Albert Einstein knew that space and time are not separate aspects of nature but rather a single interwoven phenomenon called “space-time”. Personal wealth is similar. Assets at a single point in time reflect only a slice of a much more important lifetime reality. Wealth over a lifetime can be thought of as a single concept – call it “wealth-time”.
Economist Franco Modigliani developed the life cycle theory of consumer behavior in the 1950’s. The idea is that people become educated, work, save money for retirement and then spend their savings after retirement. Wealth is also acquired to cover unexpected emergencies and to provide an inheritance for children. Whatever point you occupy on the wealth-time continuum, be aware of the big picture.
For example, the biggest component of wealth-time for young workers is future earnings. This future income is capitalized in the form of life insurance. $1 million dollars in life insurance for a young, responsible professional is common and, in my view, puts them in the top 20-30% wealth cohort that I represent and advise even though their current income and net worth is modest.
It’s critical to manage both wealth and risk over the long term. Not only is wealth built over time but it will be threatened with unknown future risks. Today’s conceptual additions are: 1) Managing wealth is a lifetime endeavor; and 2) The future is unknown – it’s essential to plan for future risks now – have a War Chest…just in case. More on risk next week.