Wealth is built on behavior, not on the amount of income a person earns. Stories about NFL football players or Hollywood stars receiving huge paychecks are often accompanied by follow-up stories that tell the tragedy of wasted resources. While wealth is also often associated with advanced education or sizable inheritances, it is the behavior of the individual that determines whether or not wealth is retained. Wealth is more appropriately attributed to a commitment of basic financial planning and practices.
“Take a minute to look at your goals, look at your performance, and see if your behavior matches your goals.” Kenneth H. Blanchard, American author and management expert.
The first step is to determine how you’re spending your income. It may seem silly at first, but keeping a log of how you spend your monthly funds could be a tremendous eye-opener. Take an accounting of every penny and you might find you are regularly buying items you don’t need, and the aggregate amount you could save and invest might advance your financial strength significantly.
For example, we’ve all seen articles about the excesses of buying a daily Starbucks coffee. $4 twice a day adds up to $160 a month and almost $2,000 a year. Did this get your attention? It’s the same with having lunch out every day. A $10 lunch costs $200 a month which adds up to $2,400 a year. Could you purchase stock in a company with your extra $4,400? Of course you could! This doesn’t mean you should always forgo a morning coffee or lunch out, but by making some simple behavioral changes, you could advance your financial progress. $4,400 earning 10% could result in $8,800 in seven years… I’m sure you see the point.
Other examples include saving money by lowering your cell phone costs, or limiting your television bundle. You could also be spending too much money on gifts or clothes. Once you start realizing how you spend your money, you’ll find a number of ways you could rein in your expenses and cut waste. All too often we get involved in behavioral patterns that leak cash, robbing us of the healthier financial future we could otherwise have.
Another place to consider changing your behavior is the amount of debt you owe. The more debt you have, the less likely you’ll be able to escape its hold. Yes, some debt may be serving a good purpose, such as using it as leverage to reach a larger goal. Debt can be dangerous, however, and must be used rationally as part of your financial plan.
Also, another key aspect of healthy financial behavior is saving regularly. Funds should first be set aside to provide you with a 3-6 month emergency fund in case your car needs a repair, or you have a sudden and necessary home project that’s urgent like fixing the roof. After you’ve established your emergency fund, your focus should next be on building your retirement savings.
When planning for your retirement, perhaps the best decision you can make is hiring the services of a Registered Investment Advisor (RIA). Unless you’ve taken college classes and earned a degree in investment finance, have already spent many years investing successfully, and have studied portfolio construction, you should hire the services of a fee-based investment advisor who already has the academic and experiential background to guide you with making investment decisions customized to your unique set of circumstances.
Have you written your Investment Policy Statement (IPS)? Do you know what your individual required rate of return (RRR) is? Have you constructed a portfolio designed to achieve your financial goals during the time remaining before your retirement which builds your wealth while guarding against risk?
These are just a few examples of how an investor’s behavior can result in varying degrees of financial success. To be successful as an investor, you must first develop the mindset and behavioral practices that help you achieve the wealth you desire. It’s not uncommon that administrative assistants have larger portfolios than the doctors for whom they work. Income does not determine wealth; inheritance does not determine wealth; education does not determine wealth. A person’s wealth is best attributed to sensible behavior with wise guidance over time.
“Be + Have = Behave. You will experience your success when you BEHAVE accordingly. BE and you shall HAVE.” Steve Maraboli, behavioral scientist.
We hope this article about building your wealth through behavior was informative. Please contact us so we can review your behavioral practices and the corollary possibilities available to you for securing and increasing your personal wealth and enhancing your retirement.
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM