You’ve used a great deal of discipline to pay off all your debts and you need to follow the same principles if you want to build serious wealth.

If you see paying off debt only as an end in itself, you will struggle to move on to wealth. To build wealth you need to retain the same principles of looking after your money that you used for debt repayment.

Why would you want to start wasting money now that you actually have some of your own? You will likely be even more motivated to make every penny work as hard as possible.

I’d therefore like to introduce you to the Asset Allocation Wheel that will help you create a disciplined system for building wealth while still giving yourself the chance to have some fun now.

The six spokes of the wheel are as follows:

Living Expenses: Essential day-to-day living costs.
Short-term Investments: Investments tied up for the next year or two.
Long-term Investments: Funds you are building for five, ten or more years ahead.
Fun: Money set aside for pleasures and luxuries.
Holidays: Money set aside for holidays during the year.
Future: This covers investment in your financial education and, if you wish, charitable donations.

1. Living Expenses

Once you have paid off all your debts, including your mortgage, you should be able to live on around half of your net income. Most people use more than half of their income repaying debts!

I therefore suggest you allocate up to 50% of your net income for paying normal living expenses.

2. Short-Term Investments

I recommend that you allocate around 10% of your net income for short-term investments such as bonds, Individual Savings Accounts and high-interest accounts.

These are not intended as your emergency funds so the best guidance for these investments is that there should be a strong disincentive to touch your money.

For example, you may have to give up interest if you cash them in early but you receive a higher return in exchange for this.

3. Long-Term Investments

I also recommend that you set aside 10% of your net income for longer term investment.

This is the area where you begin to build real assets. Remember an asset is something you own that pays you income or increases in value with the intention that you can sell it and capture the value.

Possible ways to build assets include:

Retirement Funds: Depending on your financial situation, there may be tax benefits in making some of your investments through the vehicle of a pension plan. However, I always recommend that you make choices for the overall long-term financial benefits and not just to save some tax.

Shares: Buying shares in individual companies can be profitable but can also be time-consuming especially if you want a low-stress lifestyle. You may not want to be spending your time reading the Financial Times or similar newspapers or magazines.

Unit Trusts: This is like investing in a company that invests in other assets of many types. The advantages include diversity of investment, professional management, research and limited paperwork. When you choose funds that track market indices, you save the cost of active fund managers.

Property: Investing in property can be a sound long-term choice. But you need to decide if you want to be a landlord or invest with a manager. If you do your homework well, residential and commercial property can be a real asset and create both long term wealth and passive income. You need to make mental transition that you are going in to business and not buying for yourself to live in. We cover property investment in a lot more detail in the next section.

Art and Antiques: These forms of investment can be very successful provided you work with someone who has extensive experience and specialist knowledge of the field.

Choosing which of these is most appropriate depends on your own situation and preferences.

Whichever you choose, you need to make sure you have the right advisers. However, if you really want to be wealthy, never rely completely on your advisers.

Make sure you invest in your own education so that you know what you are doing and can take full advantage of the opportunities.

The Golden Goose Principle

When you invest for the future, it’s important to bear in mind the Golden Goose principle. There are several variations of this traditional tale but the basic principle is that a man owned a goose that laid a golden egg every day.

He was initially quite happy with the daily golden egg but he started to get greedy and decided that there must be a huge lump of gold inside the goose. So he killed the goose in order to get to the piece of gold.

It turned out that the goose inside was just like any other goose. In his rush for some instant gratification, he deprived himself of the daily golden egg.

The moral of the tale is that if you want to keep receiving your golden egg, you must never harm the golden goose.

What that means in term of your investment is that you must never touch the capital of your investment.

In addition, if you want to maintain the full value of compound growth, you usually want to make sure that all dividends and growth are reinvested.

As long as you leave your Golden Goose intact, it will continue to generate capital growth and passive income forever. In addition, remember that the bigger your Golden Goose (your investment) gets, the bigger the eggs it lays.

4. Fun

Rather like being on a diet, you won’t stick to a wealth-building plan if it does not make any provisions for you to have a treat once in a while. I therefore suggest that you allocate about 10% of your net income to your Fun Account for extra treats and expenses.

5. Holidays

In the same way as for fun, it’s important that you allocate a specific amount of money to save for holidays. The exact amount will vary slightly between different people but I suggest around 10% of your net income.

6. Future

If you want to build wealth, I believe that one of your most important investments is in your own financial education.

The better your knowledge, the more money you will make. It’s as simple as that. So I suggest allocating about 5% for buying books and home-study courses, attending seminars, and paying experts.

I know many people also believe that giving to charity is an important part of the wealth-building process. So I typically suggest allocating about 5% of your net income for that as well. That, of course, is entirely optional.

Allocation Percentages

The typical allocation percentages I suggest are therefore as follows.

	% of Net Income
Living Expenses	50%
Short-term Investments	10%
Long-term Investments	10%
Fun	10%
Holidays	10%
Financial Education and/or Charity	10%

The exact amounts can vary a little between individuals. For example, if you can live on less than 50% of your net income, you can allocate more funds to long-term investment.

What is most important is developing a system that you can follow in a disciplined way.

SETTING UP SPECIAL ACCOUNTS

You can operate this system just by allocating the set amounts of money in your spreadsheets, but if you can easily set up different bank accounts for each fund, that can be even more effective.

WEALTH WORKOUT 16: BUILDING FOR THE FUTURE

This step is only to be completed once you have completely repaid all your debts.

Step One: Establish an Emergency Fund to cover all your living expenses for at least six months.
Step Two: Allocate your net income on the basis set out in this chapter or adapt it slightly to suit your own preferences.

LIFE STORIES: HOW JACK AND KATE GOT OUT OF DEBT

Jack and Kate are in their mid-forties with one teenage daughter and both work full time. I began working with them when they faced serious financial problems due to having more than £80,000 of credit card debts in addition to a mortgage of more than £250,000.

With about 60% of their £3,000 net monthly income going in debt repay- ments, they were struggling to make ends meet and were behind on some payments. Their relationship was suffering and both were on medication for stress.

We worked out a strategy including the following:

Remortgaging their home with a lower interest rate and more future flexibility.
Negotiating deals on their other debts to freeze interest payments or settle on special terms.
Applying the Debt Destroyer approach to focus maximum possible on remaining debt repayments.
Using the Waste Annihilator to save hundreds of pounds a month from their expenditure.

This enabled them to clear the non-mortgage debts in just over four years and they are on course to clear the mortgage five years after that, making it under nine years to pay off all their debts.

They are already working on a wealth-building strategy that will enable them to retire earlier than they expected. This includes learning more about how they can profit from property using other people’s money.

64. The Wealth Building Process