Paper wealth is meaningless when it comes to true financial security.
Or, more accurately, there’s an enormous difference between paper wealth and real wealth. With investments, until you sell an asset and lock in any gains you have (hopefully) accrued, all you really have is a bunch of numbers on paper. This applies to your retirement and investment accounts, your college savings plan, your real estate appraisals and the valuation of your business.
In order to have true financial security, the numbers on your statements must be locked in and not subject to the whims of the market or economy. You should also be able to access your money for anything you want, any time you want, without having to ask permission or sell or liquidate assets.
In previous installments, I’ve discussed why it is so important for small business owners and self-employed professionals to have a safe and secure “Plan B” for retirement. Now I’d like to address how to do that.
Warren Buffett, who is arguably the most successful investor in history, has two simple rules for successfully building wealth:
Rule #1: Never lose money.
Rule #2: Never forget Rule #1.
Business owners and self-employed professionals take calculated risks in their businesses, but they should not risk their financial security when it comes to saving for retirement. Instead, they need what I call a Safe Money Plan. As with Buffett’s rule, there are two core principles to such a plan. It should allow you to:
- Get a little richer every single day.
- Never lose your principal or gains.
Five aspects of a true safe money plan:
- Guaranteed annual growth.
- No loss of principal or gains in a market crash.
- Liquidity – you can access your money whenever and for whatever you want with no restrictions or penalties for doing so.
- Control – you should control the money in your plan – not the government.
- Favorable tax treatment.
When you look at traditional investments — stocks, mutual funds and ETFs, bonds, gold/silver, real estate, currencies and art or other collectibles — every one of them violates Buffett’s two rules. They also lack most or all of the five characteristics for a true safe money plan.
Credits: Pamela Yellen