• Matt Wolodarsky

How to build wealth thru successful planning

Welcome 2020, goodbye 2019, and the 2010s for that matter. What a year and decade it’s been! We closed the decade with the longest bull market run in history still intact. The current US bull market run, which began in March 2009, turned 129 months in the last month of 2019. Will this streak continue throughout 2020 or will we experience a correction? Nobody knows the answer to that elusive question.


The one truism I can tell you with great certainty is the following:

Wealth creation, the kind that enables you to reach a level of financial freedom to pursue your dreams without restraint, takes long-term planning, discipline, the right motivation and a growth mindset.

This post is going to focus on the first pillar - wealth creation planning. And, what good timing as we’ve just entered a new year and a new decade. Turning the page to a new year always give me pause to reflect on the investing and wealth creation lessons I learned in the past year, but most importantly to think about what I want for the future. This typically takes the form of setting my new year’s resolutions. The problem I have with new year resolutions is that they stop short of providing the plan necessary to achieve your resolutions. Resolutions on a piece of paper without a plan are just wishes. Let’s make a joint resolution to avoid this trap – let’s make this the year we create a plan to achieve our wealth goals.

Keep reading to learn what makes a good wealth creation plan, how to build your own wealth plan, and to get an example (my wealth plan) that can help you get started.


What makes a good wealth creation plan?

There are three main elements to a successful wealth creation plan:


  1. Wealth goals: Set wealth goals that align with your core values and beliefs. They must deeply motivate you so that you persist in the face of adversity and sacrifice today so that you can realize financial freedom tomorrow.

  2. Wealth creation strategies: The paths to wealth creation that you’ve chosen to invest your limited resources into, in order to achieve your wealth goals.

  3. Tactics: Specific and tangible steps you will take in the short term (1 year), mid term (3 – 5 years), and long term (6 – 10 years) to achieve strategy.


Wealth goals

To realize your wealth goals, you must select goals that go to your core. Your wealth goals must touch on that life aspiration or human emotion that can motivate you, over the course of your working life, to go into overdrive in pursuit of your goals.

A good place to start when setting your own personal wealth goals is to ask yourself: Why do I want financial freedom? What do I want to do with my time when I no longer need to work?


Strip away the material and small. Think big. This is about having the time and freedom to do what fulfills you the most.


Whatever financial freedom would inspire you to do – be it pursue advanced education, volunteer, travel the world, philanthropy, leave a financial legacy for your kids; you must choose your wealth goals carefully. They are your guideposts and will help to keep you motivated on the journey to financial freedom.

Wealth creation strategies

Developing sustainable wealth requires a comprehensive approach. I believe there are five main wealth creation strategies we can all pursue, and in fact should. Omitting one of these can make it difficult, or impossible, to pursue others. You will not be able to invest if you are not also saving money. The more you invest in each individual strategy the greater amounts of wealth you will create. Some of these may not always be practical at different life stages, but master these five areas and you’ll be well on your way to achieving your wealth goals.



The Five Wealth Creation Strategies

Income expansion

Undoubtedly the most material of the five levers at your disposal to grow your wealth over time, expanding your income is about investing in yourself and exploiting your unique skills for economic personal gain.


There are three key ways to expand your income, which are you going to pursue?


  1. Building your skills and expertise to improve your performance in your chosen field

  2. Building a side hustle business

  3. Building a portfolio of income earning assets, such as dividend paying stocks and real estate

Savings

While many may believe to the contrary, the simple fact is that it is your personal savings rate—not your investment choices—that is the most important determinant in growing sustainable wealth over time.


With so much riding on what you set as your personal savings rate (the percentage of your income that you put into savings), what is the right amount? There are two primary questions for you to answer to help you determine what the right savings amount is for you:

  1. How much do I need to live on each year in retirement?

  2. How much do I need to accumulate over time to finance this standard of living in retirement?

A good financial adviser can help you answer these questions and build you a customized plan to reach your retirement objective. In the meantime, there are some good rules of thumb from best-selling personal finance authors that can help inform what savings rate is right for you.

