The Nuts & Bolts of Wealth Accumulation
Wealth accumulation is the act of increasing your net worth over time.
The modern approach to Wealth accumulation relies on increasing accumulation during the earning years and the draw-down of accumulated wealth during the retirement years.
The accumulation phase tends to take place during our 30’s, 40’s, and 50’s. The preservation stage begins once we begin approaching retirement age. This will lead us to entering the distribution or draw-down phase during retirement.
Wealth Accumulation Strategies:
Lower Expenses
One of the first steps in a successful Wealth accumulation strategy is lowering expenses. Lowering expenses may be easy enough to say but following through can be the hardest part. Creating a budget can be one of the best ways to start lowering your expenses.
You could begin the process by identifying your total monthly expenses. Figure out how much you’re spending each month vs the amount of income you are receiving. Once you have the expenses nailed down, you can proceed with creating trade-offs. These trade-offs may come in the form of cooking meals instead of dining out or pouring that cup of coffee before your leave home vs. stopping at Starbucks. According to the U.S Bureau of Labor Statics, pre-pandemic housing, transportation and food costs make up more than 60% of U.S. Consumer spending. (Consumer expenditures report 2019, 2020)
These tradeoffs may seem small, but small is where most of us need to start. This small start can help us use excess income to pay down high interest debt, which will ultimately lead to the accumulation of wealth.
Increase Income
We have already discussed lowering expenses. Now we can talk a little bit about increasing your income. You may be thinking, “If I knew how to increase my income, I wouldn’t need to read this article”. In some ways this thought may be accurate, however increasing your income will not help with the accumulation of wealth if your expenses continue to inflate at the same rate.
People tend to earn higher wages by means of a promotion or career change. The area of concern we face revolves around the inherent nature of humans to buy the big new house or brand-new car. I’m not saying that buying a bigger house or brand-new car is bad, but I will put caution around this action until your budget can support the increased debt while continuing to accumulate wealth. This means that you may need to focus on eliminating other debt before embarking on the new lifestyle.
What if you can’t seem to get that promotion or land that new career? You may want to consider working more hours. Working additional hours may help increase temporary wages long enough to pay down debt. Once this debt reduction has taken place, you may be able to reduce working hours while still accumulating wealth.
Keep in mind, we would want to create that emergency fund, based off budgetary needs. This Emergency fund should be in place before trying to advance to the last strategy that I have listed in this article.
The Entrepreneurial Spirit
We have now arrived. Our journey started by lowering expenses and creating a budget. We have also increased our income, which led us to accumulating excess cash and creating our emergency fund. Now, the fun begins. We are ready to invest our accumulated cash in a variety of ways. Let’s talk for a moment about growing our accumulated wealth. There are many ways to grow wealth, but we will focus on the following three: investment accounts, entrepreneurship, and real-estate.
Investment accounts can include a tax advantaged IRA, 401k, 403b, Roth IRA (to name a few) or retail non-tax advantaged investment accounts. Tax deferred investment accounts can be a great way to grow wealth without the growth being hindered by taxes today. Sure, you will have to pay taxes on this growth eventually, however the tax advantage today can help that wealth grow faster. The Roth IRA can help you guarantee the taxes paid, at today’s rates, without hindering the future growth. You may be asking yourself, which one of these accounts should I use? The answer to that question would be, “It Depends”. It depends on the growth strategy that you may currently be using, your current position within the wealth accumulation process, or the need for current tax relief. The best way to decide an answer may be to make an appointment with a Certified Financial Planner or other fiduciary planner.
Entrepreneurship can be defined several different ways. The Entrepreneurial spirit is full of endless opportunities, but what does it really mean? Entrepreneurial is defined as “taking financial risks in the hope of profit, enterprising.” This can be done by starting a business, investing in an established business, or buying a business. It is important to do your homework on this strategy, as it can be a risky but rewarding endeavor.
Real-Estate
The last strategy that I will mention in this article revolves around real-estate. Real-estate can create several avenues for growing wealth. You could be looking to buy commercial buildings in hope of creating a fixed income stream while also allowing for property appreciation. Alternately, you may be looking to buy a piece of property with the intent of improving it to sell. Which option is for me you may ask? Well, it depends on the goal you are trying to achieve. This goal could be limiting taxable income by creating a passive income stream, or it could be rapid capital appreciation achieved from buying and selling properties. Either way, real-estate investments can help a person grow their accumulated wealth with an entrepreneurial spirit.
Conclusion.
We have discussed several great strategies for accumulating and growing wealth. All previously mentioned strategies tend to build on one another while developing an over-arching portfolio of growth assets. We all need a starting point; whether this means creating a budget to lower expenses or increasing income to accumulate excess cash. Everyone has an opportunity to build wealth, and sometimes building wealth can come with trade-offs. Our responsibility revolves around deciding on a solid path and understanding the trade-off’s required to achieve our goals. Many people measure wealth by the amount of money you have, or the cars in your garage, however accurately measuring wealth goes much deeper than a bank account balance.
I will leave you with this thought. What is the difference between being Rich and being Wealthy?
Anyone can have a large income, or hefty bank account to support a windfall of debt. Wealth on the other hand, is about learning how to make your money grow for you and sustain your future. Identifying and defining what type of life you want to live is one of the most important aspects of truly being wealthy. Our goal at CapSouth Wealth Management it to help you identify, define, and live your One Best Financial Life.
To learn more about CapSouth Wealth Management visit our website at www.CapSouthWM.com
If you would like to further discuss wealth accumulation strategies, request an appointment at www.CapSouthWM.com/contact or contact our office at 800.929.1001.
Article by: Wes Hayes, CapSouth Wealth Manager
CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.
