Building Wealth Isn’t a Mystery

I recently ran across an article posted on Marketwatch.com that explored the different ways Republicans and Democrats view how people get rich.  To be clear, I try to make this blog an apolitical place.  I assure you that neither party is your road to financial security!  It’s up to you and you alone.

What I found interesting was the large percentage of both party members that believe wealth is accumulated by means other than hard work.  As you can see in the chart below, 34% of Republicans and a whopping 71% of Democrats believe a person is rich for reasons other than working harder than most.

Building WealthSource: Marketwatch.com

There are certainly some folks who are wealthy for reasons other than hard work.  I’m not sure that Paris Hilton or the Kardashians are great examples of how regular folks become wealthy.  For everyone who was left with large trust funds, there are many more people who built their wealth the old fashioned way – they worked hard and invested prudently.

As noted in the book The Millionaire Next Door, 80% of American millionaires are first-generation rich.  They didn’t inherit or steal their wealth.  They built it themselves through hard work and having a plan for their spending.

While many in the media love to say the “American Dream” is dead, I assure you that it is not!  The secret to building wealth isn’t really a secret at all:

 

  • Know and control your spending Your income is your primary wealth building tool.  Not knowing how you are spending that income leads to wasting some portion of it.  The elimination of just $500 a month in wasteful spending will add nearly $750,000 to your retirement savings (assuming an 8% return for 30 years).  Using a 4% withdrawal rate in retirement, this additional amount of investments can increase your annual income by $30,000.

 

  • Avoid debt.  Even zero percent debt requires you to use part of your income to make monthly debt payments.  Most will need to have a mortgage when they purchase a home, but keep the mortgage reasonable for your income level and pay it off as quickly as possible.  Pay cash for cars.  Send your kids to affordable colleges without using student loans.  The above example shows how a few hundred dollars in monthly cash flow can make a big difference in your ability to build wealth.

 

  • Invest regularly Dollar Cost Averaging  (DCA) really does work!  The decade of the 2000’s is considered a “lost decade” by many since the market started and ended at about the same level.  However, if you invested consistently through the decade, it was a great time to invest.  When the market dropped significantly (twice!), regular investors were able to buy more shares with the same amount of money!  When the market returned to where it was at the beginning of the decade, the regular investor had made money on those less expensive shares.  No one can accurately and consistently know what the stock market will do, so stay invested and invest regularly.

 

  • Keep your investing costs low Investing costs matter.  As Vanguard shows in the following illustration, a $100,000 starting investment is worth nearly $94,000 less after thirty years if the annual cost is 0.90% instead of 0.25%.  There are many great low-cost index fund investments that are well below the 0.25% annual cost used in the illustration.  Use them and keep your hard earned savings in your pocket!

 

Building Wealth

Assuming a starting balance of $100,000 and a yearly reinvested return of 6%.  Source: Vanguard.com

  • Avoid lifestyle creep.  As your income grows, it’s easy to let your lifestyle grow by the same amount (or even more!).  Instead, limit your lifestyle growth to only a portion of the increase in your income.  For example, if you get a 4% raise at work, increase your 401k contributions by 2% and allow the other 2% to increase your paycheck.  This provides two benefits: (1) You are saving more money so your investments will grow faster, and (2) Your need for retirement funds will be lower as your annual expenses will be less.  This (1) / (2) combo will greatly increase your opportunity to build wealth and retire with dignity and self-sufficiency.

 

Note that none of the above steps require assistance from anyone other than you!  You can build wealth with hard work and diligent planning, regardless of your political beliefs.  It will take time, so get started today!

If you’d like help with creating a wealth building plan for your family, consider our no-cost initial coaching conversation.  Please see our financial coaching page for more information.

John is a CPA and personal finance coach.  Email your questions to john@60minutefinance.com.

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 If you need confidential financial coaching for your particular situation, please contact John for a no-cost, no-obligation discussion of your needs.

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