Personal Savings Rate Recommendations

My general philosophy on setting a personal savings rate is to not over analyze it, the key is to get started and adapt to the new adventures life will bring along the way. At a minimum, you should target 10% of your gross income as a target savings rate, checking periodically to ensure you remain on the path to realizing your financial goals. Keep in mind the more you can save now, the longer you will have for your savings to grow and compound, setting you up for an earlier and even more lavish and rewarding retirement. If you target and achieve a 10% savings rate you will be far ahead of what the average Canadian is able to save. According to Stats Canada, the household savings rate in 2013 was 5%.


Define strategies that will help you optimize your savings, such as finding expenses in your budget that can be reduced or eliminated and making your savings automatic. The most fail-safe and effective way to build up savings is to set up pre-authorized biweekly or monthly contributions that automatically transfers money from the deposit bank account for your paycheck into your investment account.


Easy credit avoidance

The average Canadian consumer carries $3,637 in credit card debt[1] with most Canadian credit cards charging approximately 20% interest. Said another way, the average Canadian consumer pays $727 in credit card interest payments per year.


The idea of paying $727 in interest payments alone each year to cover the debt I accumulated on my credit card for things I could have done without makes my skin crawl.


Of course I am not saying never use credit cards. Like many things in life, credit cards are a double-edged sword. While the interest rates can be absurd, there are scenarios where the informed investor can use them strategically, while there are situations where you should avoid credit cards like the plague. Use the following guidelines to help you determine how best, if at all, to leverage credit.



[1] High credit card rates costing Canadians a fortune, Financial Post, March 30, 2013; http://business.financialpost.com/2013/03/30/high-credit-card-rates-costing-canadians-a-fortune/

While we are all inundated with the lure of easy credit, we are still in total control in terms of whether or not we succumb to this costly temptation. So the next time you feel that twitch to buy the next big thing in fitness such as slimming sauna shorts or the Thighmaster, resist the temptation of easy credit with all your might.


Invest wisely

Successful investing starts with knowing and being honest with yourself, getting in touch with your “inner-investor”. While this may not seem obvious and seems a little too Zen like, the simple truth is your future financial independence is highly dependent on it. Because if you are not honest about your interest in dedicating the time necessary to first learn the fundamentals of successful investing and then each time you come across a company you have an interest in, you will be risking your financial future on a whim. This does NOT mean that if you are not willing to invest the time necessary to improving your investment acumen that you will need to forego the fantastic returns of the stock market and rely on fixed income investments or other more conservative, yet lower return investment vehicles. It may just mean hiring and managing this investing expertise carefully in the form of a financial advisor. But know this, the more you improve your own investing expertise, the greater the likelihood you have to increasing your investment returns. Until you are ready to build your own investing acumen, protect yourself from yourself and hire a financial advisor with a solid track record and whose goals align with your goals – making you wealthy.


Getting in touch with your true “inner-investor” also means being honest with yourself about your risk tolerance, what stage you are in life, your time horizon, and your goals. These factors will determine what investing strategies you employ at different times in your life to be successful in achieving your goals.


To help you get started on learning how to invest wisely, check out the Wealthy Owl’s checklist for selecting winning stocks.


Reinvestment

As you start to accumulate your own wealth you can either over consume or re-invest in yourself and your future – whether that’s reinvesting in your professional development (e.g., returning to school to do your Master’s degree) or reinvesting in your stock retirement portfolio.


One of the most powerful forms of reinvesting is through DRIPs. No, DRIPs have nothing do with those dreaded beads of sweat that start to drip from your armpits through your shirt on a hot or pressure filled day. DRIP stands for Dividend Reinvestment Plan and they have a significant impact on the amount of wealth you can accumulate over time. They way DRIPs work, if you chose to opt into a stock’s DRIP, is the company or broker (depending on how you DRIP) reinvests the dividend income automatically at the prevailing stock price on your behalf.

For an investor in a company that pays a dividend they basically have two choices when it comes to deciding what to do with their dividend distribution – reinvest it or spend it. Hopefully you have bought into the notion of delaying instant gratification, or NOT satisfying every itch our consumerized society may evoke in you, and instead opt to reinvest in your future. DRIPs make this easy for you by automatically reinvesting your dividend payment into the purchase of new shares in the company stock you already own. Don’t worry this won’t be done without your consent, although for the security of our society’s golden years I sometimes wish this was the case. Alas, these are still free markets after all that we trade in.


