key to setting the foundation to building enduring wealth. This is because when followed in a systematic fashion, the components can be used to help generate the crucial financial resources you need to make your money grow over time.
Figure 3: Three Key Components of Growing Wealth
Make Your Money Work for You
So, we’ve just talked about creation and how the first step in our wealth management process provides a base from which wealth can grow. Next, we’ll walk through how you can actually grow your wealth. To start, we’ll need three key components for growing wealth:
- Accumulated savings
- A rate of return
When taken together, you can use the Law of Compounding to grow your money in our current framework. More specifically, we mean earning a return on your savings, then investing that return back into your savings and repeating the process over a given period. Let’s take a closer look at the components necessary to grow wealth.
Figure 4: Law of Compounding
Savings is the first ingredient that you can use to grow wealth. To be sure, it’s primarily through the wealth creation process that we establish a solid foundation for growing financial resources. That is, without some form of savings developed during our creation process we have no base from which to grow money.
Our second growth ingredient focuses on a rate of return. For example, this would be a return that you could get from a savings account at a bank or the expected return from investing in the stock market. Whatever the case, the rate you receive will be either higher or lower depending on a number of factors, including time and the risk characteristics of your savings vehicle.
“…there are no shortcuts to building enduring wealth.”
Finally, to grow wealth you need to allow your returns to accumulate over time. While many of us wish we could grow our money in the quickest way possible, the fact is that there are no shortcuts to building enduring wealth. In fact, some research has shown that growing enduring wealth is typically accomplished through a consistent systematic process and done over an extended period of time. So now that we’ve talk about the three ingredients necessary for growing wealth let’s move on to looking at how this process works in practice.
A Practical Example
So how can you practically make your money work for you? Well, let’s look at an example. And we’ll begin by going back to our three ingredients for growing wealth: accumulated savings, a required rate of return and time. In our example here we’ll assume that you’ve accumulated $100,000 in savings through the creation process. More specifically, you’ve done so by being intentional with your money, maximizing your value to others and optimizing your net worth.
Figure 5: Growth at 1% Over 10 Years
Let’s also assume that your savings is held at a bank and that bank offers you a 1% annual rate of return. So, where does this leave you? Well, in one year, your savings will theoretically grow by $1,000. Therefore, by the end of year one, you would have $101,000 in savings. If you were to repeat this process over a 10-year period, your savings would have grown at a compounded rate by about $10,500 and in excess of $500 more than a simple rate of return.
Now let’s assume that we increase your rate of return from 1% to 5%. How would this affect your savings? Well, with $100,000 earning 5% compounded annually the value of your savings would increase to $105,000 after year one and over $110,000 in year two. In fact, after 10 years, the difference between a compounded return and a simple return is nearly $13,000!
Figure 6: Growth at 5% Over 10 Years
What’s more the compounded excess return at 5% is nearly 28x larger than the 1% return when measured over a 10-year period. So, the point here is that with a little time and a decent rate of return you can make your money work for you in a very meaningful way.
Keeping Your Money Growing During Uncertain Times
So, what can you do right now to keep money growing during these uncertain times? Let’s review the two key points we’ve already touched on. For starters, consider your process. It will be increasingly difficult for you to grow and build enduring wealth if you’re undisciplined in the way you create wealth during this time of economic volatility and uncertainty.
If you’re serious about growing wealth, we recommend that you start by taking the time today to gauge your wealth creation habits. You can start by going back and reading our last report. But generally speaking, this includes evaluating the alignment between your wealth habits and intentions, how you’re maximizing value for your employer or clients and the extent to which you are saving and using debt wisely.
“The stock market is a device to transfer money from the impatient to the patient.” –Warren Buffett
The other thing that you can do to grow wealth in today’s environment is to keep in mind that enduring wealth can grow meaningfully when given time and a reasonable rate of return. Financial markets have experienced wide swings in prices lately. And it’s also likely that non-financial assets (like real estate) could see downward pressure in the coming months as well.
Our point here is that there may be a temptation to chase swings in the markets in an attempt to catch an asset while it’s on sale. Well, rather than spending your time and energy trying to time the markets, or looking for a good market entry point we recommend looking for assets that can provide a generally consistent rate of return and that are in alignment with your long-term goals and risk tolerances. With a little time and a decent rate of return, you can make your money work for you in a very important way.
Figure 7: Time and A Reasonable Return Go a Long Way
In short, we believe it’s still possible to grow wealth even in this challenging economic and market environment. You can do this by sticking to a disciplined wealth management process. This begins by systematically creating wealth and then using the law of compounding to make your money work for you. No matter your current circumstances, we believe that people from all walks can start building enduring wealth today simply by following a few key steps to create, grow and preserve their financial wealth.
Read More Recent Posts
- Four Ways to Set Your Retirement on FIRE
- The Executive Way: Treat Your Career Like a Sport
- Mid-Year Outlook: Not Out of the Woods Yet
- Inflation: An Insidious Threat Your Financial Independence Journey
- Does Crypto Belong in Your Retirement Portfolio?
- Biden’s Infrastructure Plan: Will a Deal Get Done?
- From Six Figures and Broke to Financial Independence Master
- Should You Invest When the Market is High?
- How to Stay Sane when the Markets are Going Crazy
- Why Your Investments Might Thrive in 2021