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New Year's Resolution: Create wealth

Biltmore Hotel, Coral Gables, FL
Biltmore Hotel, Coral Gables, FL
Alicia Willen

Wealth is not money but, by and large, it is the result of having money. In large part, wealth is having the things that you want and that you can acquire with money, such as houses, cars and vacations. In this context, money is simply the means by which to create wealth.

The process of creating, maintaining and growing wealth can be summarized in three words: Earn. Accumulate. Invest. So, the first step is making the money, the second step is saving it, and the third is investing it so that it grows. Below is a breakdown of each step.

Earn: Earnings are the result of being employed in a gainful activity, be it a job or a business, although not all earnings qualify as wealth builders. You must earn, not just enough to cover basic day-to-day expenses, but enough so that you have money left over for the other two steps. You must use your time wisely in order to increase your earnings continuously. This plan will work for you only if you are propelled by a healthy ambition and a desire to strive and struggle to get ahead, but not if you are simply happy to get by,

You must point all your habits towards creating wealth. One place to start is planning how you will increase your earnings. Is education the answer? Better training? New skills? Or, if you own a business, do you need to analyze the competition, your offering or your management abilities in order to prosper? Set a goal, devise a strategy, write out a business plan and review it often to make sure that you stay on track.

The money you earn is the basis of your wealth building goal. You've worked hard to earn it, so treat it with care and don't squander it. Be a responsible money manager. Make a budget, setting priorities on how you will spend your money, and stick with it so that you can save.

Accumulate: To accumulate the capital necessary to build wealth, you must save. Saving is spending less than you earn. Live below your means. Make sure that, out of every paycheck, you take for yourself the first 15 to 20 percent and that you put that in a savings account in order to build the capital that you will need to invest. To find out how your savings will grow, please click here.

Years ago I had a Financial Planning professor who told his students his life story: He came from a very poor family with several children, but each got one penny every week as their allowance. Early on he found out that, by saving his pennies, he could buy a better piece of candy or a small toy. With determination and hard work he put himself through school and became, first, a high school teacher and, later, a tenured university professor. By saving and investing, he also became wealthy and, at the time, was the owner of several self-storage facilities, two homes and a farm. Even then, he still maintained a budget and kept track of every expense of more than one dollar. I suspect that he also gave each penny a good squeeze before letting it go.

Be a responsible money manager and spend wisely, staying out of debt. Get a handle on your expenses and pay your bills on time. There's nothing more wealth destroying than badly managed debt, so use debt wisely, financing only assets that appreciate and paying cash for assets that depreciate. Think about that before you take out your credit card. Stay away from credit card debt and pay off the balance every month. To find out whether you are carrying too much debt, please click here.  Don't try to impress others by spending, and don't be impressed by other people's appearance of wealth. Remember, the one with the most savings, wins.

A prominent doctor once approached me for help. He had many properties but all were mortgaged to the hilt. Some time back, he had married a beautiful woman, 40 years younger than him and, to please her, he tried to give her a life of supreme luxury. After using up the money he had saved for his retirement, he went on to mortgage his ocean-view penthouse in Bal Harbour and his medical buildings in Coral Gables and Kendall. Looking at them you'd think they were a happy and wealthy couple but the truth was that his income no longer covered his expenses and his situation was so bad that he was at the brink of bankruptcy. Rather than being delighted with his apparent wealth, he was really a sad and wretched character who knew he was going to lose everything, including his wife and friends, in a short time. His desire to impress got the best of him and devastated him.

The book The Millionaire Next Door contains many examples of wealthy people who got that way by not trying to impress others with their money.

Invest: At some point you have to take the leap of faith from wishing to be wealthy to doing something to be wealthy. You have earned and you have saved, so now you must decide how you are going to put your money to work so that it multiplies. That is the purpose of investing.

There are many types of investments and you should pick a few asset classes that suit your financial situation, your knowledge and your personal profile. You can invest in stocks, bonds or mutual funds, or you can keep money in a certificate of deposit, an IRA, or 401K. Some of these are sophisticated, speculative, investments, and the latter are rather passive, low-risk accounts that keep your money safe but don't give you much in return. Before investing, you should seek out a knowledgeable, licensed professional with a reputable firm to advice you. At all times, be sure to understand what your advisor is proposing to insure that it is the right thing for you.

Historically, real estate has been the strongest wealth builder but it is not an asset class appropriate for speculation, since it is illiquid, and should be considered an investment for the medium or long term. In Miami, many people speculated in the last few years, some getting in and out at the right times and making a lot of money, and others, not seeing the risks, joining the throngs at the height of the bubble, and getting burned when it burst.

When done correctly, after appropriate analysis, real estate will provide price gains from appreciation over time, generate cash flows, increase the owner's capital through loan amortization, and shelter income from taxes. It is an investment that you control as if it were your own business, that is physical and you can see every day, and that you can buy with someone else's money.

I have a client who became a professional real estate investor. That is his job and his business. He told me that, when he was 19, he worked as a mechanic for an airline, but that he wasn't happy having his time controlled by someone else. Because of that, he said, he determined that he was a bad employee and that he had to change careers. He put together a few thousand dollars and bought a duplex in a very poor neighborhood. He rented out one side and lived in the other. After some time he was able to buy another property at a better location and he moved there and rented out the part of the duplex that he had occupied. He kept that up for twenty years and, by the time I met him, he owned several apartment complexes in two states. From early on he had a long term vision and strategy and bought real estate wisely.

Keep in mind that different stages of a person's life require different types of investments. Someone who is young can take more risks, such as purchasing a small building that requires renovation, while a person ready to retire may want to own properties that produce steady income without too many hassles.

Create a strategic investment plan for yourself: Determine the types of investments that you want to have in your portfolio; calculate the level of risk that you can tolerate in each asset class, and make a plan of how you are going to get there. Maintain a diversified portfolio and be sure that you accumulate assets that appreciate and create wealth, rather than assets that depreciate. Stay away from "get rich quick" schemes. If it looks too good to be true, you can be sure it is. There are no free lunches here.

Above all, remember that wealth is not money. It is having the things that we want, many of which we can buy with money. Having a lot of money, however, doesn't guarantee happiness, health, peace or joyful relationships. These come to us freely through the decisions that we make regarding our family, friends, health, behaviors and attitudes.

Note: If you want to invest in Miami real estate, you can search all Miami properties in the Southeast Florida Multiple Listing Service by clicking here. Choose any combination of features and click the "Search" button, or just select the desired property type and the city of your choice and hit "Search." If you have any questions, please contact the author at Alicia at