Diploma of Share Trading and Investment
Course Code: 69793

The laws of wealth creation

Published in The Practice - the official publication for the Financial Planning Association of Singapore, September 2008

by Dale Gillham

Financial independence is a goal many strive to achieve, yet only a few accomplish. In my experience, the most common reason why people fail to achieve this is due to a lack of knowledge on how to create financial independence. For others, it is probably due to a lack of confidence in their abilities to apply the knowledge.

Interestingly, many people are willing to spend years studying to gain a formal education with the expectation that they will obtain a job that will pay enough to enable them to sustain a desired lifestyle. Yet when it comes to educating themselves about how to create wealth, they never quite find the time. Instead the majority seem willing to live from pay cheque to pay cheque – which means they have to work harder and longer to create the extra income that will satisfy their needs.

The desire for individuals to have whatever they want now and pay for it later means that many forego the required planning process for their retirement years. But this need not be the case as it is never too late to get your investments in order.

By simply educating your clients on the ‘three laws to wealth creation’ you can help them build a solid foundation and ensure that they have a sustainable income during retirement.

Based on my experience, I feel that many people do not give enough thought to these principles. They take it for granted that they already understand them and do not give them the attention they deserve. But first, let me ask you this – how many of your clients are truly building a nest egg to ensure their financial independence during their retirement years?

Three laws to successful wealth creation are:

1. Spend less than you earn,
2. Invest your surplus wisely (at least 10% of your income), and
3. Leave it alone so it can grow.

Unfortunately, the majority of people do not obey the first rule of spending less than they earn and are therefore unable to move on. For those who do obey the first rule and move onto invest their surplus cash, many also fail to do their homework beforehand. As a result of their lack of knowledge in this area, they either do not invest wisely or are unable to leave their investments alone long enough to compound over time.

Spend Less than You Earn

It is usually the first rule that creates considerable angst amongst people. This is because many people do not have a budget and without a budget, how do you know:

• How much you are actually spending, or
• How much you can save?

Usually it is not until the end of the financial year when people realise just how much they have earned. But when spending habits are quantified, only then we do we know how much we can save. Indeed, budgeting is like a roadmap to financial independence; it provides you with a plan of attack that allows you to create your preferred reality.

Invest Your Surplus Wisely (at least 10% of your income)

The second rule to creating wealth is to invest your money wisely. All too often people do what is simple or easy rather than what is wise when it comes to investing. A wise investment, however, must give you capital growth and it must give you income. If an investment does not have both of these components then someone else is benefiting from the component that you are not getting.

Once you invest, it is also important to consider how you will manage your investment. In other words, you need to consider your exit strategy before you decide to invest. Most investors do not consider this because when they invest they expect the asset to rise. Even though there is likelihood for the asset to rise, the value of the asset is not realised until you sell. Consequently, this is considered unrealised profits as the asset could fall in value. Therefore, you need to consider how and when you will exit if your investment turns sour or does not perform as expected.

Leave It Alone So It Can Grow

The third rule to wealth creation is to leave your investments alone to grow. When you invest wisely, your money will normally earn you interest, dividends and capital gains. When you reinvest these earnings, it yields additional income because of the compounding effect. Consequently, it is this rule that is the real key to wealth creation. Therefore, once you embark on your investment journey you should leave your capital alone to allow it to grow. Only when your investments are generating income and growth that is equal to or better than what you earn from working should you consider using your investments or income for lifestyle purposes.

Educating Your Clients

Regrettably, the lack of knowledge about wealth creation for the average investor has the effect of intensifying the emotions of fear and greed, causing investors to react and at times over react to market conditions. In essence, this prevents many from becoming financially independent.

An educator and fund manager, I have learned that once can attract and retain more clients by adopting a proactive approach towards educating clients. Once can also develop stronger relationships and create like-minded synergies with the client. Many advisors fear imparting knowledge to their clients because they mistakenly believe that their clients will control their own investments rather than utilise their services. However, I have found that the more I educate my clients the more they trust what I do and the more they benefit from my services.