LOUISE FAIRSAVE: Wealth building
IT IS IMPORTANT to realise that being a millionaire is not necessarily being rich. To be a millionaire, you would need to have accumulated assets of a million dollars or more in net worth.
However, if you have an extravagant lifestyle where expenses well outstrip your level of earning, being a millionaire would not qualify you to be called rich.
Given the limiting levels of some incomes, everyone does not have the opportunity to become a millionaire in their lifetime, yet potentially everyone can become rich based on the benchmark definition.
This benchmark was established by researchers and bestselling authors, Dr William Danko and Dr Thomas Stanley. They posited that a person’s wealth can be assessed by factors related to their gross income, the assets that they have acquired net of any debt obligation, their age and the time they have been earning.
Based on this benchmark, you may be a millionaire and not be assessed as rich. Alternately, you may be far from being a millionaire yet assessed as rich, given your accumulation net assets for your level of income. If you want to transform a disappointing assessment of your wealth, here are some valuable suggestions.
Foremost, the goodly doctors stress that change is very difficult. However, if you ask yourself a few important questions, great impetus can be added to the charge towards building wealth.
Ask yourself: Why am I not well off and comfortable in spite of earning an adequate income? Maybe you are spending too much rather than saving and investing. Material goods are depreciating assets. Financial assets are generally appreciating assets.
It is not surprising that the research showed that auctioneers in the United States have a higher number of millionaires in their grouping than any other work group. That is because auctioneers truly appreciate the liquidation value of depreciable assets, and they tend to place their funds in more sound investments.
The authors also found in their research that persons who under-accumulate wealth have a high propensity to spend. Persons who are prodigious accumulators of wealth, on the other hand, tend to be frugal. They tend to live below their means, whereas the under-accumulators tend to live above their means. Under-accumulators tend to consume a significant portion of their income sustaining a lifestyle well beyond their means.
If you want to build wealth, you need to schedule more time planning and budgeting your spending. Most prodigious accumulators of wealth in the survey had a detailed plan and budget. When they did not report having a clear and well-understood spending plan, their alternative was the pay-yourself-first system. This alternative approach forces them to live on what is left.
Prodigious accumulators typically could state the annual cost of various items in their household budget. They tended to be exceedingly frugal, a trait which had usually been inculcated during their upbringing. Furthermore, their spouses tended to be just as or even more frugal than they were. It will be very difficult to accumulate wealth in a household where one of the partners is spending indiscriminately.
For those who want to be rich, avoiding a high incidence of personal income tax is also important. An important strategy proposed for achieving this is to minimise realised or taxable income, and maximise your unrealised income. Unrealised income refers mainly to the non-cash capital appreciation (gains) in investments, which is not taxable.
This can be achieved through careful planning which may include getting professional advice from accountants and lawyers. High incidence of tax represents the loss of cash that could be added to the investment portfolio if the tax was avoided.
* Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.