In short, financial wealth is when your money works for you. This means owning assets that are independent to your income and can be used to reduce your labour hours in the future. A common narrative in terms of saving extra cash is what could be called the Latte Savings Plan (LSP). In the LSP, the idea is to sacrifice short term gain (a latte every morning) in order to see long term benefit (financial savings that add up over time). However this plan overlooks two key factors involved with building wealth: a financial plan needs proper cash management and an end goal derived from a personal perspective.
Without effective cash management, both savings funds and investments will not contribute to the creation of wealth over time. The reason for this is due to the nature of cash (which includes both investments and liquid assets) as it is highly likely that it will all end up spent in one way or another. Similarly, the nature of cash often makes a raise at work largely unhelpful in terms of building wealth, since it is uncommon for the extra money to stretch far enough to create a sizable investment for the future, while also covering all of your family’s expenses and desires.
Take a business woman in Toronto for example. She decides to try out the Latte Savings Plan, and after a year she contacts an investment firm to put the cash she saved into a few companies that seem promising. Despite the Toronto market staying strong and her stocks go up, she suddenly finds that she must pay for an unexpected expense, and decides to liquidate her remaining stocks to pay off an additional debt. This means that her savings never actually contributed to helping her build wealth, and in turn she still needs to work the same amount of hours every week.
While having extra cash in your savings is always welcome, effective cash management is crucial in terms of actually building wealth. To do this properly, you must first consider what your end financial goal is – that is to say, you must determine what defines the term ‘wealthy’ for you.
Since financial goals vary from person to person, there is no investment firm, broker, or retirement planner who can determine your end financial goals for you. For some, this could mean paying off their home more quickly and then investing once its paid off; for others it could mean diligently investing in non-liquid assets such as RRSPs over a long period of time and slowly reducing their weekly labour hours.
With an end financial goal in mind, you can then begin to work backwards and assess the risks you are willing to take in order to achieve your goal. This allows you to begin accumulating wealth according to your own parameters, and not according to a cookie-cutter plan laid out by a local investment firm. Also, since it is difficult to turn a raise at work into wealth due to the nature of cash, the decision you make with your invested capital is the largest and most important decision you can make in terms of generating wealth. By reinvesting with your personal financial goals in mind, you can begin transforming your savings and liquid assets into the exact type of wealth that you desire for your future.
If you would like to learn more about wealth generation, cash management, and the Latte Savings Plan, the CEO of Mill Street & Co., Noah Murad, has shared his thoughts on the topic in his first Perspectives piece: Lattes, Rainy Day Funds & Wealth Generation. The Mill Street & Co. website also includes an online knowledge base, which is a helpful resource for those who are looking for more information regarding investing and understanding risk.