PERSONAL FINANCIAL PLANNING PART 3:
TRUE WEALTH
GEORGE WILSON ADAMS CPA MBA
January 3, 2022
True wealth is both an abundance of dollars and the absence of certain very stressful relationships.
This article concludes my three-part series on personal financial planning. Part One: The Access Code to Success is 21100 discussed how most people can build financial wealth. Part Two: Miserable Millionaires discussed how mere money isn’t enough to be truly wealthy. Finally here in Part Three I will explain my own definition of true wealth based on thirty years of experience as a CPA and business advisor.
I would like to emphasize (again) that this series of articles is focused on financial wealth and its associated risks and benefits. There are indeed other (more important) types of wealth, both tangible and intangible, that are outside the scope of what I discuss here. Shakespeare’s warning on the price of financial wealth is very relevant:
He that wants money, means and content is without three good friends.
William Shakespeare
As You Like It, Act III, Scene II
True Wealth Is More Than an Abundance of Dollars
The common definition of wealth is that it is simply an abundance of dollars. Different people will give a different amount to satisfy this definition, based on their lifestyle and expectations. For some wealth begins when you have $500,000 in safe investments. For others, millions or more are required.
What this simple definition doesn’t consider is that true wealth requires the absence of certain things from your life as well as the presence of a certain amount of money. Let’s get the ‘delete’ button ready and discuss what you need to get rid of in your life in order to acquire true wealth:
Time to Say Goodbye
Here are the three things I believe must be deleted from one’s life in order to achieve true wealth –
(1) No Boss: Own Your Job
Most employees work ‘at will’ and can be fired for any reason, or no reason at all. The business environment today is harsher and more competitive than ever and employers demand more from their workers. Most employees work at the pleasure of their masters (employers). At any time you could be informed that “your position has been eliminated” and “yesterday was your last day.”
It is stressful and difficult to build a life, raise a family, incur debt, and make plans for the future when your primary source of income is controlled by someone else. The solution is obvious: self-employment. Fire your boss, own your job and seize control of your future.
Self-employment is not for everyone and has its own burdens, risks and costs. But if you don’t own your job that means someone else does, and can take it away from you at any time.
There are actually several ways to own your job and include self-employment, employee ownership of a company (through an ESOP or Employee Stock Ownership Plan), tenured professors, partners at professional service firms, military personnel who can usually be terminated only for cause, and other special work relationships based on legally enforceable contracts.
(2) No Landlords: Own Your Home and Workplace
Leasing is a form of financing used by those who, for whatever reason, choose not to buy. Residential and commercial landlords have enormous power. Tenants are never more than one month away from the commencement of eviction proceedings.
I’ve had many business clients who rented space for their business and who faced severe problems because they didn’t own and control their physical environment. Leases may or may not be renewed. Rent can go up entirely at the discretion of a landlord.
A restaurant that invests thousands of dollars in leasehold improvements will lose it all if they lose their lease. Leasehold improvements revert to the landlord. Further, pursuant to Internal Revenue Code Section 109, tenant improvements that revert to the landlord on termination of a lease are completely tax-free. Landlords acquire such property without owing a penny of tax. They win when a tenant loses.
Landlords can suddenly change important rules, such as declaring a “no dogs allowed” policy. This happened to me when I was renting commercial office space for my CPA firm. Our dog Rex is a family member who goes with us everywhere. I decided the time had come to fire my landlord and buy my own office building. This is one of the best business decisions I have ever made. Now we have three dogs.
Not owning the physical space where you live and work could be a very expensive mistake.
(3) No Creditors: Own What You Have
I’ve had many business clients who, on paper, were millionaires, by which I mean they legally owned assets worth millions. But their assets were encumbered by enormous debts. Debt is a powerful and risky tool that may help a business when it succeeds while hurting a business if it fails.
If the annual sales of a company increase 20%, debt service payments will probably remain unchanged. This is a wonderful thing, until the opposite occurs. If annual sales decline 20%, debt service payments remain unchanged and must still be paid even though fewer resources exist to make the payments. Beware of financial leverage: it is a slippery slope.
One good measure of true wealth is net worth: the fair market value of assets less debt. Individuals and business owners who avoid or minimize debt will insulate themselves from its risks.
A smaller home that is fully paid for is a wiser choice than a much larger home with a huge mortgage. An older car that is debt-free is another wiser choice than a new SUV with a big loan. A small business that grows through reinvested profits is yet another wiser choice than a bigger business saddled with a large commercial loan.
It is better to have less, and own everything debt-free, than to have more and be owned by a bank. Will your banker call you today? Is he pleased with your latest tax returns and financial statements? Do you satisfy the bank's current lending criteria? Maybe and maybe not. I’ve heard fear in the voices of many of my clients with big loans. The truth is that the bank is their boss regardless of the millions of dollars of assets they own on paper. Banks routinely cross-collateralize everything owned by a borrower.
In my real-world experiences with clients I’ve seen many cases where loan interest expense is a disguised form of tuition.
Conclusion
Frugality, wisdom, efficiency, hard work and modesty are the best friends of true wealth. Some of my clients have achieved true wealth: they control money instead of being controlled by it. They own their sources of income, own their homes and workplaces, and own what they have by controlling or eliminating debt. Many of them live modestly and don’t need vast amounts of money to consider themselves rich. Nor are they afraid to enjoy what they have spent many years earning.
I believe true wealth is available to many people, by making good choices over and over again through your life. True wealth is the cumulative effect of hundreds, perhaps thousands, of good decisions. It is the triumph of persistence over despair, wisdom over indulgence, logic over emotion.
As a practical matter, it may be the case that only some people will arrive at the financial goals advocated here. Still, it is useful to know what to aim for in life. A compass that reliably points north is a good thing even if you never actually arrive at the North Pole, the place the compass points to. A compass can help people improve their position in life because knowledge is power.
In these articles I’ve done my best to show why you don't need millions of dollars in the bank to be rich. True wealth is both an abundance of dollars and the absence of stressful and threatening circumstances.
Wealth is the degree to which you own and control your life.
Photo Acknowledgements and Credits: Sunny Strip Background by ©Chris Combe | Flickr.com / Signs, Composition & Modifications by Shawn Hill | VASTmicro
George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
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