The Hierarchy of Wealth
Nelson Nash, the creator of the Infinite Banking Concept, was a forestry major at the University of Georgia. When he graduated in 1952 he had learned the importance of classifying things correctly. Our problem today – and Nelson’s before he connected correctly classifying plants to what we find in the financial world – is that we don’t know what we’re looking at.
The typical current-day American doesn’t devote much mental energy to discerning differences in financial products and strategies, and certainly doesn’t think long range to see what fruits they will bear. This is a byproduct of the financial environment we’re operating in.
Understanding the Hierarchy of Wealth is an important step in changing your personal financial environment, and this new understanding will equip you with a field guide to correctly classify, order, and act on the financial products you find.
The Hierarchy of Wealth is a framework for anyone pursuing financial success to, layer by layer, build a financial strategy to achieve freedom. Based on Maslow’s Hierarchy of Needs, the Hierarchy of Wealth points out primary needs and goals and then moves upward, addressing less-necessary decisions that arise once safety, mobility, and flexibility have been realized.
Here are the consecutive levels of the Hierarchy of Wealth:
Tier 1: Cash/Cash Flow
The foundation of your personal Hierarchy of Wealth is whatever tool and most common medium of exchange you use to acquire the things you need and want. Most people do not realize the importance of cash in their lives. The earth is 80% covered by water; but even a seven-year-old could tell you that water doesn’t just sit in our oceans, lakes, and streams. Water follows a process; heating, evaporation, cooling, and condensing. This is where we get the phenomena of rain, sleet, snow, and hail. This process brings life to the earth. Cash – and just as importantly, the flow of it – brings life to your finances. If you didn’t flow any cash, you would be dead in just a few days; how would you buy any food!
Cash flow is the foundation for the Hierarchy of Wealth, because just as you can increase the flow of water to create incredible force and amazing reach, the more cash flow you can create, the more power you will have to purchase assets, pay off debts, and do amazingly creative things in your family, business, and world.
If you can discern the mechanics of operation of all profitable banks, you can see how important the flow of money is to the success of their business. Deposits, withdrawals, loans, and investments keep cash moving in and out of banks as predictably as the rising of the tides. By simply focusing on the flow of cash, banking is one of the most profitable industries in the world.
Focus on enhancing cash flows, and you’ll subsequently see the foundation of your financial situation increase in strength; and you’ll also have a clear picture of what to do next.
Do you have unnecessary expenses that are limiting your monthly retained earnings?
Are there opportunities right in front of you to create additional income that you’re unable to take? Have you been tricked into believing you should only park and conserve large sums of cash rather than flowing it to pay off debts and free up monthly payments or invest in things that create streams of cash back to you?
The answers to the questions should help you discern how solid your foundation is presently.
Finally, consider what vehicle(s) are you currently utilizing to store and flow cash? The majority of people we talk to are content with their current savings accounts. If banking is the one of the most profitable industries in the world, what are banks doing with their cash and cash reserves? Did you know J.P. Morgan Chase holds approximately 11 billion dollars of cash value in life insurance policies? Wells Fargo has 18 billion dollars. Bank of America has 22 billion dollars in cash value life insurance.1 Cash value life insurance is the safest, most efficient vehicle for warehousing wealth. You can learn more about this and the framework for utilizing these policies – the Infinite Banking Concept – by accessing the Infinite Banking 101 course in the Wealth Without Wall Street Community.
Tier 2: Control
After you optimize your cash flow and create a mindset and framework to consistently increase cash flows, you can look at the next best place to create more wealth. The thinking for that begins as follows:
Consider: What is the number one place in your life that you can control to put more money in your pocket? This will look and be different for everyone (you’ll see why shortly).
If you don’t have self-esteem issues and you’ve mastered Tier 1, you should have an inclination that YOU are your greatest asset. You have full control over your own ability to create value and income. Before taking your dollars and investing them into someone else’s value-creation, look to yourself as your greatest asset and invest accordingly.
You and/or your business is the best place to make an investment – which begins with gaining understanding, knowledge, and ability.
Who do you have to blame if you fail?
