The Wealth Cycle

The Wealth Cycle attempts to describe the relationship and flow of money during the life of a person. The underlying assumption of most financial advisors is that this wealth cycle is largely linear and is focused on the lifetime of a single person.  However, that view is short-sighted and self-centered. Because of its short frame of reference, it fails to serve people as it could.

There are four distinct activities which comprise the Wealth Cycle.  They are:

A)     Wealth Creation

B)     Wealth Accumulation

C)     Wealth Preservation

D)     Wealth Distribution

In the traditional view, the first two are synonymous. As you will see, when it comes to financial liberty, they are not, and perhaps never have been.

Wealth Creation

A key failure of those who disdain capitalism is their misunderstanding of how wealth is created.

They think wealth is created by the delivery of objects in your hands.  That is wrong. The object in your hand is the very last vestige and nearly the least important part of wealth creation.

Wealth creation is not driven by things. Wealth creation is driven by ideas. And, who has the sight to see to the very end of that expansive resource?  In fact, the very nature of ideas is the total opposite of the zero-sum game.

In the zero-sum game if I have a pie and give it to you, then I have none.  However, if I have an idea and give it to you, I still have the idea, and now you do too. What is more, when I give you my idea you might add to it your idea and make my idea even better, and now we both have an improved idea.

This is the true genesis of wealth. It comes from ideas.  Ideas get improved and eventually turned into goods and services which people value enough to trade for some portion of their material goods.

Quite literally, wealth is created out of thin air. Ideas are the very essence of “thin air.”  They are utterly insubstantial and ephemeral until first put into words, and then into actions. Every entrepreneur begins with an idea, which they eventually turn into an enterprise that provides value to others.

In the context of financial liberty, the creation of wealth is driven by finding a way to provide something of value to others and making it accessible to them after making them aware of it.

In business terms this is about creating the need through marketing and then fulfilling the need through sales.

While marketing and sales are relatively well-known processes and have many expert practitioners, it is extremely challenging for most of us to truly figure out what those around us need and will value enough to make it worth our while to bring to them.

When Apple Computer and MicroSoft were founded, very few people had any idea that they needed what those teams were about to bring to them.  Today it is almost unimaginable to consider life without personal computing.

Wealth Accumulation

Wealth Accumulation means building up a surplus. Initially, your surplus is there to tide you over if you hit a financial rough patch.  It means having enough money to pay all your bills for a week, a month, three months, even if you have no income.

Living without a financial safety margin is stressful. It is living on the edge of losing everything. Unfortunately, many people are less than four new tires away from bankruptcy.

Many entrepreneurs working hard to turn their ideas into wealth have to shut their doors.

Meaningful Wealth Accumulation is when you have a large enough amount of wealth that you can pay your bills for the rest of your life without having to earn a paycheck to do it.

Significant Wealth Accumulation is when you have enough that you, and your loved ones can pay their bills for the rest of their lives without having to earn a paycheck to do it.

To be clear, the ability to pay your bills without having to earn a paycheck is not necessarily the same thing as not working. First, when you have attained significant amounts of wealth you must work diligently to preserve it. Second, everyone, without exception, needs to invest time and energy in something that is bigger than their own self-preservation, a cause greater than themselves.  When your wealth allows you to no longer invest most of your time in earning the money you need to make your ends meet, you have more time and energy to focus on something more enduring than yourself. It is this reason that drives many of the wealthiest people to become philanthropists. They seek out ways to use their wealth to make the lives of less fortunate people a bit better.

The people of the United States of America are the most wealthy in the world. If you are fortunate enough to be born in this country, then you are automatically among the 1% most wealthy people in the world. In 2020 Americans gave $471.44 billion to charities. With a GDP of $20.94 trillion that same year that is an uncoerced offering of more than 2% of every dollar they earned. In 2020, according to Forbes magazine the most generous countries in the world were (in order) Ireland, USA, UK, Canada, and Australia.  All of those are, by anyone’s standards, wealthy, capitalist countries.

Wealth Protection

In the generally accepted theory of the Wealth Cycle, protection of your wealth is correctly recognized as an activity rather than a phase.  If you fail to protect what you have, it will go away, or be taken away.  This is illustrated as simply as the furniture in your home. If you put all that furniture outside in a vacant lot, if no one steals it, the weather and bugs will destroy it. However, if you keep it inside your house, it is preserved or protected from the weather, and bugs, and thieves.  You must give at least as much consideration to protecting your wealth as you do the protection of your furniture.

Unfortunately for many of us, we are the single biggest threat to our wealth. We want to spend it. In fact, we must spend it. If we don’t spend some portion of it, we won’t have any furniture, or a home to live in, or food to eat. Preserving our wealth is first about controlling our own spending habits. Living within our means.

The second biggest threat to our wealth, again comes from ourselves. Making good investments is not an easy task. If we make bad investments, our wealth can evaporate almost before our very eyes. InvestTools teaches people that they must let their winners run and cut their loser short. This is a wealth preservation strategy.  Without using it, your bad investments will likely leave you broke and hinder your ability to make good investments which might preserve or grow your wealth.

The third biggest threat to our wealth is theft.

There are lots of folks who want to steal your wealth. They will scam it out of you, litigate it out of you, tax it out of you, and sometimes legislate it out of you.  While each of these different sorts of threats to your wealth requires different means to protect your wealth, the threats from sovereign authority in the form of taxation and legislation are far more powerful, dangerous, far-reaching, and difficult to combat than all the scammers, thieves, and greedy litigants put together.  In combatting those latter threats, the power of the State is on your side.  In combatting predation by taxation and legislation the power of the State is against you.

Government is the only thief you cannot throw in jail.

I recently listened to an interview where a successful investor shared how he had used a strategy to accumulate some very valuable investment positions.  Before he could translate those positions into his wealth preservation space, the US Government changed some rules and, with the stroke of a pen, made his positions illegal and wiped out the wealth he had accumulated in them.

Increasingly, ordinary people find that the biggest threat to their wealth building is the very government that is supposed to be protecting their life, liberty, and pursuit of happiness. Prior to the 1960’s the fiscal philosophy of the US Government was that the money belonged to the people who earned it and the government would exist on what the people could spare it.  During the Kennedy Administration, that philosophy was upended. From then until now the fiscal philosophy in the halls of government is that the money belongs to the government and the people will exist on what the government decides they need.

The only way to keep government from confiscating your wealth is to keep it where they cannot readily lay hands on it. In the past, this meant converting wealth into portable forms like gold and jewels and putting wealth in places that were physically secure. While that can be done today to a limited degree, with the advent of cryptocurrency, digital wallets have arisen as the most secure and portable way to keep your wealth from thieves. Even if your digital wallet falls into the hands of others, without the cryptographic key, they cannot open it. In fact, if you lose your key, you cannot open it.

Wealth Distribution

In the traditional view of the Wealth Cycle, this is focused on living off your wealth in retirement and passing you wealth on to the next generation. Unfortunately, this view of life as a waterfall where your existence flows down to the ocean (and beach!) at the end ignores the reality that your wealth is being distributed from the very moment it is created or accumulated. Sometimes even before then.

Every day as you live your life, whether you are working or retired, you are consuming (distributing to yourself) a portion of your wealth. Wealth Distribution is not a phase at the end of the Wealth Cycle.  It is an ongoing activity throughout your life.

The key to successful wealth distribution is to arrange things so that your money outlives you, instead of the other way around. One of the saddest jokes of our time is saying that the greeter at your local superstore is in that job because they have outlived their wealth and must keep working for others until they die.