The Key Is Living The Principles, Not Executing Technical Strategies
It’s not uncommon for financial advisors to receive and advise on technical planning questions and items such as:
- Should I do a ROTH conversion?
- Should I use Universal Life rather than variable life versus term life for insurance?
- How should I set up this trust?
- How can I take advantage of the Intangible Drilling Cost credit on my tax returns?
It’s not to say that tactics and technical strategies don’t have a place within wealth building. But many times people think that these are the “keys to the city of wealth.” Nothing could be further from the truth.
Living by time tested principles will greatly impact your wealth more than any other factors (including fancy estate planning or life insurance products). Do you have a well-defined set of wealth building principles that you live by? You should. I hope they are something similar to mine which are below;
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Make a substantial living.
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Live below your means and control spending.
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Save consistently. Make savings a priority by paying yourself first.
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Eliminate debt.
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Always keep adequate emergency funds on hand.
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Invest prudently over a lifetime. Get rich quick schemes are the dreams of fools.
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Use proper risk management in all areas of your life.
Let’s use a few analogies from a business perspective. Success in business over the long term comes down to delivering a superior product or service over the competition. Successful companies live by that essential truth year after year. Ask yourself this; Was it better at Apple for Steve Jobs to be fanatically obsessed about building better products and services (like the iPhone, the iPad, and iTunes) or would it have been better if he spent his days working on tax inversions, share buybacks, debt to equity ratio’s, and calculating Apple’s weighted average cost of capital? What drove success more; being obsessive about business principles (products, services and customers) or pursuing technical tools?
Wealth builders treat their households like a company:
- They know what drives revenues.
- They control costs (spending).
- They save and reinvest (driving up equity).
- They focus on what matters (living by principles and executing on what drives up your net worth the most).
Your long-term net worth will be far more influenced by whether you can avoid borrowing vast sums to buy cash draining items (like homes, cars, boats, fine dining), than whether or not you do a ROTH conversion.
Have you ever met a single wealthy person when asked what their key to success was responded anything like, “Oh that’s simple, I bought variable life insurance rather than term life insurance.” Have you ever heard a wealthy person like Donald Trump say, “I became wealthy once I completed a ROTH conversion and set up a trust.” Answer; NEVER!
Know the difference between living by principles and getting sucked up into very detailed and technical tools (many of which are pitched by salespeople or so called “financial advisors” who aren’t wealthy themselves.)
What matters is whether or not you could sock away and save a lot of money during your peak earning years (news flash – peak earning years don’t last forever). What matters is if you could hold off or not buy something that you can only purchase by taking on large amounts of debt. What matters is if you can make prudent investments year after year. What matters is if you can keep an emergency fund in a liquid bank account without having that money burn a hole in your pocket.
Principles are the key.
Once the principles are established then it’s up to you to mold your personal behaviors around the execution of those principles. Daily habits drive your behaviors. Rinse, repeat. Wealth building is simple. It just isn’t easy.