Stages of Financial Empowerment

The following article is an excerpt from our informative net worth eBook. Download a free copy here.

What stage of your financial journey are you in today?

Over the course of your life, you will find yourself at different financial stages. And, depending where you are in your financial situation, your needs will differ. They will, in fact, change over time as you get older, your situation changes, and you move from stage to stage. Luckily, the importance of monitoring your Net Worth and your Savings Rate and using them as primary tools to achieve success does not change. These tools are always critical no matter where you are in your financial life. With them, you can always reap real benefits.

I like to break down your financial journey into four general stages. In my opinion, to achieve financial security and success, people at each stage should maintain a focus that is unique to that particular stage. In this discussion, I will focus on three of these stages and the distinct focal points for each. In the fourth stage, “The One Percent,” individuals have many resources available to them and therefore that stage will not be part of this conversation.

The path to achieving wealth often begins when you are starting to become interested in your wealth and you want to learn how to grow it. As you become more educated and informed, success in your career often follows, and your interest likely shifts to a desire to create a bigger nest egg. Eventually, income created by your wealth (that is, the money working for you) may become larger than the wages you earn through work; at that point, you may decide it is time to perhaps retire early. Consequently, the complexity of your wealth often increases as you age and your focus changes from initial accumulation of your nest egg to successful management and continued growth of your wealth through efficient and effective management of your net worth to increase its return.

A Story from Chris: Knocking Down Old Patterns & Accepting New Ideas

I’d like to share a quick story about electric cars with you. In the past, I always ridiculed and held a strong negative opinion about electric cars. To me, they seemed so silly and never made sense. I was sure they would be a fad. I asked myself, why would anyone use electricity made primarily from dirty coal in power plants to power electric cars? How could that be an eco-friendly alternative or good for my pocket book?

Then, during a visit to my home country, Switzerland, my nephew Enrico encouraged me to test-drive his electric car on the Bernina mountain pass, a mountain road connecting my home town with the Poschiavo valley. That was all it took to make me a believer!

Today, I own a hybrid car and cannot wait to get an electric model. I’m in the process of installing solar panels on my house. The experience with Enrico completely changed my perspective on the subject, and now I have converted to appreciating alternative energy sources. I realize now that I had a simplistic rationale before–a need to create a story that fit with my belief system even though that story didn’t serve me well. Even today, I am still thankful for the opportunity Enrico gave me to change my mind and allow me to embrace something new. (For more on the power of negative and positive stories, see the sidebar near the end of Chapter 5).

My point is this:

No matter where you are on your financial journey, learn from me and others, and don’t get stuck with old ideas. Start using a global perspective to achieve your financial goals.

Embrace the concept of using Net Worth and Savings Rate as a primary tool to analyze, score, track and grow your wealth. Doing so will open your eyes and serve you well.

Stage One of Financial Empowerment: Starting Out

69 percent of Americans are saving less than 10% of their earnings. If you currently do not have a savings plan in place or if you are just starting out on your financial journey, you may want to focus on creating a savings plan and a rainy-day fund, so you can sleep well at night, knowing you have a financial cushion in case of an emergency. This financial cushion also builds the foundation for a successful financial future.

The goal is to have, at the end of each month, some money left over that you can move into your savings. A fancy term to measure your savings is “liquidity ratio.” Your liquidity ratio is the amount of money you have in savings, as a percentage of your monthly expenses. In other words, it answers the question, “How many days of expenses could I cover in case my income suddenly stops for any reason?” What’s the answer for you? Could you cover ten days? Twenty days? An entire month? Six months? For many people, the more days, weeks or months they can cover, the better they sleep at night.

There are many free budgeting tools and expense management programs out there, but the bottom line is that if you want to get started on your journey towards financial success, understanding your liquidity is the right place to start. The process starts with tracking your income and your expenses and documenting them well. Your goal is to move off the paycheck-to-paycheck roller coaster from which so many people suffer.

Your biggest challenge is to not overspend and to create a habit of living within your financial means by starting to pay yourself every month through your savings.

A risk in Stage One is simply that you may feel overwhelmed. You may think that whatever you do, you cannot change your situation. You may want to give up. But, you must not! One step at a time, you can reach financial security and ultimately success.

