Wealth Accumulation is the process of accumulating enough wealth to have financial peace of mind. You are, essentially, raising your net worth over time in order to hit a point of financial stability and consistency. Although many people want to accumulate wealth there are some things which make it difficult: living expenses, debt and uncertainty about how to plan for retirement. Sadly, many people fail to accumulate wealth and are running out of money during retirement because they don’t have a step-by-step process to help guide them through the steps for successful wealth accumulation.
Avoiding these three common wealth-accumulation mistakes is key to a successful start. To effectively progress toward wealth accumulation, you’ll need the right strategy—and a strategy you can start using right now.
There are five key components to successful wealth accumulation. And the order of these five components are also critically important. A big problem for many people is they don’t know what these steps are, or what order to put them in…
Protection always comes first and foremost with wealth accumulation. Protection is more important even than savings. Without protection, you risk losing any wealth you accumulate, leaving your family and business associates in a bad place. If you don’t protect what you already have, it’s nearly impossible to increase your net worth over time.
For example, if you invest your savings or retirement plan in the market and the market crashes, you could easily lose 50% or more of your account value. This could ruin the retirement and wealth accumulation plan you were counting on. What happens if you lose this money? How do you make up for lost time? What if the market crashes again? There is little to no protection for your wealth or retirement savings in the market. Financial protection is key to wealth accumulation.
Life insurance is a good way to get protection—for your family, yourself, and your finances. Life insurance, especially whole life insurance, provides for your family and preserves your wealth when you die. Whole life insurance also creates cash value that can be used throughout your lifetime to help with your wealth accumulation and give you financial options, flexibility, and liquidity. For pennies on the dollar, you can get the protection you need. Learn more about the best kind of life insurance for protection here: Whole Life Insurance Pros and Cons
A bad budget system is like a fad diet. It may work for a short time. You may be able to cut down unnecessary expenses, pay off some debt, put some money in savings… but it’s so restrictive it’s not sustainable. This is not a good wealth accumulation plan.
A good wealth accumulation plan will include a budget system that’s simple to follow, is sustainable long-term, and doesn’t make you feel too restrictive.
The 10-20-70 Rule is a good budget plan that gives you an easy guide for how to use your income in a way that will help you accumulate wealth. The 10-20-70 Rule gives you three main categories your income should be used for: Savings, Debt Management, and Expenses:
As you establish your budget plan, review your expenses at the same time. How much are you spending and how are you spending your money? Consider the kind of purchases you are making. Are they necessities? Are they helping you accumulate wealth? Review automatically recurring subscriptions. Are they still meeting your needs? Make changes accordingly.
Saving should be the third focus in your wealth accumulation plan. The biggest catch to saving, and where most people go wrong, is saving money incorrectly. Many people think they can save their money by investing. This is NOT saving! That’s investing, which is a completely separate process. To count as saving the money needs to be in a safe place where there is no market risk and, preferably, where it is free from taxation, fees, and penalties . It also needs to be in a place where you can easily access it. Having your money easily accessible is a large part of any successful wealth accumulation plan.
What’s better than saving money, though, is keeping money. Saving implies stashing money away and letting it just sit there. Think of that nice pair of shoes you’ve been saving for a special occasion. They are not being used; they’re just sitting somewhere in your closet being saved. Keeping money means you’re taking care of it. There are several safe places to keep money: a savings account, a certificate of deposit, a money market account, but one of the best places to keep money is in a participating whole life insurance policy because you have the protection of life insurance as well as the guaranteed growth, plus any dividends, and the McFie Insurancethat are part of a good whole life insurance policy.
This brings up another question, “How much should I be saving (or keeping)?” To make good progress with your wealth accumulation plan you should be keeping 10-30% of your income. Following the 10-20-70 Rule, you can quickly calculate how much you should be keeping based on your income.
When people focus on wealth accumulation, sometimes they feel pressured to invest money before they pay off debt. But many people will actually make a higher rate of return managing their debt than they will through investing!
Managing debt doesn’t necessarily mean paying off debt. Some debts are preferred debts. For example, if a debt allows you to have better cash flow or provides you with favored tax treatment, it may be a good debt and a debt you want to keep. If your car payment allows you to get to work where you make money, it could be a good debt. Student loans or high-interest credit card debts that keep accruing interest and eat away at your efforts to accumulate wealth may be bad debts you should pay off.
Review your debts carefully and identify if they are good debts or bad debts. Create a plan to pay off your bad debts. Then put your plan into action.
Once you’ve paid off bad debts, reevaluate the amount you are saving (keeping). Chances are the money you were using to pay off bad debts can be redirected towards savings and boost your wealth accumulation plan.
Investing should always come last in your wealth accumulation plan. There are two main reasons for this:
There is a lot of knowledge and disciplines that must be mastered in order to invest successfully. What you don’t know about investing could ruin you financially and wipe out your wealth accumulation efforts. Investing is risky, even with the help of a good financial advisor.
When you are in a position to invest, consider the risk level of an investment. Is it high risk? Low risk? Keep in mind the market is not the only place to invest. Oftentimes the best investments will be in areas you are familiar with. For example if you’re a mechanic, a good investment for you might be a new lift or a special tool.
A WORD OF CAUTION: Many people think higher-risk investments mean they have a higher chance of reward and greater chances to increase their wealth accumulation. This may or may not be true. High-risk investments usually have a higher chance of loss too. This can be catastrophic to your wealth accumulation. Try to find a balance with investments that are likely to help you accumulate wealth over time, not necessarily in one high-risk shot. “Slow and steady wins the race” is very applicable when it comes to investing.
People in desperate situations tend to think they must opt for a high-risk investment to “make up for lost time” or “get back to where they started”. This is dangerous for your wealth accumulation plan.
From time-to-time people get lucky. Betting on luck, however, is not a reliable way to accumulate wealth. A better wealth accumulation plan is to protect first, build up secure savings (to keep), and manage your debt before heading into high-risk areas like investing.
Many people reverse these wealth accumulation steps. They try to invest first thinking they’ll make enough money to pay off their debts. Once their debts are gone, they’ll be able to save something and jump-start their wealth accumulation. By the time they get around to protecting their wealth accumulation, it’s often too late or too expensive. And if an investment doesn’t go as planned and wipes out their accumulated wealth, there are no savings or protection to fall back on. This leaves them with debt payments demanding repayment…the opposite of wealth accumulation. Make sure you accumulate wealth correctly by implementing these 5 wealth accumulation steps in the right order and sticking to these successful principles.
Like the old Chinese proverb says, “The best time to plant a tree was 20 years ago. The second-best time is now.” It’s always best to take action while you can. The best time to start your successful wealth accumulation plan is now.
Following these steps will help you create a wealth accumulation plan that works and allows you to accumulate wealth successfully.
If you want to get protection and keep your money in a low-risk place, where taxes, fees and penalties are minimal, we’d like to help you. Schedule a strategy session with our office and we’ll design you a custom whole life insurance policy that aligns with your wealth accumulation goals and budget.