Circles of wealth
There are several places where you hold your wealth. These areas can be looked at as the circles of wealth. Your life may have several, or it may only have a few. Your goal should be to distribute your wealth amongst the circles and balance it appropriately in order to protect and grow your assets.
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First circle: Debts.
This is a circle that is primarily for consumer debts. Debts like your home do not fit in this category, as they add to wealth, not subtract from it as the other debts do. In order to achieve wealth, this circle should be small or non-existent.
Second circle: Income.
It does not matter how much you make, you can achieve wealth as long as you have an income coming in. Wealth can not be obtained without some sort of in-flow of money. It costs money to live, so you have to have money coming in. The bigger the circle is does not necessarily indicate a better chance of wealth. How you spend your money makes the biggest difference.
Third circle: Home.
This circle should not be looked at as an investment, as you have to sell or mortgage your home to tap into the investment, and you need some place to live. So, this is its own circle, and one that is important, as if you have a home, you make smarter financial decisions in order to protect it.
Fourth circle: the Bank: 5-10%
The bank, or your bank accounts is the next circle in the circles of wealth. In order to obtain wealth it is wise to put about 5-10% of your money into the bank. This means each time you get a check, deposit a percentage of it into an account you will not touch. This can be an MMA, a CD, or a cash type account. However, the fact of the matter is, people with a substantial savings are far smarter with their money, and less prone to high risks then those without savings.
Fifth circle: Investments: 85-90%
This is where you should have 85-90% of your wealth. This is not just typical investments, but also lifestyle assets like your cars, time shares, toys, etc. In addition to that you will find things like stocks, bonds, mutual funds, real estate (not your home), business accounts, pension accounts, etc. This is the area that helps you enjoy life, and grows your income.
Sixth circle: Insurance: 5-10%
You use this wealth to protect the rest of your financial situation. This should be about 5-10% of your wealth, and is used primarily to help you not lose everything should the unexpected happen, as it frequently does. Consider getting the following:
- Life
- Disability
- Property/Casualty
- Health
- Long term care
