When it comes to the blogs and other tracts providing information on building wealth, frugality carries most of the weight. And it makes sense. The greater the difference of income over spending is a strong determinant of the level of wealth an individual will achieve during their lifetime as compared to their income level.
As important as frugality is, spending is even more important, even if it doesn’t garner the column inches the matter deserves. Spending less than you earn is the seed money for investments and without investments it is impossible to build significant wealth.
As an accountant I see people from all spectrums of income. Frugality, even hyper-frugality, is the hallmark of those with modest levels of wealth. Even the lowest income earners can amass a half million or more in a working career when frugality is taken to religious levels, with the excess invested in equities like index funds.
Mid-levels of income also do well with only the single tool of frugality. As their wealth grows they sometimes seek out professionals to help them. These clients tend to want short consulting sessions once a year with a review at tax time.
Then come the serious achievers. These people sometimes have modest incomes, sometimes large incomes. Regardless their income level, these people smack it out of the park. Their level of wealth is well beyond what would be expected for their income level or level of frugality (the excess of income above spending).
Super-achievers in wealth building focus on spending rather than frugality. They know spending is more important. And they know most spending drains their energy and wealth while proper spending can actually make them richer!
They also know that wealth is fleeting. The highway is littered with the corpses of wealthy people of yesteryear. A lifetime of building wealth can be lost in less time than it takes to snap your fingers. That is today’s topic. Wealthy people that keep it long enough to leave a legacy spend on the 5 things listed below in a disproportionate amount compared to the general population. As you flex your frugality muscles you want to consider spending some of that excess on these things to grow and preserve your wealth. Because, remember, when you have money there are always those looking to separate you from it.
Millionaires and Health
How wealthy can you really be if you are chronically sick? In pain? Or dead!
If you have your health you are already wealthy and rich people know it and take steps to keep it that way. Eating quality food and exercise are primary. Proper medical care also plays a key role.
I see poor people and those looking to super-charge their frugality, to achieve goals like early retirement, refuse to pay for quality food or a gym membership or a piece of exercise equipment. It is counter-productive behavior.
I have a membership at Lake Park Swim & Fitness. Mrs. Accountant attends two or three exercise groups per week and I hit the floor (where the weights are) three times per week. This is a part of our routine! Physical activity is a priority in our life. Mrs. Accountant loves it so much she took a part-time job their working two nights per week cleaning up a bit (and for a free membership).
Outside the gym I also remain active. I walk an hour each day and sometimes jog. My sneakers see at least 3 miles of travel daily above and beyond normal movements (walking to the water cooler, et cetera). I chop wood on my farm, plant trees and work the garden. I recently bought a step meter to see how I’m doing. Rare is the day with fewer than 10,000 steps and many days are well above 20,000. Mrs. Accountant has similar numbers.
Lake Park isn’t the cheapest gym, but they also are not the cheapest gym. (Yes, you read that right.) It is the cleanest gym (and friendliest) gym I’ve ever been a member of. I want a clean environment and working equipment. My workouts are serious business and I want a gym that feels the same way.
Food is another important expenditure for the wealthy. I grow much of my own food, but nutritious food can be had from the grocery store and it doesn’t require the “organic” label. Processed foods are limited in my household. Fresh fruits and vegetables are a common sight. We freeze and can lots of homegrown produce. Home prepared meals are the best so we do it a lot.
Health includes medical services. I see many poor people (and even some earning a reasonable wage) foregoing medical care and recommended treatments. Modern technology has given us the longest lifespan in human history, but it does no good if you don’t use the technology.
Reasonable medical insurance to deal with a big medical issues is a must in the U.S where there is limited national healthcare for people under age 65. Regular checkups and taking required medications are all part of the program. Wealthy people know it is easier to stay healthy than to regain health. And as a reminder, without health, financial wealth has far less meaning.
Millionaires and Legal
Most people know they need to take care of their health. Fewer understand the importance of legal protection.
What takes a lifetime to build can be sued away in a fraction of a moment. Wealthy people know it, too. Keeping wealth already accumulated is vital to keeping wealth all the way to the finish line.
It blows this accountant’s mind when people set up their own business entity. They have no experience (in most cases) in how to do this correctly, but they do it anyway. These hard working people put in the hours for years and even decades. Yet, their first step is to take a shortcut, the cheaper way. (Notice I said cheaper, not frugal. Frugal doesn’t take shortcuts; cheapskates do.)
The same applies to wills and other legal documents. Of course, if you do it wrong you will not be around to clean up the mess; your friends and family will. (Nice memory you left the kids.)
