September 30, 2011 6 Comments
No great fortune was built in a day.Slaving away, saving and putting money away might make you a nice nest egg after a while and over a few lifetimes a family might even get to be pretty well off.But when it comes to a fortune of any considerable size, in addition to sustained hard work and probably talent there is some effect of fortuitous circumstances . Often fortunes are made in just one business or one through one right call on some speculation.However there are too many ways to lose a fortune either through greed, overconfidence, a failure to admit a lack of understanding,a change in circumstances etc.So no matter the size of one’s wealth or the precise nature of its origin it is important to have a wealth pyramid in place.The general idea is to ensure the safety of the largest amount of one’s wealth.
The first thing to do is to make a list of all the circumstances that might put your wealth at risk.This can range from ill health,disablement,misfortune of family members, loss of employment or business or other sources of income,divorce,economic disasters, thieves, natural calamities,government seizures,wars etc.Then think of what you can do to protect yourself against such eventualities.Have a plan for what you will do in each scenario.Both the risks and the plans are bound to be unique to each family/individual.Then go ahead and build the bottom of your wealth pyramid.At this level you have items like contingency funds,insurance products,cash,gold etc.etc.The idea is to plan so that you don’t lose all your wealth and that you and/or your family has the means to rebuild life without having to start from zero.
Then focus on increasing your income from all 4 quadrants.Watch video2 here for an explanation:http://wealthymatters.com/2011/07/22/robert-t-kiyosaki/ .Focus specifically on building passive income streams: http://wealthymatters.com/2011/07/24/passive-income/ because they will allow you to rest up a bit and in time will become small machines growing your wealth even in your absence.Also they will help pay the holding costs associated with the previous level and the next higher level.These cash flow investments will also help you pay your living expenses.
The third layer is to guard against inflation and to progress in an orderly manner to higher levels of wealth individually and as a family.While these investments might yield a small income,the primary focus is on secure capital gains.The cash flow from the second layer is meant to help you hold these assets.As no one knows what will happen in future,its better not to go overboard with non income producing growth assets.
The top of the pyramid consists of speculative assets.As long as you win more than you lose in value terms from these speculations you’ll be fine so keep good records.Memory is never perfect.Be certain to demarcate a certain amount you will hazard and stick to it.That way you won’t find yourself betting the shirt off your back.Allot only a small part of your wealth to such assets;that part that you can live without permanently and without regrets.Check if you can make back such an amount in a year or two.Two years tends to feel like a very long time and we tend to appreciate things only after they are truly gone.
A lot of finance professionals tend to mix up issues by assigning different assets to different layers.So some will automatically assign shares to speculative assets and gold as insurance etc.This is shear nonsense.A single asset say physical gold in the form of ornaments can be many things.So gold ornaments are not insurance unless you are comfortable selling them in times of need.They could potentially be growth assets in a inflationary environment. Bought at peak prices they might be speculative assets.