The general economy in North America, and the world quite frankly, was not too healthy in 2020 – especially considering the recession, Covid, and the fairly high unemployment rates. The signs for 2022 seem to be better, and most of the forecasts suggest that the economic signs remain strong as we head into 2022 especially as the vaccine takes hold.
Regardless of what happens though, when you’re building your wealth, whether in 2021, 2022, or beyond, you need to strategically plan for the growth of your business, and your investments and portfolio needs to be properly allocated.
A proper asset allocation doesn’t mean putting all of your funds into the S&P index, or, the technology sector. I’ve spoken with quite a few CEOs who are heavily invested in the tech sector, not only in their own business, but, also with their cash allocation, and while the tech sector has been on a multi-year high, it doesn’t mean that the sector will continue to trade at highs forever.
Conversely, I’ve also spoken with a number of CEOs who are so focused on the growth of their business that they don’t pay attention to the balance of their investments, and leave everything sitting in cash. If your plan is to do something with that cash, whether it’s an investment in real estate, or, a possible acquisition, then that’s fine, but, if you’re holding cash because you’re too busy to spend a few minutes every month to think through your overall wealth equation, then you’re potentially losing the opportunity cost of the dollar invested.
If your asset allocation isn’t properly diversified, it’s possible that one bad market correction, which is inevitable at some point in the future, and you can easily watch your investments and wealth decline by 50% or more. Worse, if you’re a business owner, and you need access to the cash because your business is in decline, and your stock investments have just taken a 50% haircut, then you’re in a somewhat precarious situation.
Your asset allocation is a fluid process, meaning, it will change as your life and circumstances change. In my situation, and while I was actively running a business, I allocated my portfolio into three equal buckets between real estate, fixed income, and equity. My equity bucket was primarily based on the value of my business. Fast forward a few years, with the sale of my business, and some changes in my life scenario, and my allocation has changed somewhat. (As a side note, you can download a free copy of my book here: The Kickass Entrepreneur’s Guide to Investing.)
Regardless, there’s the old adage, it’s not timing the markets, it’s time in the markets. It’s very difficult to create wealth by buying and selling, in fact, if you try to time the markets, there’s a good chance that you’ll not only drive yourself crazy but, worse, you’ll miss the market’s biggest up days, like the 1,086 advance on December 26th, 2018,
the biggest up-days in 2020 post Covid as we headed into April, May, and June 2020. With that in mind, and as we prepare for 2020, let’s review whether you’re on track to create wealth this year.
So, how did you do in 2020 in regards to building your wealth, and how to grow your wealth, and what’s your plan in terms of building wealth in 2021?
I have a five-step plan to help you build your wealth, and if you’re currently not following any (and all) of these 5 steps, then let’s make a 2021 New Year’s resolution that beginning today, you’ll work on growing your wealth by following these 5 steps:
On a related note, and before I dive into this post on my five-step plan for creating wealth in 2021, I have two articles to share in case you haven’t read them yet: My 2019 Portfolio Performance and 2020 Asset Allocation Strategy, and How I Protect and Grow My Wealth With These 8 Simple to Understand Concepts.
My 5 Step Plan to Building Wealth
STEP 1: TRACK YOUR WEALTH
A single number on its own, as far as I’m concerned, is generally meaningless. A number, in the context of a string of numbers and an established goal, tracked over a long period, not only provides history but, more importantly, makes it easier to reach your goal.
So when I ask the question, “How did you do in 2020 in regards to building wealth?” and then, “What is your goal?” it’s important that you know the answer to both questions, and if you’re not tracking, or planning, then you’ll never reach your goal.
There’s an expression I’ve shared with you in the past: “If you don’t have a dream, you’ll never have a dream come true.”
Your life might be awesome, and you might be accomplishing all sorts of financial and career milestones, but in the absence of a dream (and goal), how do you know where you’re aiming, and then when you do hit the mark, how do you know that you hit the mark?
You need a baseline and a goal.
What is your current level of wealth? How did you do in 2020? What is your 2021 goal?
If you don’t currently have a separate Excel sheet, or a program like Personal Capital, or some program like that, to track your wealth, then start now. You need to know:
– how much you’re saving and spending on a weekly and monthly basis
– how your investments are doing
– what your overall level of growth has been in the last 12, 24, 36 … months
Once you have a baseline and understand how much you’re spending and saving, then you’re in a better position to establish and meet your financial goals.
STEP 2: PLAN
What is your 2022 goal? Like the “if you don’t have a dream” quote above, what level of wealth are you trying to achieve in 2021, 2022, and beyond?
