Jan. 27, 2021

5 Tips for Building Real Wealth

What is Real Wealth?

Real wealth is not what most people think it is. Often wealth is thought of how much money you make or what kind of job you have. It is assumed that you need a fancy education, a high paying job, or own your own business to have real wealth. This is not true. Those things are great, even helpful on the journey to wealth, but they are not prerequisites.

Real wealth is the gap between what you make and what you spend. Anyone who has the ability to earn money also has the ability to spend money. More importantly, if you earn and spend money, you can create a gap. The bigger the gap, the more wealth you can create. If there is no gap, you are just stuck at zero. If the gap is a crater, then you are in debt. In a prior post, I spoke about this equation in more depth.

No matter what you earn, you can build wealth. What follows are 5 tips I have learned over time that helped me go from debt to stuck at zero to building wealth. Because of the lessons I learned from people way smarter than me, my wife and I are now on the path to retirement by 50. Had I learned this earlier, we would probably be done now. Despite all of the mistakes we have made, we learned, moved forward, and built wealth using these simple strategies.

Tip #1: Track & Slash

Maya Angelou once said, “If you don’t know where you’ve come from, you don’t know where you’re going.” She was not speaking about money, but this advice can be applied to our money. To create the gap, you need to know where your money goes. We all know where it comes from. I can ask anyone I meet on the street how much money they make from their job, and they can tell me without hesitation (after wondering what kind of person asks that anyway). But, if I asked that same person how much they spend monthly on groceries, coffee, Amazon, or just about anything else, they would grossly underestimate or flat out would not know. This is a problem.

If you want your money life to be in order, you have to start tracking. Start now! You can use Fin-Tech apps like Mint and YNAB, make your own excel sheet, or use a sheet of paper. It doesn’t matter. You need to start. Once you do, you will be amazed. I have been doing this for years, and I am still in shock when I see how we spend our money sometimes and how easily it can get away from us. Recently, I discovered that even though we were doing well and growing wealth, our family of four was spending $2300/month on groceries! I would not have been able to know and ultimately cut that in half had I not been tracking our spending in Mint.

After tracking your expenses for a few months, you can find trends. One month doesn’t make a trend. We often have “one-time” expenses show up every month and can skew the data. Track for a few months to account for these outliers. When you find the trends, it’s time to make some choices. These choices are for you to make, not me. Determine what you value most to least, and start cutting out the things you spend money on that do not give you value or happiness—the decisions made at this stage are personal and unique for everyone.

There is no single answer as to what and how much you should spend on a certain category. Think deeply about what you really value and make value-based choices. This will help you feel like you are depriving yourself because you will still be spending on what makes you happy. Remember, as Paula Pant from Afford Anything says, you can afford anything, just not everything.

Tip #2: Money = Time

We have all heard the saying time is money. Even though this is often said to get people to produce more in less time, the general sentiment is true. In her book Your Money or Your Life, Vicki Robin takes a deep dive into this topic. To make money, we have to spend time. I have a full-time job because I make zero dollars from this blog. For every hour that I work, I get paid an hourly rate. Most of us can say the say thing. If we take this knowledge and apply it to our spending, it can help us make those value-based decisions I mentioned above.

Before I make any significant purchase or splurge, I do some simple math and ask myself a question: Is this splurge worth X hours of my life? Is that big screen TV, impulse Amazon purchase, new furniture, or new car worth the number of hours of my life that it would take to pay for it.

For example, if I make $40/hour and buy a $20,000 car, it will take me 500 hours (12.5 weeks or 3 months working 40-hour workweeks) to pay for that car. Is it worth it? If the answer is yes, I do it. If the answer is no, I don’t. If there is hesitation, either way, I will sleep on it for a few days and then decide, which is usually no. Again, the answers to these questions are different for everyone. What I value is and should be different then what you value. The goal is to create a process like this that will allow you to make mindful choices regarding spending.

Tip #3: Save First, Then Spend

Pay yourself first. I am sure you have heard it before. But it is really that simple. Warren Buffet, a pretty smart guy, said, “Do not save what is left after spending, but spend what is left after saving.“For most people, if you have money in your account or wallet, you will spend it. So make it easy for yourself, create a barrier between you, and free access to your money by automating your savings.

I will use my own finances as an example. My wife and I get paid on two-week cycles. It happens to be alternating cycles, so we get a paycheck for one of us every week. I have set up a system where the following items are deducted from our checks, either pre-tax via our employers or post-tax through automation with our bank and brokerage firm:

  • Max out our pre-tax 401K through our employers (along with the matches)
  • Max out a Roth IRA for both of us
  • Contribute to our two boys 529’s up to the amount that we get a tax benefit from the state of MA
  • Put a set amount (changes periodically) into a growing emergency/cash fund in a high-interest savings account.
  • Send reaming available free cash (which I know because I track my income and spending, so I know my gap) to a brokerage account to invest.

