The world is constantly changing, and most individuals need to be much wealthier today than they did before. This is where having a wealth creation plan comes into play.
What is a wealth creation plan exactly? It’s a strategy for getting from Point A to Point B in your financial life. How are you going to achieve the goals you set out for yourself? Do you even have a set of goals yet?
So many of us have a scarcity mindset – how can we protect what we have? Instead, we need to adopt an abundance mindset: how can we grow our net worth? Growing your wealth isn’t something that magically happens nor is it a mystery how it happens. Your wealth creation plan is a strategy for acquiring assets and increasing your cash flow.
What is a Wealth Creation Plan?
A wealth creation plan is a multi-pronged approach to how you look at your money. First, understand your current position. Look at what you own, what you owe, and how much money you gain and lose, each month. Every aspect of your financial life can be broken down into these parts. This will allow you to see how they interact with each other, thus demystifying the path to wealth.
Once you understand where you are, it’s much easier to map out solutions for where you want to be. This includes the kinds of investments you want to make. These investments include retirement solutions, and how you’ll pass on your wealth to future generations.
Wealth Creation Plan: Know Your Net Worth
The first thing you must understand is where you are, today. Charting a path forward is impossible if you don’t know where you’re starting. Knowing your assets and your current cash flow situation is critical. Making an inventory of those resources allows you to effectively manage them toward a more prosperous future.
This means understanding everything about your net worth and your financial life. It’s best to write this down or put it in a spreadsheet. Doing so will allow you to have something concrete you can refer back to.
Analyzing Your Wealth Inventory
#1- Debts
Start your wealth inventory by examining current debts. For most of us, our home mortgage is our largest debt. It’s also one of the least troublesome, especially if you locked in a fixed-rate mortgage when interest rates were low.
Student loans are another one of the major debts that many people carry. If you have government-subsidized loans, they likely have low-interest rates and won’t be your primary concern. However, some student loan debt may be at a higher interest rate, which is important to note.
More concerning is high-interest debt like credit cards and short-term business loans that have a repayment period shortly. There are also auto loans, which have highly variable interest rates depending on your credit history and what you’re purchasing. This rate is typically between 6% and 20%.
Put your debts in order of highest interest rate first. This is the order you want to pay your debt off.
Also, if you can get a higher interest rate than the debt, it may be better to invest instead of paying off debt. This depends on your level of self-control. If you have a mortgage at 3%, you may be better off making the minimum payments and investing the difference at a higher rate of return.
It’s helpful to make a list of all your current debts and their associated interest rates. Then you can prioritize the ones most detrimental to generating wealth.
#2- Assets
Your assets are anything you can use or sell to achieve your financial goals. This includes cash accounts, real estate, 401ks, and business equipment.
Together your debts and assets make up your personal balance sheet. Subtract the debts from your assets to get your current net worth. Now let’s look at your income and expenses.
#3- Income
While not considered part of your net worth, your current income is something to consider when planning. Think beyond your primary employment though, do you have any secondary income streams like rental properties, dividends, savings interest, or a side hustle? This is the first component of your income statement.
#4- Expenses
The second aspect of the income statement is your expenses. This would include everything from groceries to child care to your streaming subscriptions. Anything you can eliminate from this side of the income statement leaves more cash available for investing.
We can create a simple cash flow statement by taking our monthly, or annual, income, and subtracting our expenses. This is a great way to visualize how much capital you can add to your net worth regularly. Learn more about cash flow banking to expand your wealth as well.
Simple Ways to Increase Your Net Worth
Now that we know where we’ve laid out our balance sheet and income statements, how can we improve on those numbers? The goal is to increase your net worth, these are some of the more basic strategies to get you there.
Spend Less, Save More
You won’t grow your wealth simply by cutting back on lattes. The less you spend and the more you save, the more money that’ll be available for investments.
This isn’t to say you can’t make frivolous purchases that don’t further your financial goals. However, you can reign them in and identify which of those purchases are bringing you joy and which are just making someone else wealthy.
Wealth Creation Plan: Tips on Saving
1. Make a Budget
Writing up a budget and sticking to it is one of those more difficult steps in making a wealth creation plan. Doing so forces you to see in stark terms how your money is spent, and it’s not always pretty.
Start by looking at your fixed expenses, things like your mortgage, car payment, and insurance costs. These are the most difficult to change but they can significantly improve your financial situation. This also leave more money available for investing.
Reducing your variable expenses a little easier, like forgoing the aforementioned latte if you buy them regularly. You might switch to store-brand products at the grocery store or trade in fancy meals out for home-cooked dinners.
2. Eliminate High-Interest Debt
Paying interest is a necessary evil for building wealth. You don’t need to eliminate all forms of interest nor would you even want to. The vast majority of business owners use low-interest loans to purchase cash-flow-generating assets. What you want to do is trim unnecessarily high-interest payments tied to assets that don’t generate income.
Carrying credit card debt is probably the most obvious example. Most cards have an interest rate above 20% – an amount that’s nearly impossible to offset with smart investing. Personal vehicles are another type of loan you’ll want to pay off as soon as possible.