I love DRIPs, and you should too, for three main reasons:


  1. Forced savings – DRIPs are one of the most powerful ways to automate wealth accumulation over a long period of time, they automate savings and investment unlike any other strategy. DRIPs remove emotions from investing due to their mechanical nature, emotions and investing do not mix well when it comes to building sustainable wealth.

  2. The compounding effect of investing on steroids: While it did take Albert Einstein to proclaim compound interest as the greatest mathematical discovery of our time, once you start DRIP-ing you will be able to plainly see how DRIPs can further boost your returns and supercharge the compounding effect of investing.

  3. Dollar-cost averaging: DRIPs by their very nature of buying shares in a regular rhythm on the ex-dividend date of the public company are a way to institute the popular investing strategy of dollar-cost averaging. This strategy allows the investor to buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. Dollar-cost averaging helps you reduce the downside risk of investing and DRIPs enable this way of investing.

Learn more about DRIPs and dividend investing with my guide to dividend growth investing.


Tactics

With your overarching plans defined in the form of your wealth creation strategies, it is now time to select your tactics. While your wealth creation strategies determine what paths you are following on your long journey to financial freedom, tactics are the specific actions or steps you take to accomplish your chosen strategies.

A couple suggestions for defining tactics that will set you up for success:


  • Include short term (1 year), mid term (3-5 years) and long term (6-10 years) tactics. Certain strategies, such as expanding your income thru real estate, take a long time and you need to break them down into achievable chunks of work. For example, you may have a mid term tactic to save enough for a down payment within 3 years to buy your first investment property and a long term tactic to buy your second investment property five years later.

  • Make the tactics very specific. Vagueness is your enemy when defining tactics. A well defined tactic includes the details of the exact steps you will take, is achievable, and is numbers specific. For example, “set up an automatic 10% withdrawal from my monthly paycheck into an investment account” is a great tactic. “Save money every month” is not a well written tactic.

Putting it all together

With a specific and feasible wealth plan you will have a blueprint to follow to get you to your wealth goals. Then it’s just about executing your plan and sticking to its core fundamentals, while optimizing it for new circumstances and events you may find yourself dealing with as you go through life. As you complete the tactics over time, update your plan to represent what you’ve accomplished and what you will be focused on in the coming years.


To help ensure you have a good wealth plan, do the following:

  • Take time to ruminate on your plan. This is one of the times in life where rumination is a good thing. Creating a wealth plan is a big deal and you want to come up with the right plan for you. Don’t rush it, let your first draft sink in, refine it and make sure your final plan inspires you and is feasible.

  • If you have a spouse or partner, share your plan with them. You are going through life together and something as important as a wealth plan needs both of you on the same page.

  • Get help from experts to help you fill in the details of your plan. You can’t be expected to be an expert in each of the areas required to build wealth, especially when you are just beginning. Build a team of experts to help you develop, refine and implement your wealth plan. For example, if you are new to investing hire a financial advisor whose goals align to yours. If you are interested in real estate investing, find someone who has done it successfully to mentor you.

My plan

I tend to be a very analytical thinker and like to learn through models and examples. To help you build your wealth plan I want to share with you the highlights of the plan I built for myself this year.


I have to admit it feels very awkward for me to share so much, but it’s important to set an example and be transparent if I am ever going to be able to help others achieve their wealth goals.



The Wealthy Owl's Wealth Plan

You can see in my plan how I defined multiple strategies for each of the five wealth creation strategic areas. It’s important to diversify your investments of time and effort, but also not spread yourself to thin across too many strategies. I favor two strategies per area, but three would not be pushing it. Notice how I’ve broken each strategy into specific tactics over the short, mid and long term.


Are you ready to start turning your financial resolutions into a reality? Start today and get on the path to financial freedom.


P.S.: I’d love to hear about your plans, as well as feedback on my plan or approach. Do you feel there are any important strategies or tactics I’m missing?


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