What creates wealth and financial independence? This is a question that people often wonder about, and in turn, seek out answers from their financial adviser, friends, family or the internet.
This also is a question that I have tried to touch on in my previous writings.
There are two questions here because “wealth” means something different than “financial independence.”
Wealth is a relative term that has different meanings for everyone. In general, wealth can be defined as something like “an abundance of valuable possessions or money.”
In contrast, financial independence implies having “enough,” meaning that we have enough financial resources to make independent choices and to do what we want to do in life with a lifestyle to which we are accustomed.
There are three main components to becoming financially independent and potentially wealthy, which are earning, saving and investing. The ranking of importance of these three items changes based on our stage of life.
In our early years of adult life, earnings generally ranks first because we must have earnings before we have anything to save, and we must have savings before we have anything to invest. We improve our earnings through education, work experience, skill, aptitude and hard work.
It is no secret that higher earnings through employment often comes with working extra hours, handling more stress and getting advanced training. We each then decide how much we are willing to do for more earnings.
Earnings must be combined with savings if we want a chance at financial independence. I’ve known many people with great incomes that are not independent because spending is too high, thus leaving little for savings or investment. I’ve also known people with modest incomes that are great savers and who are well on their way to financial independence.
This seems simple, but if it were, everyone would be doing it. It simply does not happen without a clear roadmap combined with discipline in spending and saving, and that is why we focus on financial planning.
The earlier in life we begin investing the more those investments can multiply. There is a crossover point in life where investing takes its role as the primary driver toward financial independence or wealth. At some point in life the annual growth on our investments might exceed what we could save in a given year.
The more disciplined we are in early life the greater the chance this will be true. At that point, our investment decisions concerning risk and return objectives become important. We always can pursue the “best” return; however, the risk we accept, or experience can have a dramatic effect on the financial independence outcome. We cannot accurately predict risk or return with certainty; therefore, we should plan accordingly to make sure the impact from a negative outcome does not derail our plan for financial independence. This is a second major piece that we focus on in financial planning and investment management.
Wealth can be possible if we have earned, saved and invested successfully through time. Yes, some people are wildly successful in their business pursuits or some might inherit wealth, yet for most people the path to wealth is achievable with diligence.
Wealth is different for everyone. We might look at someone who appears to have more assets than us and feel they are wealthy. We do not know for certain if they are as wealthy as they appear, and they might not feel wealthy based on their pattern of life. This is precisely why wealth is considered abundance, or more than we need for “our” life. Comparing ourselves to others is a certain path to unhappiness because there always will be someone with more wealth. This also can lead to spending more than we should, and therefore not saving enough.
In closing, we can focus on increasing our income through education, training, hard work and taking on certain risks. Next, we need to focus on controlling our spending to save an appropriate amount from whatever we earn. Last, we need to be diligent with those savings and invest with a proper balance between risk and return. Do those well and financial independence, and possibly wealth, will be possible. Seek help from those with experience and knowledge. Even the “wealthy” do so regularly.
The views expressed here reflect the views of Timothy Breitfelder as of 02/12/2021. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.