FINANCIAL LITERACY, INVESTING
3 Wealth Building Strategies & Why You Should Start Today
Joseph A. Davis, CDFA®
September 28, 2017
“Your level of success will seldom exceed your level of personal development, because success is something you attract by the person you become.” ~ Jim Rohn
It’s said that the love of money is the root of all evil. Jesus said that it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God. Personally, I think that money is a magnifier. If you’re a good person at heart – wealth will allow you to magnify that good.
I once heard someone say that if you want to become a millionaire – you should focus on helping a million people. I’ve always liked that.
If you’re selfish at heart becoming wealthy I think, is much more difficult. Unfortunately, we have a lot of bad examples of celebrities & professional athletes whose activities can’t be discussed around the kitchen table.
You’re a business owner if you can walk away for 1 year & come back to a business that is still making the same if not more money than the day you left.
“You’re a business owner if you can walk away for 1 year & come back to a business that is still making the same if not more money than the day you left.”
The definitions of wealth or financial freedom have been tossed around so much over the years, for many, they have lost all meaning. What is wealthy for one person may be excess or poverty to another.
Take a minute and think what wealth would mean for you and your loved ones. This is what it means to me & this is how we are pursuing wealth in our lives & for our clients:
1. Becoming wealthy provides jobs & services for the good of the public.
Want a good example? Check out Jon Huntsman Sr. After going through his own bout of cancer he established the Hunstman Cancer Institute at the University of Utah. Additionally, he’s given over $1.2 BILLION of his own money & he and his wife also agreed to join Warren Buffet’s Giving Pledge, promising to donate 50% of their wealth.
How did Jon Hunstman build his wealth? After a successful scholastic career & rising in the ranks to become president of the Dolco Packaging Corporation, in 1970 he formed the Hunstman Container Corporation with his brother, Blaine, and others.
So, what’s the success formula here? Build a business. Work up from being an employee, to become self-employed & eventually a business owner. I know a lot of people who consider themselves business owners but are truly self-employed. Not that one is necessarily better than the other – but if your focus is to build wealth – you should build a business.
What if you’re self-employed right now & want to know the difference? Check out Robert Kiyosaki’s book, Cash-Flow Quadrant. In it, Kiyosaki asks how long can your business survive without you? You’re a business owner if you can walk away for 1 year & come back to a business that is still making the same if not more money than the day you left. You’re self-employed if your business dries up the day you leave. Simple as that.
2. Building wealth will make you smarter
Actually, it’s the other way around. To build wealth – you must become smarter. I’m not saying that people that struggle financially are not smart. Quite the contrary. I know super-intelligent individuals that are miles ahead of me in terms of IQ, math, science & geo-political knowledge. But they still struggle with finances. When I ask what was the last book they read, they can’t remember.
One of the most success-forming habits of ultra-wealthy individuals is that they are voracious readers. Check out this article from the Huffington post detailing the reading habits of the super-rich. Over half of all American’s read less than 5 books per year. Warren Buffet is known to have been reading over 600 – 1000 pages per day when he was beginning his investment career.
Want to know what Warren Buffet is currently investing in? You can check out the Berkshire Hathaway portfolio online. Currently valued at over $178 billion dollars, Warren Buffet still spends over 80% of his day reading. I’ll bet my lunch that he’s not reading gossip magazines or children’s literature.
Can you become wealthy in equities like Buffet? Stock investments, with all their risks can provide substantial assets for the average person. Check out this portfolio of 10 listed stocks here: DOD_Report.
A $100,000 investment in 1990, re-balanced every 6 months, with an advisory fee of 1.00% grew to $4,016,870.18 by 08/31/2017.
Most planners agree that a sustainable income stream from this portfolio would be approximately $160,674.81 per year. That’s not too bad. Contact us to get the list.
