Three Essential Ingredients for Building Wealth

Father’s Day is coming up. It’s a perfect time to reflect, cherish and remember the financial wisdom your father instilled in you and how it shaped your life.

The author of Rich Dad, Poor Dad, Robert Kiyosaki, offers many important quotes about health and wealth throughout his book, but here are two of my personal favorites:

“The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant.”

“I am concerned that too many people are focused too much on money and not on their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve the problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.”

A healthy mind, a sound, lifelong education and financial wisdom: three ingredients to wealth creation. How right is Mr. Kiyosaki? Spot on, in Canada at least.

Over time, changes in net worth can lead to shifts in wealth concentration, says Statistics Canada in a June 3 review of their Survey of Financial Security. Age and education have a lot to do with that; so do healthy financial behaviors, which underscore the importance of tax and wealth planning advice.

Net worth is an important measure to track; an increasing trend in this metric indicates a healthy balance between asset growth and debt reduction. In other words, wealth will grow when people make choices to spend less than they make and invest in assets that will appreciate in value and produce investment income.

The statistics, in fact, underscore the importance of committing to responsible, life-long financial behaviors to guarantee a prosperous future.

On a national scale, 3.5% of Canadian family units have little or no wealth. What’s frustrating is that these numbers are unchanged in 13 years (3.3% in 1999). Who are the people in this circumstance?

• Singles. At the top of the list are unattached individuals and lone-parent families. This speaks to the need for people to be connected, make good choices about their partners and think carefully about the circumstances around which they start a family.
• The Young – 15- to 34-year-olds. Financial knowledge and skills are critical to this cohort, who set spending and saving habits in these formative years.
• The Uneducated. Finally there are those who haven’t achieved a high-school diploma. Education is critical to financial success later in life – a key factor in the ability to earn sufficient income to buy a home and invest in the financial markets.

It is true that if you are well educated, income will be higher, and the opportunity to own assets will be possible. However, debt may also be higher. In 2012, top earners held 47% of the total household wealth (compared with 45% in 1999) but also held 41% of all debt (compared with 40% in 1999).

The key ingredient in wealth inequality is the purchase of real estate assets, which, according to the study, represented 57% of total assets. For families in the top income quintile, the share of real estate ownership increased from 34% to 40%.

Mortgage debt, meanwhile, was blamed for three-quarters of all debt in both 1999 and 2012 across the board, yet for the poorest home owners mortgage debt represented 64% of all debt. That’s an increase from 61% in 1999.

This speaks well to the important three-part role tax and financial advisors must take with their clients:

Educator.  Tax advisors and financial advisors working together have an important role to play in counselling young people in the principles of Real Wealth Management – how to accumulate, grow, preserve and transition wealth with sustainability.

This is a great investment in the future growth and transition of the family wealth they may be accounting for today.

Advocate.  Income counts when accumulating assets and in managing debt. Look for relationships with tax and financial advisors who are interested in working hard with the whole family to create more after-tax income that can be put to work to acquire assets and manage debt.

Steward. “The careful and responsible management of something entrusted to one’s care. . . ,” that’s the definition of stewardship from the Merriam-Webster Dictionary. Growing healthy, well-educated children is the job of parents. Growing healthy, tax-efficient financial portfolios that build sustainable wealth is the work of a dedicated wealth advisor.

Wisdom results when collaboration is sprinkled into the decision-making process. Cherish your dad and his gifts of financial wisdom this weekend...

Evelyn Jacks is President of Knowledge Bureau and author of 51 books on tax and personal financial wealth management.