Wealth Building and Financial Planning

Decoding the language of financial planning can be difficult and discouraging.  As a financial counselor I find it useful to avoid the use of terminology that may confuse the purpose and need for a financial plan. 

The most over-used term in financial planning is: Wealth Building. Warren Buffet is a wealth builder.  Buffet decided early in his life to prioritize wealth building.  He has been quite successful.  However, most of us do not have the same commitment, nor will we achieve true wealth: having large possessions, or larger than most men, as lands, goods, money, or securities; opulent; affluent; rich.

Wealth Management is another over used term. Wealth Management strategies require two things: (1) A deep commitment to wealth building; often resulting in a frugal lifestyle in order to preserve investment capital.  (2) Investments that are not subject to depletion for cash flow and can be left for growth and reinvestment.

The Personal Financial Sustainability model for financial planning focuses on an asset accumulation model based on accumulating enough assets to fund a valuable life until death; a reasonable expectation.  The pyramid below illustrates the three primary types of accumulation funds, Reserves, Savings, and Investments, essential for sustainability.  The amount required to fund each of these categories depends on the unique financial circumstances of the individual or household.   

Savings are the next level of accumulation.  A savings account is interim accumulation, invested in interest bearing accounts, CDs, money market savings accounts, or accessible investment funds that are liquid enough to supplement cash flow in times of unemployment, underemployment, or exceptional expenses or need.  Savings accounts can also be used to fund personal rewards and special purchases. 

Investments have a greater time horizon than savings.  Investments are meant to go untouched unless there is an extreme need or major long-term planned expense;  education, home purchase, retirement.  Investments provide asset growth through additional contribution (transfers of excess savings and contributions to retirement accounts), growth, and reinvestment of earnings.  Most investment companies offer online services that provide enough guidance for people to select appropriate mutual funds or stocks based on risk tolerance and time horizons (when the funds must be available for spend-down).

Working with a carefully selected investment advisor can provide relief from the stress and responsibility of managing investment accounts.