February 10, 2014



What is wealth? The concept of wealth can apply to anything of value. But normally, when we talk about wealth or about someone being wealthy we think about material possessions. While other kinds of wealth are important as a financial planner I am primarily concerned with the material kind, and sometimes that's a problem.

It's a problem because when people think of wealth the first thing that comes to mind are either ultra-wealthy people that are in the news because they do outrageous things with their money or the latest lottery winner. These people are a pretty small portion of the population, less than .01%.

The focus of anyone's long term financial plan should be to build enough wealth to sustain you in your retirement years. But the word wealth gets in the way. If I tell someone they need to build wealth they freak out - they are thinking I can never be as wealthy as Donald Trump so why even try.  As a result I don't use the word wealth I tell people they need to accumulate valuable possessions. Valuable possessions are those things that increase in value over time or produce income.

The traditional creators of wealth in America are financial assets like stocks and bonds, real estate and the ownership of private businesses. Accumulating valuable possessions (wealth) is simple in theory but difficult in practice. You only really need three things.

First, you need to make enough money. If you don't have the income to cover your basic expenses you will never be able to accumulate anything. Almost everyone is capable of doing math yet when it comes to money many of us think 2 plus 2 equals 5. It's really simple. If income is less than or equal to outflow accumulating valuable possessions is not possible.

Second, to accumulate you need to save enough. Once you have the income you need to cover the basics you need a savings plan. The more you save the more valuable possessions you can accumulate. It doesn't matter what your income is, saving is where most people make mistakes. I have had people in my office who make hundreds of thousands of dollars a year say they don't make enough money to save. Most people have the same problem. They can't distinguish the difference between a want and a need.

Saving is hard because you have to put off instant gratification and that is really hard to do with all of the societal pressure to have "things". It is hard to sacrifice for some far off goal. Not only do many people not want to sacrifice but they want those things now before they can actually pay for them. The biggest roadblock to saving is debt. Particularly auto loans and credit card debt.

Finally, you need to invest. The goal of investing is to find something that is going to increase in value or is going to give you passive income (income you don't have to physically work for). Where to invest is the big question. You can't go wrong with the three classics - financial assets like stocks and bonds, real estate and private business ownership. These are by far the three areas that made have created the most wealth in America.

I specialize in financial assets but I never discourage people from investing some in the other two if they have a good plan which includes not borrowing a lot of money. But most people will use financial assets inside retirement plans because of the time involved in the other two.

One investing mistake I see people make is starting a business that just pays them a salary that they could make somewhere else. If a business has no other value and cannot be sold is not a valuable asset. It may be better than working for someone else but it's just a living. If you have this type of business you have to be able to put away money in the financial or real estate categories or figure out a way to make your business a business that someone would want to buy someday in order for it to be considered a valuable possession.

Bill Oldfather offers fee-only money management and personal financial advice. Oldfather Financial Services, LLC is located at 2033 Central Avenue in Kearney Nebraska. Email to bill@oldfatherfinancial.com