As an asset, I find real estate exceptionally interesting. Here’s an asset that potentially generates cash flow, reduces my tax-footprint, builds wealth & continually defer taxes (if done through 1031 exchanges) indefinitely until I pass away
3. Building wealth is challenging & makes life interesting
Consider real estate for a moment. When I’m talking about real estate I’m not talking about your primary residence. I’m talking about single family homes, multi-units, wholesaling, “flipping” & syndicates.
As an asset, I find real estate exceptionally interesting. Here’s an asset that potentially generates cash flow, reduces my tax-footprint, builds wealth & continually defer taxes (if done through 1031 exchanges) indefinitely until I pass away. At that point, the assets can be transferred to my estate tax free. Amazing!
The leverage found in real estate is super interesting too.
Consider the following example: Mary & Tom purchase a $150,000 single-family home as a rental property. They secure a 5% 30-year mortgage with a 20% down payment. With closing costs & other expenses considered, our couple puts $39,500 into this property.
Over the next 5 years they rent the property out and benefit from a small stream of income (after all expenses considered), depreciation & equity growth in the property. Tom & Mary decide to sell the property due to high home prices & sell for $225,000. 5 years of payments @5% leaves them with a principal balance on their 30-year loan of $110,194.48. Contact us if you want all the numbers.
After their realtor fees & capital gains taxes, they walk away with $96,305.52. Subtract their initial investment of $39,500 – our couple had gains of $56,805.52.
What’s interesting to me is that the bank covered 80% of the financing yet allows Mary & Tom to keep 100% of all the proceeds. Take this leverage away & it would be exceptionally difficult for the same couple to achieve similar returns in such a short time. While I don’t consider equity growth when looking at real estate, it’s hard to ignore it in this market.
But leverage is just another word for debt, right? Right! I hate debt. Want to pay off your house? Do it. Pay for it in cash if you can. Don’t get student loans & don’t build credit card debt. Just say no!
However, consider again the words of Kiyosaki, “Be careful when you take on debt. If you take on debt personally, make sure it is small. If you take on large debt, make sure someone else is paying for it.”
Real Estate then makes up the third part of this conversation. Which is best? It depends, which investment strategy do you want to learn the most? Which interests you?
I personally think a combination of equity markets, business & real estate creates a powerful investment trifecta. Building wealth through three (hopefully) non-correlated assets, creates diversification & keeps life interesting. You will auto-matically be required to seek out mentors, read & engage your communities. You can include your family, generate income, build wealth & take advantage of the tax code in separate ways.
I recently returned from a trip with my family. In fact, it was the first real vacation I’ve had in the past two years. At the communal breakfast in the hotel & noticed a woman wearing this shirt: I’ll admit, I used to hate Mondays too. But something changed me a few years ago. One of the things that changed me was reading The Miracle Morning by Hal Elrod. Check out his interview on BiggerPockets podcast 157.
I don’t follow his system religiously, but I did notice a change in my life. Most notably, I love coming to work! Loving what you do has its perks. For me, the challenge of moving from self-employed to business owner motivates & drives me forward.
I love working with our clients & watching them win. Building a successful financial planning practice has allowed us to expand into tax planning & divorce work. But most importantly, it has allowed me to focus on my family. They are my “why” and what drives me through the challenging times. Find your “why” and success will follow.
Throughout the past two and a half months I have continued to ask myself, did we jump off a financial cliff? The answer was no. How did I know? The answer, while somewhat complex, is profoundly simple.
While it’s true that retirement accounts can be used to save for college, there may be negative consequences to doing so. It’s best to talk with a financial professional to determine the appropriate course of action and to make sure you’re on track to meet your goals.
A 401(k) isn’t the only option for retirement, but it’s definitely one of the most attractive. In many cases, it offers free money and is relatively easy to roll over when you change jobs. A financial professional can help you prepare for retirement with a 401(k) that fits your current investment style and stage in life and adapts to changes in career or investment styles.
Qualified plans, such as 401(k), profit sharing, defined benefit pension and money purchase pension plans, have defined benefits or defined contributions. A qualified domestic relations order, or QDRO, is required when dividing qualified plans.
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