However, mortgage payments and low-interest loans used to purchase income-generating assets are a different story. It doesn’t make sense to pay off this type of debt immediately. In this case, you’ll just be left with less capital to invest in cash-flow-producing ventures.
Wealth Creation Plan: Increase Your Income
It’s so simple! Just make more money, right? Increasing your income isn’t as simple as cutting back, but small changes can substantially grow your wealth.
By focusing on growing income, you will have a much greater income on your future wealth than budgeting ever will.
#1- Seek Out a More Lucrative Position
In the short term, quitting your job might be outside the realm of possibility, but have you considered advocating for a promotion? Make notes highlighting your value to your employer and how you’re ready to take on more responsibility for a higher paycheck.
In the long-term though, consider developing your skills or relocating to find a position that pays better. Unfortunately, many businesses are unwilling to pay their employees more and the only way to get a raise is by finding work with a new employer.
#2- Start a Side Hustle or Your Own Business
If your regular paycheck is only enough to pay off your expenses and set aside a little for savings, your best bet for securing investment capital is with a side hustle. Think about skills you possess that could be parlayed into a business, ideally with minimal start-up costs. This is a great way to dip your toe into entrepreneurship while maintaining an income with your full-time work.
A side hustle does require you to work more hours in the near term. However, over time you can build up enough wealth to start investing in less time-consuming business ventures.
#3- Buying an Existing Business
Purchasing an already profitable business is something of a hybrid between a side hustle and investing. You’ll be running the operation, but many of the kinks in the day-to-day routine were worked out by the previous owner. Many investors overlook this middle-ground investing option, assuming they need to build something from the ground up.
#4- Make Investments That Increase Cash Flow
Passive investments are one of the best ways to grow your wealth as they only require minimal time and effort to maintain. If you already have significant savings, you’re better off opening a secondary income stream through passive investments rather than starting a side hustle. This way, you increase your cash flow without committing too much time to them.
There are many options for increasing your cash flow. These include buying rental properties, maintaining a stock portfolio, or purchasing a fully functioning business. They aren’t risk-free, but are safer than many other investments. Diversified mutual funds are relatively predictable, but have only a moderate rate of return and don’t increase your cash flow unless you look for ones with a significant monthly dividend.
Also, strategies like private family banking can help with increasing monthly cash flow overtime.
Rental Properties
Rental properties are only profitable if you can time the market to buy when home prices are low but the rental market is hot. To increase your cash flow, your rental’s monthly revenue needs to be significantly higher than the mortgage payments on it. Turn-key businesses can also be lucrative but necessitate a watchful eye to ensure management doesn’t degrade after the purchase is complete. If sales fall flat, you could end up in a negative cash flow situation, where you’re putting in more money than you’re taking out each month.
The goal here is to use investments to raise your monthly income, which increases your cash flow, which can then be fed back into more investments that will raise it even further.
This might feel like an information overload, with so many different ways to save money or make more of it. What’s important though is understanding how all of these components interact with each other, and how they affect the income statement. The goal is to maximize your income and available cash, which allows you to purchase more assets that can bring in greater cash flow.
Wealth Creation Plan: Maximizing Growth Through Investments
Spending less, saving more, and increasing your income are all helpful strategies for securing your financial future, but the only realistic path to wealth is through investments. While cutting back on expenses might grow your wealth by 10%, well-timed investments can increase it by 200% or more.
Investing requires a certain level of risk though, and you should have a solid financial foundation before making any big decisions. Once you’ve built up that base, these are some of the best strategies for investing your money wisely.
Strategy #1- Diversity or Not?
Putting all your money into one type of stock, one business enterprise, or one piece of real estate puts you at the complete mercy of market conditions. Spread your money around to ensure market corrections have only a minor impact on your finances.
Diversifying your investment portfolio is a maxim of most financial advisors, but to truly grow your wealth, sometimes it needs to be concentrated. You could invest in a variety of stocks and bonds and get a decent return as the market steadily creeps upward, but putting all your money into buying a business has the potential for much higher returns.
Concentrate your resources early in your wealth creation plan to maximize growth. Then once you’ve built up some assets and have a steady cash flow, diversify to protect the wealth you’ve earned.
Strategy #2- Maintain Your Liquidity
Having money when you need it is key to smart investing. Unexpected opportunities frequently appear and if you can’t tap into your capital reserves or access credit immediately, someone else will. Invest your money in financial products that can be easily sold if a better opportunity arises.
Contributing towards the cash value of a whole life insurance policy, with the best company, is an excellent strategy for maintaining liquidity. Not only will your cash grow at a steady rate, but you can also use the policy as collateral to take out loans and capitalize on investing opportunities as they appear.
Strategy #3- Buy Low, Sell… Never
Very basic advice for investing in the market, but you should only buy stocks when they are especially cheap or when you know something that could substantially impact the company’s future revenue. Putting money into your favorite ETF every month is just locking up your money on a financial product that isn’t guaranteed to go up in value.