In all my 37 years in practice I’ve never seen a truly wealthy person take legal shortcuts. I have seen many people lose a lifetime of work, sometimes while in retirement, over not using a qualified professional to handle their legal needs.
I keep a law firm on speed dial for legal questions and other legal services. They have my retainer. When in doubt I go to the professionals to help me make quality decisions. I understand tax laws well (and still rely on other tax professionals for research all the time), but legal matters not so much. Attorneys sometimes have a bad reputation. It should not be that way. My legal team is a vital part of my financial plan. Their advice is always welcome. Attorneys can save you a massive amount of money and grief when planning ahead, or, they can cost even more trying to fix a mess that might end up with a settlement costing you decades of your invested savings (work or lifeforce, as some say).
Millionaires and Tax and Accounting
I’ll admit this part is self-serving. It is also a vital part of wealth creation and retention.
When you add up all the taxes you pay (income, property, excise, gift, sales and more) it is the biggest single expense in your life. Even your home doesn’t cost as much as all taxes combined are pealing from your wallet. Even a modest income can see half or more lost to the litany of taxes the government has devised to separate you from your hard-earned money.
In my office the tax professionals sometimes laugh when people say they prepare their own tax return. “We always enjoy summer work,” is their response. There is some truth to that.
But it gets worse. To this day I have never had a consulting session with a client or someone from this blog where I didn’t save that client several times in taxes what they paid me. There have been cases where a $1,000 consulting fee yielded 6-figures in additional wealth, much of it from tax savings.
I have no problem with people preparing their own return when it is very simple. However, a tax professional is worth her weight in gold if she works with you! Rare is the non tax professional that knows when it is best to elect to treat their side hustle or business as an S-corp over a sole proprietorship. If you own income properties do you understand the mechanics of a cost-segregation study? If you own any investments are you aware of tools to defer and eliminate taxes on the profits? Like-kind exchanges? Opportunity funds? Delaware Statutory Trusts?
Even something as simple as professional bookkeeping can send your net worth skyward faster. One of my accountants just helped an investment property owner from Mississippi clean up his books. Now he knows where he is financially at all times. He can make better decisions; I can give him better advice. Banks loans are easier to get and rates lower. He really has professional looking books! (It would be bragging if I did the work, but Dawn gets all the credit.)
His taxes are also lower because I can help him plan instead of react. He refers to us as his OCD accountant. Yes, we take pride in our work and pay attention to detail. It is never enough to have clean books. We demand we provide guidance to optimize wealth building for every client we serve.
It doesn’t come cheap, of course. But I deliver greater results because I am incentivized to do so and invest in growing my arsenal to better serve clients. The cheapest isn’t always that cheap.
The income property owner discussed above had several accounting firms who could not get his fast growing rental business under control. Dawn even struggled in the beginning. There was, and is, a lot to digest. I kept applying steady, yet firm, pressure. While the client benefited, I was training an accountant on how to handle the difficult cases. Now that the books are clean it isn’t so challenging anymore.
And this brings up another important point. Not every tax and/or accounting professional is cut from the same cloth. Some are better than others and some are outright incompetent. In a previous post I discuss how you can find high quality tax professionals and accountants for your wealth building team. The same applies when looking for a legal professional.
With so much on the line it is worth hiring a competent tax professional. If your return is simple you can prepare it yourself. I have many consulting sessions with people who prepare their own tax return. I review the prior return as part of the consulting session and it is usually okay.
Tax and accounting professionals are worth their most when consulting. Their large reservoir of knowledge and experience can help you make better career and investment choices. It is difficult at best to build serious wealth without a highly qualified tax professional.
Millionaires and Education
Primary and secondary schooling, along with a college, is designed to teach you how to learn. Until you learn how to learn nothing else will matter. Yes, college will educate you on the basics in your field of study, but it is just the basics, as hard as those final exams were.
Nothing prepares you for real world. College textbooks have nice neat questions with exact answers. Real life rarely delivers such a neat package. Thinking on your feet and designing answers on the go is vital to success. That is why doctors spend so much time in college and even more time sharpening their skills as interns and in residency.
Once you learn how to learn the world is at your beck and call. What you learn in college can quickly become dated. Your “real” education begins after graduation!
Many professions require continuing education (CE). Doctors, attorneys, accountants and enrolled agents (a tax professional designation) all are required to take continuing education courses each year. And for good reason. Bad habits can set in and CE can bring behavior back in line. New technologies and changing laws all require more learning, more education.
