Here’s a ‘capital’ idea

By BETH FRENCH

French Insurance & Financial Services

"Them what's got the gold makes the rules." While the vernacular might cause a reader to scoff, the idea within the statement makes great sense (and "cents" too!)

To arrive at the position described above requires discipline and knowledge of how to save, protect, and control one's capital (savings, investments, and other financial assets).

The introductory statement starts from the premise that one must first possess gold or capital, so the obvious starting point is that one must save. I recommend saving 20 percent and adhering to the adage, "pay yourself first." Since each person's goals, time horizon, and risk tolerance vary and change, the "storage tanks" for their capital should be customized. Another very important point that many fail to understand is that in building capital, there may be more to be gained by minimizing or eliminating unnecessary wealth transfers than by chasing after higher returns and taking on more risk.

There are two significant pressures which can derail capital for all of us. The first is an external pressure — inflation. On the average, since 1980 to present, inflation has been about 3.64 percent, which means that an item costing $1 then would cost nearly $2.92 now. For those folks who have lost money in the stock market and have since relied on the "safety" of bank savings accounts, this means their capital is shrinking in its purchasing power.

The other pressure that disrupts capital accumulation is the internal pressure of debt, which transfers money away from you. Some transfers are avoidable and others can only be minimized. But, if financing costs are allowed to compound, they will erode capital. Sadly, debt is the only purchasing option for large or unexpected expenditures when one has no capital. That's one reason why saving is so important.

Protecting one's capital takes on different appearances based on goals, time horizon, and risk tolerance. When folks are just starting their earning years, it's critical that they protect their earning power with disability and life insurance; that they prudently transfer the risk of catastrophic losses to health, home, and auto insurers. At the end of those wage-earning years it becomes important to protect the retirement nest egg from the ruinous costs of long term care and to facilitate the smooth transfer of assets and heirlooms to the next generation or to charities.

While saving is a goal that may take a disciplined lifetime to achieve, once there is a reserve in the storage tank and the appropriate protections are in place, one can begin to make the rules, so to speak — to look for opportunities and to make major purchases on their terms, rather than on the terms of a finance company. Just as savings is a long-term commitment, this type of control doesn't happen overnight either, but should be the position of strength from which we all seek to operate.

Why not begin 2012 by assessing your present storage tanks of capital and by committing to a plan for growing and controlling them and maximizing how capital can work for you?

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