For many investors, selling assets at the top of the market is the goal, but you don’t really know when that is. A better strategy is to purchase assets when they’re cheap and then use them to increase your cash flow without ever selling the asset. The most successful investors buy income-generating assets and then keep them for life.
Strategy #4- Invest Passively
Time is your most precious resource, and there’s only so much that you can devote to income-generating activities. To supplement your primary income stream, you’ll want some passive investments requiring only minimal input on your part.
Stocks indexes and bonds are relatively low-risk, low-effort means to increase your wealth, but you’re unlikely to see significant growth with them. To truly level up your income and increase your cash flow, it often pays to invest more locally.
Do you know anyone who’s starting a business or a local business owner looking to expand? Offer to invest with them and take a very hands-off role. You just front some of the capital, they do all the management.
Strategy #5- Purchase Real Estate
Real estate purchases are a great way to grow your wealth as rental income provides a steady stream of revenue and real estate values generally appreciate over the long-term.
With strategic property selection and management, real estate investments provide a resilient and potentially lucrative avenue for building and improving cash flow over the long term.
Strategy #6- Smart Leverage
Most of us don’t have the means to buy a business, or even purchase equipment to run one, without borrowing substantially. Even if you did have the money to buy everything outright, it wouldn’t be a great financial move. The vast majority of successful entrepreneurs and investors use debt to their advantage. By using other people’s money to fund your projects, you can risk more and secure greater returns than would be possible using only your own savings as startup capital. The key is to borrow at interest rates markedly lower than your expected returns.
Wealth Creation Plan: Protecting Your Wealth by Minimizing Taxes
Lowering your effective tax rate is vital to growing your wealth as it preserves more of your income for investment and savings. By optimizing your tax strategy, you can put more of your earnings toward wealth-building activities.
Tip #1- Don’t Pay Off Your Home
For many people, owning your home free and clear is a mark of success. Knowing that you’re debt-free can feel incredibly liberating. Unfortunately, paying your home loan off as quickly as possible usually isn’t a smart financial decision.
Both the interest on your mortgage interest and property taxes can be deducted from your income taxes. That low-interest debt isn’t something to be avoided but utilized. Your home’s equity is one of the cheapest sources of investment capital and paying it off early leaves you with less money to invest and grow your net worth.
Tip #2- Hold All of Your Investments for at Least a Year
Regardless of what kind of securities you trade – stocks, bonds, mutual funds, or ETFs, you’ll pay considerably less in taxes if you wait a year to sell to them. Selling them before the one-year mark means any profits from them will get counted as regular income.
If you’re in the highest tax bracket, those profits could get taxed at up to 37%. Wait a year or more to sell them and you’ll pay a maximum of 20%.
Tip #3- Utilize Business Depreciation
Buying a business is an excellent way to manage your tax burden thanks to depreciation. Every asset associated with the business – the building, vehicles, equipment, etc. has an expected “useful life” and the asset depreciates in value every year until it reaches the end of that useful life. This happens regardless of actual wear and tear on the asset.
Taken together, the depreciation on your business’s assets can be quite significant, offsetting the business’s revenue and limiting the amount of taxes owed.
Tip #4- Invest in Equipment
Buying and leasing equipment is one of the best things you can do to grow your wealth. Not only does equipment depreciate, offsetting the taxable income it produces, but it will increase the profitability of your business. When done properly, you can bring your taxable income down to nothing.
Normally, buying or leasing equipment would be a complicated endeavor. When you go to a traditional bank, they’ll want to see how the equipment increases productivity and will set the interest rate according to their confidence in your business. With infinite banking, the only question you’ll hear is “How much money do you need?”. That’s the advantage of being your own bank.
Tip #5- Using Whole Life Insurance
Many investment vehicles tout their ability to minimize the taxes levied on their growth, but few can do it as effectively as whole life insurance and infinite banking. While the growth in a Roth IRA is tax-free, you aren’t allowed to make any withdrawals until you’re at least 59 ½ years old. That severely limits how effectively you can use your wealth and the growth does nothing to improve your cash flow.
The cash value portion of your whole life insurance policy is available whenever you need it. However, with policy loans, there’s no reason to touch those contributions. Rather, it can grow while you take out loans against it, which are not treated as income for tax purposes, to purchase more income-generating assets.
Whole life insurance, and approaches like cash flow banking, also has some excellent tax benefits towards the end of your life. The death benefit and the cash value portion of the policy (with a few exceptions) are considered tax-exempt when passing to the policy’s beneficiary. That money doesn’t even need to go through probate.
Building a Wealth Creation Plan
A properly-formed wealth creation plan is a multi-step process, one that focuses on your assets, debts, cash flow generation capabilities, and how they all interact to grow your wealth. One of the easiest ways to tie them all together is with whole life insurance. Not only does it provide dependable returns and easy access to your money (when it’ll be most profitable), but it also shelters your wealth from taxes and provides for your heirs after you’re gone.
At Wise Money Tools we understand how daunting making a wealth creation plan can seem. That’s why we’re here to help with free and easy-to-use resources for smarter investing through the principles of infinite banking. Need to speak to someone personally about your wealth generation goals, contact us directly, and help get you started on the path to financial freedom.
