When it comes to wealth creation, there are many theories and strategies.

From simple index fund investing to hedge funds to real estate, there are ample examples of successful people who have built wealth in all of the above ways.

However, for a person who is just starting off with the wealth creation journey, it can be a bit overwhelming where to start and how to maintain the discipline to carry on.

Because you cannot get rich quick, getting rich slower is the only way.

I see this dilemma in my clients who are new immigrants, are single income earners in the family and have multiple financial responsibilities.

What are the uncertainties in this?

There are three factors that bothers most people.

• How much should you keep in cash so that you can take care of emergencies?
• How should you grow your money and take advantage of the tax benefits available?
• How do you attain financial freedom so as not to have to trade time for money?

If we can answer these 3 questions, then all aspects of safely growing your wealth is taken care of. But it is not easy, even though each sound pretty straightforward.

We will call these pillars as Safety, Growth and Income.

The delusion of Safety – Cash reserves

What is safety is personal finance?

Most people mean holding part of their wealth in cash.

But think about the bank runs of as recent as 2022, when customers got a shock that they cannot access their money immediately.

Although there is FDIC insurance for up to $250,000 per account, the fact that the money is inaccessible for even a day can be unnerving.

You can obviously open multiple accounts and spread your cash.

Or you can use other cash like instruments like money market funds, short term bond funds in a brokerage account or even cash value life insurance (beware of the costs and commissions here in the initial years).

Now the question is how much of your portfolio should be in cash?

Conventional financial advice says 3-6 months of expenses. While it is a good start, it may not be a great advice for every situation. The amount really depends on :-

• what your short term goals and desires are
• how much debt service you have to do in a year
• how stable your job or business is
• what unexpected expenses you may have (car, home repairs)
• how much deductible you have across all your insurance policies

As you can see, a generic advice like 3-6 months of expenses is a very rough idea.

This is the reason I do a Financial Reboot with my clients, where we do a thorough SWOT (strength, weakness, opportunity, threat) analysis and also do a ratio based estimation of the health of the client’s finances.

The Growth saga – markets and taxes

The need for growing your money comes from the word called inflation.

Inflation eats away the purchasing power of every dollar that you save.

Hence, we need to grow each dollar that we save by investing it rightly.

When you invest, there are three things- the expected return, the risk and taxes.

I believe (and most of the financial advisors) that the best growth vehicle are simple stock (equity) index funds. They are low cost, can beat inflation over a long term but can be volatile over the short to medium term. And then when you sell or earn dividends from them, you have to pay taxes either as capital gains or tax on dividends.

Equity funds are also available in many forms in the tax advantaged accounts such as:

• Pre-tax 401k
• Roth 401k
• Traditional IRA
• Roth IRA
• 529 (for educational savings)
• Health Savings Account (HSA)

A complete list is out of the scope of this post. But you get the idea, this is the bucket where you can grow your money in a tax advantaged, inflation beating and low cost way.

When you are starting off with your wealth building journey, these instruments combined with low cost equity and bond index funds provide a solid foundation for investing. You should strive to max out as many of these accounts as possible per year.

One issue I have seen with investors is that they panic when the markets fall or get excited in a bull market, and forget about the sustainable ways of contributing to these accounts. You do not want to interrupt the compounding when you are fearful and do not want to invest a lot of money at the peak of the market when you are exuberant.

DCA (dollar cost averaging) is the most effective way to ride the market and invest consistently.

Another technique to reduce the anxiety is to connect your investments to your goals.

Income – earn while you sleep

I would not call it passive income, even though the end goal is exactly that.

You have to set it up correctly and do the initial due diligence, stabilization.

In this part, you can build a portfolio of primarily income producing assets.

• Dividend Stocks and ETFs
• Real Estate Investment Trusts (REITs) or REIT ETFs
• Rental Property (real estate)
• Crowd Funding Real Estate
• Syndications (commercial real estate)

Dividend Stocks and REITs and their corresponding holding ETFs are the easiest to start with and almost passive, except the initial research and occasional monitoring.

Rental Property may need lot of work upfront finding the right deal which cash flows, get funding either through cash or loan, finding a property manager or managing yourself, finding and screening tenants and then managing the day to day operations.

Crowd funded real estate are kind of privately held REIT (not all of them), and are new concepts in the last 5-7 years. So you should be very careful putting a large sum of money here, since the marketing and reality may not match. Also these investments are highly illiquid with several years (5-10 years) of lock-in.

Syndications are same as crowd funding real estate from the investor’s point of view, but needs more due diligence, accredited investor qualification, understanding the operator, market and deal and finally the risk of losing your entire capital.

Conclusion

These 3 buckets of your wealth building journey will answer all the questions.

• How much should you keep in cash so that you can take care of emergencies?
• How should you grow your money and take advantage of the tax benefits available?
• How do you attain financial freedom so as not to have to trade time for money?

While it may sound simple, the implementation of this plan has several choices and decisions to be made according to your goals, money, desires, background etc.

If you want a financial coach to help you draw a realistic plan, you can email me at:

info@startyourfinancesright.com