Application is harder than theory. I see tax professionals and accountants come out of college and struggle when they move from the legal facts to applying those facts in real world situations. Clients don’t always bring in all their paperwork. Some (all too many) are trying to game the system. Your job is to keep clients in line (they didn’t teach you that in college, did they?) and use the material at hand to build the most accurate record.
Doctors face a rude awakening when the classroom makes way for the medical theater. Answers are not always easy to define or find and time is of the essence. It’s an open book test with a human life on the line and the clock speeding forward.
You don’t have to be in a profession to benefit from education. In all facets of my life I have continued learning. Reading is a daily part of life (a big part of life). Every day is a learning experience! Even after all these years of study and thousands of books digested, I still feel like a neophyte most of the time. The more you learn the more you realize there is to learn. It is humbling.
Learning is one of the great pleasures in life, too. Wealthy people find this compelling. They spend a disproportionate amount of their income and wealth on education at all times of their life and enjoy the process. The wonder of discovery never grows old.
Spending on education is a guilty pleasure wealthy people never skimp on. My personal library has pushed past 3,000 volumes and I make prodigious use of several local libraries as well. I am a sponge for knowledge and people pay me a lot of money to see how I put the pieces together as it applies to them. And there is nothing more pleasurable and fun than that.
Millionaires and Insurance
This expenditure of the wealthy might come as a surprise to many. That is because you need to sift the junk insurance from the stuff that matters when it come to building and retaining wealth.
To start, we are not talking about the insurance you purchase for small electronics at retail outlets. If you can’t afford to fix or replace an $86 item you can’t afford the item. This is junk insurance and wealthy people don’t buy it. Besides, most credit cards provide similar insurance for free just for charging the item on their card.
Wealthy people strategically target their insurance spending. It has to protect wealthy adequately or build wealth.
Large assets require coverage. Homeowners should have adequate insurance to protect against large losses. Wealthy people frequently have high deductibles, however. Small losses are easily handler out-of-pocket and insuring for small losses is always a losing game.
Home and auto insurance are more than just protecting the asset’s value. Many wealthy people don’t have collision on their vehicle or have a high deductible. That is because a damaged car is a mild inconvenience when it comes to building serious wealth.
Lawsuits, on the other hand, are a different story. A minor fender-bender might set you back a few thousand; the lawsuit several hundred thousand and a boatload of time, anxiety and stress.
Wealthy people almost always enhance their insurance with an umbrella policy, extending liability coverage beyond the original policy limits. Damage to property almost always is a minor issue when it comes to wealth, but a lawsuit can eliminate all vestiges wealth ever existed in your portfolio. And, as already mentioned, it can happen faster than the snap of the fingers.
Other insurances wealthy people use fund legacy planning and business protection. Protecting a business protects the income stream, an important consideration for the wealthy and those soon to be. Legacy planning frequently includes insurance to deal with tax issues, fund charities of choice and provide long-term for family after our wealthy friend departs this realm. You would be surprised how much income can be generated with a proper insurance policy and it isn’t the insurance policy providing the income, only the protection and/or framework to provide such additional income.
Non-wealthy people fight this expenditure the most. I even saw a popular blogger a few years back claim he forewent homeowner’s insurance. I can only imagine the risk and damage readers taking his advice faced. (The real value of homeowner’s insurance in the liability protection, not the casualty coverage, by the way.)
Wealthy people buy insurance that protects against serious losses to wealth while poor people insure items on Amazon with a sticker price under $100. That one simple fact tells a very large story.
The right insurance is important. The insurance agent might not be the right place to go to find out the best values in insurance (insurance agents don’t always understand legal and tax issues). That is why we consult with educated attorneys and tax/accounting professionals. Your accountant and attorney are a vital part of your plan to build and retain wealth, and frequently have a fundamental understanding of all the wealth issues involved, including insurance.
There are other things wealthy people spend on too. The 5 above are areas wealthy people generally do not skimp on. Too much is at stake if they do.
Thinking like a wealthy person is the first step in building wealth. Keep yourself as healthy as possible, adequately protect yourself with qualified legal professionals, also hire qualified people in the tax and accounting field, never stop learning and protect your current and future assets with proper insurance.
You might have other priorities. Many wealthy people travel more than I do, but it isn’t required. Some buy more home than I would feel comfortable living in. To each their own, I say. But the 5 categories above are where all wealthy people focus their spending if they plan on keeping it. That might be a hint you should, too.
Engage frugality and put the excess monies to work. Learning to save and spend properly is the only way to reach financial goals; to reach true levels of significant wealth.
More Wealth Building Resources
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.