So you’ve saved on taxes…now what?

One of the biggest killers to your financial progress is not having a clear understanding of WHAT you want or ought to do with your money.

Yes, of course we want to pay less in taxes.

But what do we do with that extra money in our pocket now?

To what end are you working?

If you don’t have a clear idea of what you want to accomplish, your financial results could be good, but they will also likely add years to your financial journey and lead to poor personal and tax outcomes if you’re not purposeful.

Today I’m going to walk you through the only two things you do with your money and how to think about each of them in order to progress as quickly as possible.

Option #1 - Use your money to create wealth.

Typically when people talk about creating wealth they think of investments, and that’s not wrong (more about that in a second), but there’s more to it.

Creating wealth is often things like…

Getting out of debt.

Making more money at work.

Or starting a side business.

And when you talk about investments and creating wealth, people often get it wrong.

When you use investments to create wealth, we’re not talking about steady consistent returns over time, we’re talking about exponential growth.

So things like a traditional 401(k) or your typical managed investment account don’t fall into this category. (See option #2 below)

Alright, I digress, let’s get back on track.

Now, when trying to create wealth, it’s important that you keep the following principles in mind to maximize your chances of financial success.

First, focus or concentration.

As Andrew Carnegie (arguably one of the richest men in American history) said “Put all good eggs in one basket and then watch that basket.”

If you look at all of the wealthiest people you know, they likely didn’t become wealthy doing many many things.

Instead, they focused on one thing till they were making large amounts of money from it and then moved on.

Second, prioritize cash flow or equity growth.

Most good wealth creation decisions and investments you make will provide you with more cash flow or more equity, usually not both.

The power to create wealth comes when you stack multiple wealth creation strategies on top of each other.

This is why words like “compound interest” (equity) or “velocity/speed of money” (cash flow) exist.

Prioritize for one of them and you get the best results long-term.

Third, understand your real risk levers.

Just because you concentrate or focus on one activity or one investment type doesn’t mean that it is super risky.

The following keys will keep your risk low and chances of success high:

1. Make sure you’re in an area where you have lots of knowledge. The more knowledge you have about something, the less risky it becomes.

2. Maintain control. The more control you have over a particular outcome, the less risky it will feel.

3. Put less at risk. The more of your net worth or available cash tied up in something designed to create wealth, the more risky it will feel.

4. Get your money back quicker. The faster you see results and recoup your initial costs or investments, the less risky something will feel.

Option #2 - Use your money to preserve wealth.

When I typically talk about preserving wealth people immediately think of cash savings or guarantees.

Now, those things aren’t bad and are certainly part of any good wealth preservation play, BUT there’s nuance to it. 

For example, as many of us have experienced, cash in the bank quickly loses its value as inflation eats away at it over time.

So we can’t let the wealth we have just sit there, it must be active. 

But the principles and risk levers are different when compared to creation.

Let me walk you through them.

First, diversification instead of focus.

Instead of focusing, you now you want your wealth spread around in multiple ways: different investments, different locations, different geographies, different managers, different strategies, and a mix of cash flow and equity growth.

Each layer acts as a layer of armor to preserve and protect your wealth.

Second, keep costs low.

When you move from creation to preservation, you often have to give up some control and outsource management of a portion of your wealth in order to maximize your diversification. 

By definition you can’t know everything. So hiring subject matter experts handling a portion of your wealth becomes very valuable.

But be cautious of how much you pay those outside managers. 

The hidden and extra fees you incur can become an anchor dragging down the wealth you’ve created.

Third, find a way to invest your money (or “allocate” it as they say in the wealth management industry) that you will feel comfortable with long-term.

As one of my mentors said, “it isn’t about timing the markets, it’s about time in the markets.”

The transaction fees and lost opportunities to compound over time can quickly kill any wealth you’ve created.

For example, if you miss just the 10 best days in the market over the last 20 years, you cut your investment returns by more than 50%.

And lest you think you’d never do that, in 2021 the average investor had returned just 3.6% over the last 20 years according to JP Morgan compared to the market which had averaged 9.5%.

Woof!

Lastly, have a plan and stick to it.

Most financial advisors would call this “rebalancing” in your investment accounts, but the principle is sound.

Make a plan, set specific criteria, stick to the plan, and get back on plan when you inevitably vary from it. 

Your future self will thank you for it.

Conclusion

Now that you know the difference and have the key principles, it’s time to put this into action.

The key to making this work is having a clear plan for each and executing on that plan consistently for a long period of time.

If you’re younger, you likely are going to be focusing more on wealth creation.

But over time, your preservation strategy becomes more and more important.

Combine your wealth creation and preservation strategies with your annual tax savings and you’ll be supercharging your way to financial freedom.

Till next time.

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.