If you’re currently 30 years old and have $100,000 to your name, and your goal is to have $1 million by the time you’re 50, then you need to sharpen and more carefully detail your financial goals.
Let’s put the following numbers into an Excel document:
Column 1: your age (start with your current age in the first row)
Column 2: the year
Column 3: your current level of wealth (e.g., $100,000)
Column 4: the assumed return on investment of your liquid assets (e.g., $8,000 this year, assuming an 8% return)
Column 5: the total amount you added to your wealth in the assumed year (e.g., if you save $800 a month, then you’ll have $9,600 in this column)
Column 6: the total wealth in the year (In this case, it will be $100,000 + $8,000 + $9,600 = $117,600.)
Then keep filling in the rows with subsequent years. NOTE: the starting number in the second year would be $117,600 in our example.
Now that you’re tracking, you need a plan. In the case I mentioned above, if you started with $100,000, and your goal is to have $1,000,000 by the time you’re 50, then with the Excel document filled in, you’ll be able to determine whether you’ll achieve your goal.
So, establish a financial goal, and then track your goal on a yearly or, even more preferable, a monthly basis.
STEP 3: SAVE
Do you have a spending problem?
The same thing that plagues most businesses, the lack of a budget, spending on unnecessary business expenses, not tracking profitability, is the same thing that plagues most individuals.
Just as I advocate for saving a certain percentage of your business’s revenues in a separate account, I also advocate that you take a certain percentage of your salary, or business’s profits, (let’s say 10% of your salary or revenue as a low watermark) and have that amount removed automatically from your bank account on a monthly basis.
STEP 4: INVEST TO CREATE WEALTH
It’s now time to put your saved dollars into an investment account, one that you’ll never touch, with the exception of either a dire emergency or to invest in an appreciating asset (like stocks, bonds, or real estate, for example).
A car is not an investment. It’s an expense.
A vacation is not an investment. It’s an expense.
A stock (buying Berkshire Hathaway for example) or the S&P index fund IS an investment.
Buying a triplex, renting out the top and bottom floors while you live in one of the units, is ABSOLUTELY an investment.
Starting a business is ABSOLUTELY an investment. In fact, starting a business might likely be the single best contributor to overall wealth creation available. Is this in your 2021 plans? You can read this article: 6 Must-Know Tips For Starting Your Own Business
You need to invest in an appreciating asset, one that produces a dividend, yield, increase in value, or a return on your investment and that will contribute toward building your wealth.
STEP 5: GROW YOUR WEALTH
Some suggest that 8% a year is a good return on investment, and if you’re managing to get 8% a year, consistently, year over year, then you’re doing well.
BUT 8% ain’t great.
If you’re saving 10% of your salary and growing your overall wealth by 8% a year, then over time, you’ll build your wealth.
How about a 15%, 25%, or even 30% year-over-year compounded return for many years?
The power of compounding your wealth by 20%, year over year, means that if you start with $50,000 in year 1, by year 10 you’ll have $309,587, and by year 20 you’ll have $1,916,880!
And how can you achieve a 20%, 30%, or even greater year-over-year compounded return?
By starting and growing a profitable business, and by reinvesting the business’s profits:
– back into the business for further growth, and
– in investment real estate
The New York Times, using data from 2007, estimated it took $8.4 million in net assets to be in the top 1%, compared to $121,000 average wealth for all Americans.
That article states, “The wealthiest 1 percent took in about 16 percent of overall income—8 percent of the money earned from salaries and wages, but 36 percent of the income earned from self-employment.” A related article I wrote is the following: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
This strongly implies that a large percentage of the 1% are self-employed, which is probably a good gauge of being “self-made.”
Whether your financial goal is to make it into the top 1%, or a more modest number, you need to begin by tracking, planning, saving, investing, and growing your wealth. Let 2021 be the year you take hold of your financial well-being.
TRACK —> PLAN —> SAVE —> INVEST —> GROW. NOW YOU KNOW.
Good luck,
Before you go, I think you might be interested in reading this post: Do you Have the Most Important Trait Required to Become a Millionaire?
And here’s another: Are You Really Cut out to Be Rich? The Average Net Worth to Make it Into the Top 1% and How to Get There
______________________
Are you a younger entrepreneur? Here’s another interesting article I wrote:
My Response to an 18-Year-Old Who Wants to Become a Millionaire by the Time He’s 30.
My goal is to help entrepreneurs scale their business, improve profitability, and then, use those profits to create massive wealth. Subscribe to my blog to receive my latest thought on scaling your business and creating wealth.
Download my book and Amazon bestseller (number 1 in business, number 1 in non-fiction). You can get your FREE copy here.
