By Howard Hook
Howard Hook is a fee-only Certified Financial Planner and CPA with the wealth management firm of EKS Associates in Princeton, NJ.He has been named to Medical Economics’ list of top financial planners for physicians for nearly a decade and is a member of the Forbes’ Finance Council and contributor to that publication.
Ask someone whether they want to be rich or wealthy and they will probably tell you they are the same thing. Truth be told, the words are often used interchangeably or even together. Look up the word “rich” in Webster’s online dictionary and you’ll find the following definition:
“Having abundant possessions and especially material wealth.”
You will also find that wealthy is a synonym for rich. But are they the same?
For me, wealth implies something beyond being rich. Rich to me means someone with a lot of money. But someone who is wealthy is someone who also understands what having money can do for them, their family, and their community.
Being rich can be measured by counting how much money you have. Being wealthy is measured by what you pass on to your heirs, both monetarily and in wisdom.
So how do you build wealth?
The best thing about building wealth is that it is not job or career specific. Building wealth is not reserved for only doctors, lawyers, and investment bankers. It is reserved for those individuals who understand that to build wealth they must delay the instant gratification that comes with spending more money as you make more and instead save it and invest it.
Those savings and investments can then be used to create a lifestyle you enjoy, to educate your children or grandchildren, or even further your own education. Wealth can be used to join or start a cause that you care deeply about or to give back to an organization that was instrumental in helping you get to where you are today.
Many of you reading this last paragraph may think you don’t have enough money to do these things. But the beauty of building wealth is that no one is keeping score. While setting up a scholarship at your alma mater may be great or paying for your children or grandchildren’s entire college tuition would be ideal, it’s the thought behind the action that really counts. Every little bit helps.
The vehicle used to build wealth matters. Deciding that you wish to build wealth and leaving all your excess earnings in a checking or savings account is too conservative and can erode your purchasing power and even destroy long-term wealth. On the flip side, taking too much risk and watching your hard-earned savings disappear in a volatile market is also not the right way to build wealth. Instead, as Goldilocks learned from the three bears, something right in the middle is the best way to build wealth.
Building wealth correctly can be boring. Many times, the best way is to save money on a periodic basis into a portfolio of well-diversified investments. Boring, I know. But that’s okay. You can reserve all the excitement for the time when you have achieved your goal of being wealthy and can now do the things you want to do.)
Once you achieve wealth, how do you stay wealthy? The years you spent saving and resisting the urge to spend money excessively is to be commended. Once you have achieved your goals, you need to continue to steward your wealth so it does not disappear quickly.
The same principles that guided you as you built your wealth should continue after achieving it. Diversification, which is not concentrating wealth in only one type of investment as well as making sure your wealth is protected against unforeseen circumstances – e.g. a lawsuit – are the best two ways to preserve your wealth. Thankfully, both can be accomplished. Maintaining a diversified portfolio helps reduce the risk of overconcentration and making sure you have the appropriate liability insurance coverage can protect your wealth from lawsuit losses.
Here’s something else to note. Building wealth is not only for the very young. Many people start building wealth once they have satisfied other goals, such as buying a house or raising children. Starting young does bear the advantage of having more time for your wealth to grow but starting at a later age can provide perspective that you may not have had when you were younger. The bottom line is that any age is the right time to start. Are you ready?
