Everyone has a Wealth Curve—it’s a visual representation of our financial life and the pressures that impact our wealth and its potential. Your individual curve begins the day you receive your first paycheck and well beyond your last one. Every decision you make regarding money since that first paycheck has impacted your wealth. Unfortunately, our awareness of the power we have over our wealth isn’t always present from the beginning.
It can’t be stressed enough, one of the fundamental principles in understanding how to grow wealth is first recognizing you are the single most important part of your financial plan. You are the one who makes decisions that either increase or decrease your overall wealth. It’s your ability to earn income and save money that impacts your entire world.
This curve, a visual representation of your wealth, isn’t always going to grow as you want it to. Life happens, unforeseen circumstances can stall or even eat away at progress. Your curve will not always be a steady curve trending upward. Which is why it is so important to understand what is going on with your finances to identify financial pressures standing in the way of your wealth curve growth. This is the second fundamental principle to understand about growing wealth—factors are applying pressure to your finances every day, preventing your Wealth Curve from growing exponentially.
Taking a More Hands-On Approach
When we create a plan and commit to being continually engaged with our wealth curve, we can take greater control of what happens with our wealth. Taking a Wealth Curve System approach requires the individual to take greater ownership over their present and future financial wellbeing. Your output is the product of all of your decisions. In that sense, you are the product for growing money. Your success doesn’t come from one decision that you make, but it’s numerous decisions that you make every single day over your entire financial life. That starts the moment you walk out the door of your parents’ house and take full responsibility for yourself—and your family.
Too often, people are siloed in their view of their financial plan rather than focusing on the big picture and their direct involvement in increase their wealth curve. Sometimes, it’s because they believe in a pitch that one magic product or investment is going to save their retirement. Whether it’s a mutual fund, insurance policy, annuity, a stock option, a 401(k), or something else, the truth is that banking entirely on a single product or type of investment is setting you up for financial failure.
There is no magic wand that you can wave and save your financial plan. The “magic” that is going to save your retirement is to put multiple products and multiple strategies together in an integrated way that is unique to you, the individual.
There are always very popular products being pushed—everyone wants to treat clients with cookie-cutter solutions. But every client isn’t the same—everyone has a different lifestyle, different circumstances, and different financial pressures.
The One Thing You Must Try to Prevent: Erosion
When it comes to financial success, a single solution isn’t right for everyone. Single products are often focused very tightly on rate of return, but they don’t look at everything that’s happening in a person’s life. They don’t look at the financial pressures or erosion principles—those are actually taking away more wealth than is being accumulated in most cases.
This erosion occurs across all the financial obligations we face daily, weekly, monthly and yearly. Added up over years and decades, it makes a difference. Take for example, a bill we all pay: car insurance. Car insurance is a simple example of a “pressure” that often takes away more wealth than is being accumulated. If a forty-year-old individual has an annual premium of $800 and drives for forty years, that’s $32,000 on premiums. If a catastrophe happens—a huge tree limb falls in an ice storm and crushes the car—then paying $32,000 over forty years makes sense. But if nothing ever happens, that’s $32,000 spent with nothing in return—basically buying a car that is never driven. Plus, there’s no opportunity to put that money in something that will bring any sort of gain.
If that money were put into an investment that had an 8 percent return over that same forty years, you’d have a gain of $207,000. That’s a lost opportunity, because that gain has been transferred to the insurance company. You don’t want to go without car insurance—you don’t want that exposure. But maybe you can reduce your premiums from $800 to $700, a simple move that, over the years, can save almost $27,000. This is just one example of how capital erodes. Financial institutions have fees and other costs that are designed to transfer the wealth from you, to them. The government’s taking your money in the form of taxes: income tax, sales taxes, consumption taxes.
Taking a Different Approach
We all feel these pressures. The problem is many of us don’t do anything about it. It’s like the biology experiment with a pot of water and a frog. Boil the water first, and then try throwing in the frog. He’ll struggle to keep you from tossing him in and will jump out if you do. But if you put the frog in lukewarm water and then start turning up the heat, the frog will get so accustomed to the water temperature that as it heats up, he will slowly boil to death.
That’s what happens with so many people and their financial plans; they get so comfortable with their situation, even though erosion keeps heating up the water, that they end up at the boiling point—they’ve got no money left.
That’s why taking greater ownership in your wealth curve by understanding those pressure points is so important. This wealth curve system approach acknowledges that financial success does not come from chasing returns or selecting a magic product or asset class. It comes from having a balanced plan, and then stress testing that plan for weak areas to see how taxes, fees, inflation, obsolescence, technological changes, lawsuits, disability, medical expenses, interest rates, market volatility, college costs, risk, and so many other variables can and will impact your wealth potential. Learn more by listening to the Wealth Curve Podcast’s latest episodes on my website.