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Wealth creation – The importance of a strong defence! (Part 1)

13 April 2021
Mark Friend
Estate Planning / IHT, Building a Business, Property Investors & Developers

This is the first of a two part series of blogs on the topic of wealth creation. In this first blog I will be looking at how wealth is perceived in society and how you can measure your own wealth.

When you look around at your friends and neighbours can you identify those who are wealthy and those who are not?

Is it Sarah with her brand new Porsche 911 cabriolet, fancy clothes and Hermes handbag who lives in a lovely five bedroom detached house in the countryside? Is it Mary who drives around in a recently acquired three-year-old Ford Focus Active, wears practical down to earth clothing and lives in a three bedroom semi-detached in a nice respectable part of town?

The trappings of success, the car, the clothes, the house, the holidays are there for everyone to see, but if you dig deeper a different story often emerges.

We have been brought up in a world where success equates to fame and possessions.  We are told that in order to obtain great wealth we need a good education, a good job and then to use that money to buy the expensive house and new car. Simply by acting as if you have wealth all of a sudden you are wealthy!

Test to determine whether you are really financially wealthy

Here is a test to assess your true financial wealth:

Multiply your income from all sources by your age and do the same for your partner.

Add the two figures together and divide by 10.

This figure is your theoretical approximate net worth. If your actual wealth is double that figure you are doing great. If it is 10 times that figures you are in the elite!

So for example:

John earns £150K (salary, rental income, interest, dividends etc…) and is aged 55.

His wife Sue earns £50K and is aged 53.

Based on the above their net worth should be at least £1,090,000. Ideally it should be double this figure – i.e. £2,180,000.

Now add up the value of your house, rental properties, your business, stocks and shares, pensions, cash and personal assets and deduct from this all your liabilities (mortgages, credit card debt, personal loans etc…).

So how do you compare?

Would it surprise you to find out that Mary is three times more wealthy than Sarah? Mary has saved hard and owns a portfolio of rental properties. She has no mortgage, cash in the bank and no debt. Sarah still has a mortgage on her house, a PCP contract for her car, huge credit card debt and no savings. Fortunately Sarah does have a respectable company pension scheme, but only because her employer contributes into it!

Dealing with the tax affairs of hundreds of individuals we encounter clients both like Mary who have real financial wealth and those similar to Sarah who display the trappings of success but often have huge levels of debt and little, if any, savings.

For Sarah the insatiable need to ‘keep up with the Joneses’ or be perceived as wealthy is an almost impossible position to sustain long-term, creating a real emotional and psychological strain and ultimately an unrewarding retirement.

Below are the two key traits of those who become wealthy:

  1. Usually the wealthy are self-employed or business owners and earn good money – a strong offence.
  2. Invariably the wealthy are thrifty and it helps even more if both parties of a couple are frugal – a strong defence.

Wealth creation for most people comes from the difference between your offence (income creation) and your defence (personal spending).

Someone with moderate offence and a great defence can become wealthy. Surprisingly enough most new wealth is being created by individuals who do not earn lots of money but are simply hard working and great at saving. Their wealth is not coming from inheritances or winning the lottery!

In the second part of this blog I will be sharing with you my top ten tips on how you can build a strong defence and create real wealth in your estate.

The content in this blog is correct as at 13/04/2021. See terms and conditions.

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