In fact, by not giving up, you can grow your rainy day fund until you feel safe with your financial cushion. Then, you can invest some of the surplus into a retirement fund, pay down debt, invest in securities, and so on. As you succeed with your savings plan, you will find yourself moving into Stage Two of financial empowerment.

The free version of CalcuTrackTM is designed to help people like you, who are starting out and may need a little help to succeed with their savings plan. It is free, so you do not need to spend any money to have CalcuTrackTM help you to create these good habits.

Stage Two of Financial Empowerment: Growing your Wealth

People in Stage Two generally have two habits in common. First, they spend significantly less then they make. Second, they put their savings to work. Because of this, Stage Two is characterized by strong growth of net worth, a high savings rate, the creation of additional income streams through investments, and growth in passive income. In Stage Two, you are in the prime earning years of your life. Some individuals in Stage Two may start a side business within their core competency, or based upon a skill they have learned over time, or built upon a hobby that they take to the next level.

Once your rainy day fund is sufficiently full, you can put your money to work for you. “Passive Income” is income earned from investments, rental properties, or side businesses. During Stage Two, passive income can grow into a significant portion of your net worth. If you are working for a federal, state, or local agency or if you work for a large company, you are likely starting to accumulate a significant pension in Stage Two. This also can make up a large portion of your net worth.

During Stage Two, you are like a gardener planting, caring for and watering multiple fruit trees. Although you don’t always know what the final outcome will be for each tree, you have several that you’re cultivating with the hope that many will provide a bountiful harvest.

People in Stage Two know they worked hard for their money and are not afraid to have their money work hard for them. Their goal is to invest wisely and track their progress.

As time goes on, your net worth will become a bit more involved and complicated. As it does, you are well on your way to financial success.

You should beware of some possible pitfalls in Stage Two. One is the tendency to over-focus on savings and to forget to invest your hard-earned cash. By not investing, you prevent yourself from allowing your money to work for you. Although some people avoid investments for fear of losing their money, the only sure way to lose money every year is to leave it in the bank, and allow inflation to slowly eat away at it.

On the other extreme is the tendency of some people to spend all the extra income they are receiving, rather than not using it to “pay themselves” and grow their nest egg. They are of the belief that any money in their pocket will burn a hole through it and therefore must be spent immediately.

Stage Three of Financial Empowerment: Reaping your Reward

In Stage Three, you are likely retired, or semi-retired and, perhaps in your later years. You receive most, if not all, of your income from your streams of passive and/or active investments.

Now, your financial work is about managing your net worth efficiently and effectively and maximizing the return on your net worth.

Let’s say you have a net worth of $6 Million. If you earn 5% on that money, you will earn $300,000, but if you earn just two percent more—7% –you will earn $420,000, a difference of $120,00 per year. In this Stage, it may become more beneficial to focus on maximizing your investment returns rather than starting new income streams because even a small increase in your return percentage can be a large increase in actual dollars and cents.

In Stage Three, you will likely have a complicated net worth that may contain multiple legal entities with numerous income-producing assets in each. Tracking and analyzing your returns in dollars as well as through figures such as Return on Assets, Risk Exposure, and so on becomes more important. Each individual investment and income stream needs careful monitoring to determine its value in comparison to the rest of your portfolio. You will want the ability to compare and rank investments by return, risk, tax consequence, percentage of your portfolio, and more. At the end of the day, you want to score your various income streams and compare their performance to each other and to new opportunities as they arise

One risk in Stage Three is that although you are financially successful, you may have blind spots that are significantly reducing your returns if you are not embracing a comprehensive picture of your Net Worth. To accomplish that task of maximizing your nest egg, you must focus on your entire global net worth, calculating, analyzing, scoring, tracking and managing it with a financial application that is up to the task.

Chris’s Take Away

No matter where you are with your financial journey, you should start embracing your global wealth and using your Net Worth and Savings Rate as primary tools to help you to achieve your financial goals. Doing so will benefit you regardless of the stage you are in and it is how most one-percenters got to where they are and how they stay there. You owe it to yourself. You worked hard for your money, now let it work hard for you.

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