Financial escape velocity

A contributed perspective by Stephan J. Hess, CFP

Editor’s Note: This is another installment of a monthly series of contributed pieces addressing financial matters.

A rocket needs a massive amount of energy and speed to escape earth’s atmosphere and gravitational pull. Once in space, it can accelerate easily and pretty much go anywhere it pleases with only minor resistance. The process of creating wealth and personal financial security works much the same. When your assets cross over that point where you begin to create new assets faster than you could ever save them on your own, you have done it. You have achieved what I call, “Financial Escape Velocity.” Let’s explore the steps to see how people make this happen. It turns out that they are relatively straightforward and do not involve three EZ payments of $29.95.

Most people identify financial security as a top priority. This makes sense of course. Who wouldn’t want the confidence of comfortably meeting their financial needs for the duration of their lives? So why don’t more people achieve this? Part of the issue stems from our relationship with income. Young people I speak to often envision an advancing career path where they progressively earn more than they need, creating never-ending and increasing surpluses. Reality tells us that this is not typical and that most people fall into that trap where the more they make, the more they spend. Therefore, achieving financial security on your wages alone is not the answer. The secret is figuring out how to build assets separate from your income – and the earlier you understand this, the better.

All journeys begin with an initial step and often this can be the hardest one. You must get your butt off the couch if you want to get fit, and for wealth creation, you must at a minimum establish a process to generate small but consistent monthly budget surpluses. There are many ways to do this but ultimately it comes down to your personal self-discipline and the will to make it happen;

“If you will live like no one else, later you can live like no one else.”

This is one of my favorite quotes from financial guru Dave Ramsey. He is telling us that if we can make small sacrifices and live differently than most people today, then later we can live in a way that most people cannot.

Now put your blinders on and start building that initial stockpile of money. Unfortunately, this is the phase where most people give up or fail. We humans love instant gratification, but that is not what is going to happen here, so you better get comfortable with that. The truth is, it is going to take years, and within those years there are going to be unexpected expenses and setbacks. Without a dedicated emergency fund, most people end up consuming their critical investment money and never even get to liftoff.

Once you have this surplus creating engine running, now you need to find something that has a good chance of growing in value over time. While there are exceptions, pets, vehicles, and tattoos generally do not fall into this category. Switch your focus to being an owner of appreciating assets versus a renter and consumer of them. There are many options but two of the most popular seem to be long-term rental real estate and long-term investments. As with all investing, there are risks that must be carefully considered before you invest, and we recommend that you do your own due diligence. Outcomes are also not guaranteed and can involve significant legal, management, and time commitments.

If you do this well and consistently, there is a good chance that in time you will start to experience some initial growth. Compounding is slow in the beginning, but it can really accelerate over time, especially when you reinvest your gains. Ignore the doubters and remind yourself often of why you are doing this.

Whether your goal is to have a handful of rental properties that are fully paid for, or a pile of money in investment accounts, the key is to get to that level where any ongoing growth is meaningful and life changing. If you have $10,000 of value somewhere and it grows by 10% this is not in any way life-changing. You need to keep going. If you have $100,000 of value and it grows by 10% that will probably get your attention, but it is still not life-changing, so you need to keep going. If you have $1,000,000 of value and it grows by 10%, now you have something meaningful and you are now creating new assets far faster than you can save them from your income. If you can keep this going over the long-term then you have achieved Financial Escape Velocity.

The most important variable in this equation is time, which is why you must start early.

The act of completing an Ironman is actually not that hard. It is the nine months of training for one that will kill you.  Participants in ultra-endurance events discover that if you do something every day, you can build up your fitness over time to do something you never thought was possible. That is exactly the same process for wealth building. Everyone has the tools and ability to make this happen. You do not need a college degree, a high paying job, or an inheritance. This is the simple and repeatable blueprint for pretty much everything hard but worthwhile in life. Master it and you might accomplish things you never thought possible.

Stephan J. Hess, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and is the owner of Hess Financial in Harrisonburg. Neither he nor his company has any financial relationship with The Citizen or its publishers. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a registered investment advisor.

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