Multiplying Your Wealth By Subtraction
There’s one skit by comedian Steve Martin that I absolutely love:
You can be a millionaire and never pay taxes. You can have one million dollars and never pay taxes. You say “Steve, how can I be a millionaire and never pay taxes?” First, get a million dollars. Now, you say “Steve, what do I say to the taxman when he comes to my door and says, ‘you have never paid taxes.’” Two simple words, two simple words in the English language: “I forgot.”
It’s funny, but not what I’m recommending when suggesting that subtraction (or omission) is the key to multiplying your wealth! Too often, we try to build wealth by developing a mental list of all the things we think the wealthy have added to their investment strategy. Rather, we need to go back to the actions the wealthy took along their initial journey.
Competing Non-Primary Goals
An associate had a conversation with a young logger in Northern B.C. a few years ago regarding his investment portfolio. In response to a few initial questions, the young man said he was 30 years old, worked very hard, lived simply and had accumulated a portfolio of $250,000.The advisor was floored and told the logger that he had accomplished the most important part—actually saving the money! He lived in an environment relatively free of shiny objects competing for his attention.
Successful wealthy people and their organizations began by defining one primary goal:
- Steve Jobs’ mission statement for Apple in 1980 was “To make a contribution to the world by making tools for the mind that advance humankind.”
- The purpose of Richard Branson’s Virgin Group is “changing business for good.”
- Starbucks mission is: “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”
- The Lego Group seeks to “Inspire and develop the builders of tomorrow.”
Everyone has a primary goal. The trick is to continue stripping away everything that is non-essential until you are left with the essence of your purpose. You are then left with a simple question whenever you evaluate a purchase: “Does this serve my primary goal?” All the competing non-primary goals simply erode your power.
Taxes
There is a difference between tax avoidance and tax evasion and it often involves jail time. Our tax act gives us plenty of opportunity to avoid or defer taxes through vehicles like Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs) or Registered Disability Savings Plans (RDSPs). There are also strategies that allow us to deduct from our taxable income things like investment counsel fees, certain interest paid in pursuit of our investment goals, etc.
The most effective tax planning involves taking advantage of tax reduction opportunities that are often staring you right in the face. All it takes is a little help in identifying the opportunities.
Investment Costs
Up until a few years ago, many people may have been under the impression that there were no fees on their investments. Today, there is far better disclosure showing what you are paying for investment management and advice. That’s a good thing. Investment management and advice are not free, and you get nothing for nothing. The trick is in getting your money’s worth. It is worth having a conversation with your advisor about what kind of value you are getting, what value you may not be tapping into and what it is costing you. It often pays to do a fee audit to compare the value you receive compared to what you pay for it.
Complexity
The problems that plagued the financial markets during the great financial crisis of 2007-2008 revolved around the use of complex financial derivatives that tried to mask their true underlying risk. There is nothing wrong with owning stocks, real estate or bonds directly or through a well-structured investment fund. The risk arises when you own something that not even your financial advisor truly understands.
Negative Mindset
Depression and anxiety play a key role in determining investment success or failure. Depression over past financial performance often results in anxiety over expected future events. This certainly affects our actions and we need to be very aware of that.
Research into the psychological value of losses and gains have identified a loss aversion ratio averaging two to one. For example, a gain of 20% has the same impact as a 10% loss. Our brains are wired to avoid loss rather than to pursue gain.
You cannot strip away negative emotions. Rather, it is best to replace those emotions with a successful mindset. Warren Buffett said it best: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. You must supply the emotional discipline.”
Sweating the Small Stuff
The list of small stuff is never-ending and there would be no point to even giving examples. The fact is that most of the things that distract us and get us into a rut are all small stuff. Small Stuff is all the things that we look back upon over the years and say: “that really wasn’t worth worrying about at all, was it?”
If we focus on the big priorities in life, the little things will carry less impact when they happen to us. By focusing on all the little things, there is little room in our hearts and minds for the big priorities.
Unnecessary Do-it-Yourself (DIY)
For too many years I did my own accounting and tax returns, both personally and for our business. I would even try to do my own research on legal matters. I may have been competent in some areas, but I was distracted from my primary goal and ultimately made avoidable costly mistakes. Today, I bounce all my questions off my accountant and lawyer. Although I get an invoice, I also get valuable guidance and peace of mind.
If you are seriously focused on a primary goal, you cannot afford the luxury of being a jack of all trades and master of none. This especially applies to financial, tax and legal advice.
Financial Freedom And Security Budget
We need to clearly paint a picture of what our big long-term goals are and what kind of income will be required in order to support those goals. In other words, begin with the end in mind. Then, we need to work that plan backwards and determine what we need to save every month in order to pay down our debt and accumulate a nest egg that will fuel our long-term goals. We need to also set up contingency plans that will complete those goals for our families if we get seriously sick, injured or if we die.
Once we know what we need to do every month in order to build and secure our wealth, we subtract that amount from our income and consider it completely unavailable for spending. That’s your financial security budget and it is like having a business – you do not comingle that amount with your other expense items. All you need to do then is revisit that plan every year and adjust for any course corrections that have happened along the way.
There is no rocket science involved here. Don’t get stressed out if you feel you do not have enough resources to achieve your goals. The secret lies not in adding what you don’t have. The transformation is in subtracting what is unnecessary.
Richard Vetter, CFP, CLU, CIM | President
WealthSmart Incorporated