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The Financial Planning Habits of High-Net-Worth Individuals

Millions aren’t made overnight. You amass your retirement assets through a lifelong process of earning, saving, and investing while taking advantage of tax-deferred savings and prudent debt along the way. Financial discipline and understanding key wealth management principles are essential at all stages of the process, and your investment allocation will shift to match the ever-changing context of your life.

Wealth Management Principle #1: Savings = Income – Expenses

Early on, your savings have a greater effect on wealth accumulation than investment returns. This changes as your investment portfolio grows through compound earnings.1 If you successfully save and invest, then at some point, with adequate investment diversification, portfolio returns will surpass contributions from savings. Until then, your focus should be directed to maximizing income while minimizing expenses. The charts below illustrate the importance of saving and investing as soon as possible. In the first retirement planning scenario, $400k of savings grows over 40 years to a value of $1.64M, achieving a 410% return on investment. In the second scenario, $600k of savings is required to reach a value of $1.68M at retirement, resulting in a 279% return on investment over 30 years. Both scenarios assume a 6% annual fixed rate of return.

The first step to building and managing a portfolio, and the largest variable in our retirement savings equation, is income. High-net-worth individuals typically have multiple sources of earned and passive income. Generating significant passive income requires a considerable amount of capital. This can be a difficult task for those still focused on accumulating savings. To compensate for this, aspiring millionaires may want to seek out employment opportunities that offer various forms of compensation. Receiving additional compensation from commissions, stock options, and profit-sharing plans is a great way to mimic the diverse forms of income and integrated risk management methods of the wealthy. Now the tough part, what do we do with all this money we make?

Wealth Management Principle #2: Build a Budget

Don’t worry, following a three-step financial planning solution can be useful for those with a healthy fear of Excel spreadsheets:

  1. Know what you make.
  2. Know what you spend.
  3. Set up automatic payments and transfers.

Most banks provide cash flow summaries on their web portals; this a great place to start when building your budget. If this isn’t available, use pay stubs to determine your take home pay and bank statements to calculate your total average monthly expenses. From there, it’s recommended you maintain a baseline bank balance equal to three to six months’ worth of expenses.2 Finally, manage your portfolio with ease by setting up automatic transfers to your investment accounts. If you start to see your baseline bank balance drop, you know you have been overspending. We believe that a good target savings rate is 20%, but this should be adjusted and properly allocated across various investments and accounts to fit your preferences and goals.

Early in your career, we believe that investing should be simple. Seek to purchase high-quality, low-cost funds that expose you to the whole market, and keep buying them. Stock picking and timing the market are not recommended. Unlike most activities (i.e., math, sports), investing does not provide instant feedback.3 It takes years to find out if you are one of the extremely rare people who can beat the market. Investing tends to get more complicated as your net worth increases, at which point, partnering with a wealth consultant may be beneficial. Asset allocations should shift from growth to protection and risk management as liquidity and stability are needed for retirement.

Wealth Management Principle #3: Only Two Things in Life Are Certain

Estate and tax planning are extremely personal and complex processes. High-net-worth individuals must take constant risk management actions to reduce their tax liability. They often allow tax law to dictate the timing of major asset purchases and sales. A proper tax plan will seek to offset gains with losses and strategically realize gains in years of lower income.

An intelligent investor will also allow tax benefits to serve as a decision-making signal. For instance, someone might wait to purchase a home until they are able to claim itemized deductions that will allow them to take a deduction of mortgage fees and interest. Other common financial planning habits of high-net-worth individuals include maxing out 401(k)s and health savings accounts, using the annual gift tax exclusion, donating long-term capital assets to charity, and using debt to finance appreciating assets.

Gaining a thorough understanding of your financial situation and developing a financial plan are tasks that must be repeated often on the journey to retirement. Working with an asset manager or other financial planning professional may provide you with a clearer path along the way. Our team at Columbia Pacific Wealth Management is here to help. Please contact a wealth advisor if you want to learn more about our approach to holistic wealth management.


Sources:

  1. Maggiulli, Nick. Just Keep Buying. HARRIMAN HOUSE PUBLISHING, 2022.
  2. Saving and Investing – SEC.gov
  3. Maggiulli, Nick. Just Keep Buying. HARRIMAN HOUSE PUBLISHING, 2022.

Important Disclosure Information:

The information presented here is for educational purposes only, contains the opinions of CPWM, LLC and does not reflect the view of any other person or entity. CPWM’s website and its associated links offer news, commentary, and generalized research, not personalized investment advice. This is for information purposes and should not be construed as an investment recommendation. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with a tax professional before implementing any investment strategy.  Investment advisory services offered through CPWM, LLC, a Registered Investment Advisor with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.

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