In a recent blog post, we outlined the 12 Principles of Prosperity. That is, the guiding ideas that will help you make more prosperous choices. And with that foundation laid, it’s time to talk about the steps to finding Prosperity. In essence, these are the actionable steps you can start taking today in order to reach Prosperity.
Typical financial planning is just that: a plan. Well intentioned estimates that offer little genuine financial certainty. And while there’s nothing wrong with crunching numbers and making estimates, financial planners don’t always represent those numbers for what they are: estimates.
Typical financial plans often use hypotheticals so that a client can imagine:
- When they’d like to retire
- Their ideal retirement lifestyle
- How quickly investments will grow
- Inflation rates
- Future tax rates and rules
- Desired (or required) future income
- Additional considerations like the cost of healthcare
And that’s why we recommend approaching with caution: while the math may be correct, it’s a fools errand to build a plan solely off of projections. The result, inevitably, is a false sense of security.
Prosperity Economics is strategy-based. The projections are there, but they’re used only to supplement the creation of strategies that can adapt with you. So if you’re reading this and asking, “Well what should I be doing?” You’re in luck. We won’t leave you hanging.
Rather than a rigid—and often formulaic—plan, we’d like to offer you a roadmap. Something that will, along with the Principles of Prosperity, help you to navigate your financial life. There’s no one-size-fits-all, and these strategies can be adapted as needed. So keep reading for tips to greater financial certainty.
9 Steps to Finding Prosperity
1. Work Longer
We know, early retirement, or even the “normal” retirement at 65, sounds like paradise. And yet this is often one of the biggest hinderances to Prosperity. Most people cannot afford to quit working at the age of 65 with the proper assets in place to live comfortably for another 20, 30, or even 40 years. In fact, some people aren’t even anticipating the possibility of retirement beyond 100.
The accepted retirement age of 65 was actually established when life expectancy was in the 60s. Now, we can reasonably expect to live beyond 100! That’s a long time to live with no active income source.
If working beyond the age of 65 sounds like torture (or you’re ready to join the FIRE movement), we’re willing to bet you don’t enjoy your job. Your life will be so much more rewarding—now and in the future—if you do purposeful work that doesn’t leave you living for the idea of retirement. And the longer you work, the more financial certainty you have.
Even if you reduce your workload later in life, earning money for as long as possible is one of the most important things you can do for your long-term economic health.
2. Save more!
As mentioned above, typical retirement is a long time. Working longer will help to ease that length of time, yet there’s one other essential component. Save more money.
The baseline many Prosperity Economics Advisors encourage clients to aim for is 20% of their income. If you’re only able to save 5-10%, aim to increase your savings incrementally as you’re able. The key is to continually make honest assessments about your ability to save, as well as the things you want to save for.
And the next time you get a raise, bonus or windfall, make sure to increase your savings rate too. Establishing these good savings habits now will give you more financial certainty in the future when other aspects of your life are less certain.
3. Focus on Liquidity
If you follow the typical financial advice of maxing out your 401(k), you’ll miss an essential step to Prosperity: building liquidity. Everyone knows, in theory, the importance of an emergency fund. Yet few actually have such a fund. Instead, it gets locked away in retirement accounts for decades.
And we do mean locked up—the government has strict rules about accessing retirement accounts. So people max out their contributions, only to discover enormous penalties for early access (not to mention taxes). And during a financial crash, retirement accounts are often the first accounts people raid to cover unexpected expenses. So much money gets lost in these transactions.
When you have liquid accounts, you’ll be able to tap into your money without fear of heavy fees and taxes, and you’ll likely feel more at peace too. What’s even better than that? You can use this money to take advantage of opportunities too. Whether it’s an investment, a business opportunity, or even an irresistible markdown, you won’t feel like you’re missing out. After all, opportunity comes to those with cash.
4. Diversify Your Assets
Too often, diversification translates to a variety of mutual funds and equities. However this version of diversification still leaves your money at risk. To truly reduce your overall risk, diversify your asset classes. You can mix and match as you please, yet the following categories will help you spread your risk more strategically:
- Cash—bank CDs, T-bills, cash value life insurance
- Real estate—rental properties, bridge loans, equity positions, etc
- Life settlements
- Single-premium immediate annuities (for those over 70)
- Alternative investments—crude oil and gas, mineral rights, partnerships, peer lending
As it turns out, the world is your oyster! Pick and choose what feels like a good fit for you, and then diversify. Many people choose to stay invested in the stock market to a degree, yet it’s important to temper those investments with non-correlated assets.