Who is responsible if you don’t put the work in?
Who is limited the most if you don’t learn and thereby increase your ability to create value?
Conversely, who profits the most from investing in your ability, skills, knowledge?
Who profits the most when you invest in your business to improve and grow?
Who has control over the machine to invest a dollar in and return multiple dollars out?
Nice to meet you.
Tier 2 is about finding the safest, most predictable, most responsive place to invest your cash, time, and energy. You are your greatest asset and your business is your greatest investment. Before separating yourself from your dollars and investing them in someone else or in a shiny investment tool, look to yourself and invest in the growth of your business first. Your cash flow can be most enhanced by becoming more profitable and increasing value within your business. Imagine the day you grow your business to the point that it can run without your daily involvement, and/or when it can be sold and produce a massive windfall. Where else do you have equivalent opportunity to create this kind of wealth?
Tier 3: Collateralized Assets
Once you’ve maxed out your ability to increase your cash flow by investing in growing yourself and your business, the next tier (Tier 3) is about investing in things that have a safety net – limiting downside exposure to risk factors. A collateralized asset is an asset with a tangible value that collateralizes the investment. The most common example is real estate. When you purchase real estate, the property has inherent value. If you were investing to create cash flow from a rental property and lost the ability to find tenants to live in the property, you could sell the hard asset and be protected from total loss. There is even potential for gain simply through appreciation, aside from/in addition to rental income cash flows.
Other examples of collateralized assets include equipment for businesses, timber, gold, and hard money lending, to name a handful. Each of these assets provide some level of protection from potential loss.
The Hierarchy of Wealth is an important framework because it shows you the order you should invest in when it comes to enhancing cash flow. Tier 3 introduces an increased risk, potential of loss, from the first two. In light of risk, it’s best to exhaust your ability to grow wealth and cash flow in Tier 1 and Tier 2 before moving up to further tiers makes sense. There is no guarantee a collateralized asset will create any return. Having an object of inherent value to hedge against total loss is better than investing in an asset with no collateral potential.
Private and hard-money lending provide great opportunities in this tier for deploying cash to create cash flow. If you put yourself in a position to become a lender, you can create new, favorable investment opportunities. For example, instead of investing a large sum of cash into a 401k, imagine helping someone by issuing a private mortgage. With the real estate asset collateralizing the loan, just like a bank, you can have an added layer of security, reducing your risk exposure on the investment, and creating a stream of monthly income as the borrower makes mortgage payments to you. Opportunities like these abound when you put yourself in a healthy and abundant cash position and properly classify opportunities you encounter.
Tier 4: Speculative Investments
At the top of the Hierarchy of Wealth and the last place to begin deploying cash to produce a return and increase cash flow is speculative investments. These are opportunities where you do not have control over the process of investment, the return, and where there is no protection of collateral. The allure of these investments is in the potential for great return. Examples of these types of investments are stocks, mutual funds, and cryptocurrencies.
The typical American household thinks of these as the place to begin saving for retirement. Correctly classifying things like mutual funds tells you now they do not belong in the savings category. These are investments that should be evaluated appropriately and placed at the top of the Hierarchy of Wealth.
There’s nothing wrong with any of these investment opportunities, however, when they’re correctly categorized and organized in the Hierarchy of Wealth, doesn’t it seem crazy that these are the places most people put their money first?
The Hierarchy of Wealth tells you these things should only be invested in once you’ve maxed out your capacity within each of the preceding tiers.
The goal of the Hierarchy of Wealth is to first enhance and make efficient cash flows, and then to further increase them. Speculative investments can have a place in helping further increase cash flows, but only when evaluated in light of wise allocation in the other tiers.
The hierarchy tiers stack like a pyramid and represent the concentration of cash and resources allocated to each tier. The typical hierarchy may be a little top-heavy!
Again, the focus of this framework is increasing cash flows. The resulting correct classification of these tools and appropriate prioritization and allocation within the Hierarchy of Wealth coupled with the discipline to execute on the plan, working through and up each tier, you can increase your cash flow to and achieve financial freedom.
When you increase your passive income cash flow above your monthly expenses you will be financially free.