Building Assets – Safe on Second

In today’s entry, I’m going to continue our look at the wealth game. Up to now, we’ve discussed getting from the batter’s box to first and the traps that can keep you stranded there, and the moves you can make to “lead off” from first base. But today, we’re going to shift our focus to building assets. When you begin building assets, you’re ready to move on to second base. By this time, you’ve likely purchased your first home, and have begun moving from the debt side of your financial picture to having assets to build your net worth. But how do you know when you’re ready to move on to third base? What can you do to prepare for that transition? Read on to find out.

Follow Along With The Financially Simple Podcast!

• Reaching second base and beginning to invest in your future
• How to calculate your net worth
• The Prestigious Accumulator of Wealth category
• Why business owners should pull their businesses out of their net worth statement
• How owning a business can quickly propel you to third base
• The importance of building a portfolio of assets inside and outside your business

Building Assets to Arrive on Second Base

By this point in the wealth game, you should have begun investing in your future (401k, savings, etc.). You’ve probably purchased a home and you’re on your way to building enough assets to arrive safely on second base. But how do you know when you’ve arrived? Well, I like to follow a calculation that I learned in Dr. Thomas J. Stanley’s The Millionaire Next Door. This simple “XYZ” calculation gives a good indication of how much wealth you should have accumulated by your current age and income. It looks like this:

Age x Income (pre-tax) ÷ 10 = Net Worth

So, a 40-year-old earning $200K per year should have a net worth of $800K. Compare your actual net worth to this calculation to determine whether you’re on pace. In this example, if your net worth exceeded $800K, you would be in the top 25% of earners. This would earn you the title of a Prestigious Accumulator of Wealth (PAW). As a PAW, you should easily arrive on second base and be ready to begin moving toward third. But what happens if your net worth doesn’t quite meet that standard?

I recently spoke to a business owner who claimed his business was worth $2.7MM. Let’s use the same calculation to measure whether he’s on pace to become a PAW. In this case, the business owner is 50 years old and pulls $60K per year from the business. His net worth should be at least $300K at this point. He has far exceeded his net worth calculation. Right? Not so fast. On paper, his business is worth $2.5MM. In reality, he probably won’t get that price for the business. Therefore, I challenge you to pull your business out of your net worth statement. You should be building assets outside of your business to reach PAW status.

The Natural Progression

Similar to the move from the batter’s box to first base, going from second to third is a bit of a natural progression. Now, it’s not guaranteed, but it usually isn’t as hard-fought as moving from first to second. But why? Simply put, you’ve already laid the foundation. By the time you’ve reached second base, you have a home, fully funded emergency funds, savings, you’re contributing to your retirement accounts, you might have a business, and you probably have the beginnings of an investment portfolio. You’ve created financial habits that you can replicate, building assets to propel you toward third base. 

However, not everyone who arrives on second will reach third. Only those of us who make prudent investments, make wise decisions, and keep the target in mind will continue to move forward. Once you’ve arrived on second, you must remain focused with the same level of intensity that got you there to reach the next level in the wealth game. Typically, these are people who have regimented or even automated their savings, make regular investments, and keep a close watch on their spending.

By the Numbers

There are some interesting statistics surrounding some of the habits that are necessary to reach third base. Men are far more likely to invest (61.9%) than women (38.1%). I’m not going to attempt to draw conclusions as to why this is the case. However, investing has got to be part of your plan to move forward in the wealth game. Similarly, millennial millionaires own an average of three properties with a real estate portfolio worth $1.4 million. Once again, investing plays a role. This time, however, we can see the importance of diversifying your assets.

Between 2019 and 2020, the US saw 2,251,000 new millionaires. This increased the total number of millionaires in America to 20.27 MM. Even in the midst of incredible hardship, like the COVID pandemic, you can reach the next level in the wealth game. You just have to remain focused. As a business owner, you probably have an “I can do anything I set my mind to” mentality. That mindset plays a major part in success. But you also have to be patient, understanding that reaching your goal means taking small steps, one-by-one, until you arrive. 

The average age of millionaires in the US is 62. Just 1% of millionaires in America are below 35 years old. Most of the time, moving from second to third isn’t a sprint. It takes time. Keep pushing forward with your eye on the prize and listen to your advisor. Following the advice of a trusted advisor and staying the course can help you make significant strides toward the next phase in the wealth game. If you don’t have an advisor in your corner, reach out to our team. We would love to talk to you.

Wrapping Up…

Friends, getting to second base is hard. But it’s worth the effort. Similarly, life is hard. Life is tough. But life is good. Arriving safely on second and preparing to turn toward third can be frustrating. It doesn’t have to be. By listening to your advisor, making wise decisions, and building assets, you can make the move to second at least financially simple. Let’s go out and make it a great day!

Have questions after completing your net worth calculation? Reach out to us! Our team would be happy to talk with you about how we could help you reach your goals.