5. Own Your Home
Renting can be less expensive in the short-term, yet we recommend becoming a home owner as soon as it becomes possible for you (based on personal and market conditions). That’s because over time, rents rise and renters rights change. Becoming a homeowner will provide certainty, and you’ll have something to show for those monthly bills.
When you’re ready, buy a home with a fixed 30-year mortgage. For a number of reasons, this is the best choice. Primarily, because it will keep your payments low and allow you to maintain good saving and investing habits.
6. Don’t Prepay Your Mortgage
Another reason for the 30-year mortgage? It makes mathematical sense. Firstly, because you can actually make a larger impact on your lifestyle by saving and investing the “extra” money. Earning between 4-5% on your money will put you further ahead, and make a tangible difference, than simply making larger payments. Especially because at least a portion of the interest you pay on your home is tax-deductible.
Secondly the more you pay, the less liquidity and control you have. What the lending institutions won’t tell you is that it’s actually risky to prepay your mortgage. Too many have discovered that they can’t get those prepayments back if they fall upon hardship. Any extra money you put into your mortgage becomes trapped. And banks are more likely to foreclose on a house that’s almost paid off.
From an emotional standpoint, paying off your house makes sense. So if paying off your house will make it easier for you to sleep at night in retirement, then do so! Just avoid paying your mortgage down because of inaccurate financial reasoning.
7. Slash Taxes
One of the biggest financial drains we all face is taxes. Yet there are numerous ways to reduce your tax burden. Some of our favorite methods include: owning a business, investing in real estate or in oil and gas, and utilizing whole life insurance.
Becoming a business owner allows you to convert many of your expenses into tax-deductible expenses. Caught the travel bug? If you can find a way to travel for business, that’s a tax write-off! Have kids? Teach them valuable life skills by employing them.
Real estate is another tried-and-true way to reduce your taxes. If you own a home and have lived in it for two of the last five years, you can pocket $250k—$500k if you’re a couple—of tax-free gains. 1031 exchanges give you the opportunity to trade one kind of property for another without paying capital gains on the first.
Oil and gas investors can receive a big up-front tax break, because drilling and development costs are immediately deductible.
Saving money in the bank makes your gains taxable. And while it may not matter on 1-2% of a budding account, you may feel differently once your nest egg really starts to grow. We’ve seen clients with large tax bills that were completely avoidable through the use of cash value whole life insurance. For long term savings, these policies have massive tax benefits. You won’t have to pay taxes on your cash value gains, and if a death benefit is paid, your beneficiaries won’t be taxed either.
8. Raise Insurance Deductibles
This seemingly simple strategy makes a big difference in the long-term. Once your savings are adequate (this is crucial), raise your deductibles as high as you can. You’ll be able to lower your monthly car, home, and health insurance bills significantly (if not others, too).
If you’re a good driver, maintain your home, and have good health, you’re more likely to save money in the long run. Of course, accidents and unexpected expenses happen, which is why we recommend implementing only once your emergency/opportunity fund can support it. And you’ll have the best idea of which insurance policies will be a wise choice for this strategy. If you have new drivers on your car insurance, for example, you may not want to change your auto deductible just yet.
9. Cash Flow
Cash flow is a Principle of Prosperity AND it’s an actionable step in a solid financial strategy. In the US we spend so much time talking about other people’s net worth, yet net worth isn’t a good indicator of true wealth.
The best indicator is cash flow—the money going in and out of your personal economy. Many stock market investors will accumulate a large net worth and discover that it doesn’t easily convert into cash they can spend.
Instead, focus your efforts on investments that put liquid cash back into your pocket each month.
Steps to Finding Prosperity
Ultimately, there’s no linear path, nor one-size-fits-all to Prosperity. It’s a constant journey of readjustment and fine-tuning that allows you to live a life that you love. If it’s not in service of that desire, it’s time to change your tune.
Our hope is that the path now seems a little clearer, and that you have some practical steps you can take (and tweak) over the course of your life.
Prosperity is within your control.
Ready to start, yet need some practical guidance? Get in contact with a Prosperity Economics Advisor today.