All of that happens immediately as our checks hit our accounts throughout the month. We do not see that money as it has been accounted for. Because we do not see it, we can not spend it. If we did it the other way, which some people recommend, we would spend throughout the month and then put what is left into savings at the end of the month. In most cases, the chances are that the money will be gone, and no savings will occur.

As I mentioned earlier, everyone is different. The example above is what we do and not necessarily what you should do. It is the principle and psychology behind this that is important to understand. This is a potent tool and a key to developing real wealth.

Tip #4: Invest As Much As You Can And Do It Early & Often

Now you have tracked your income and spending, made value-based decisions on what you want to spend on to create the gap, and started to save. So now what? In his book, Rich Dad Poor Dad, author Robert Kiyosaki explains the difference between working for money and having money work for you. To build real wealth, you need your money to work for you. If you make a lot of money and spend it all, you are not wealthy, and your money isn’t working for you. If you create a gap and then invest the gap, your money is working for you.

There are a lot of ways to invest, and there is no one right way. Stocks, bonds, real estate, start-ups, gold, commodities, Bitcoin, and a million more. Who am I to tell you what to invest in. Each person should find what is most comfortable and appealing for them and do that. I will, however, tell you what I do and why I do it.

All but a tiny percentage of my investments are in low-cost index funds through Fidelity and Vanguard. I have chosen funds that mirror the S&P 500 and the broader stock market as a whole. This type of portfolio gives me the diversification and growth that I am seeking at this time. My risk tolerance is in line with the equity weighted nature of this portfolio. If I had a lower risk tolerance, I would include some bond based index funds to mitigate some of the risks.

My wife and I have also started to look into buying real estate rental properties. Our rationale here is to diversify our portfolio, create additional and separate revenue streams from the stock market, and hopefully have some assets we can cash in down the road or gift to our children. I will write a future post on our adventure in real estate investing as we go further down that path.

If this guy said it, I believe it!

The final point on investing is to do it early and often to take advantage of the power of compound interest. There are many articles out there about this magic, so google it to learn more. If you want real wealth, compound interest is the path to get there. An important thing to remember is that compound interest can also work against us. If you carry a lot of debt with high interests attached to it (i.e., credit cards), you are on the wrong side of the power of compound interest and will not build real wealth. Avoid debt, build your gap, invest the gap, and watch the compounding build wealth for you.

Tip #5: Keep It Simple & Don’t Touch It

My last tip for you may be the hardest. To feel in control of our money, we often feel the need to do something with it. Putting money into an Index Fund and then not touching it for decades is boring. I strongly advise boring. Many bad things can happen when we are “managing” our money. A few include mistiming the market, creating taxable events, and taking on risky investments. There are many more, but those are the most common.

Just keep it simple ( I will leave out the “stupid” part). No matter what you choose to invest in, have a longer-term outlook, be patient, and make mindful, value-based decisions with your money. If you let your money work for you through compound interest, rental income, or various other ways, you can only get in the way by trying to manage it more. Leave it alone, let it work and grow, and get out of the way!

This is especially hard when the market crashes. When the market tanked in 2008-09 and then again just recently in March of 2020, it created fear for anyone that has money in the market. It is hard to watch 30% or more of your money disappear in a few days, weeks, or months. The same can be said of the real estate market back in 2008-09 as well. It is scary at times.

This is when knowing your history can serve you well. If you look at this Dow Jones chart over time, you will see the various crashes listed here. Look at those, but focus on the trend line over time. It goes UP. It always goes UP. This is the hard part of investing. Everyone will have different risk tolerance. I hope that it will keep you from making the costly mistake of getting out of the market when it’s crashing or has bottomed out by showing this graph. Try and stay the course. If you do, you will be rewarded for it with real wealth.

Building Real Wealth

I definitely do not have all of the answers, and I do not believe assume that my way is the only or right way. This post is what I do and what I believe works. As you can see from all of the references, I learned much of this information by reading experts in the field. As I continue to read and learn, I may change my mind about some of these things, but I doubt it. Most of what was said here has stood the test of time.

In Summary:

Tip #1: Track your income and spending.

Tip #2: View your money as your time and make value based decisions on what to spend and where to cut

Tip #3: Save first, then spend. If you do it the other way there will be nothing left.

Tip #4: Invest the gap you created in tips 1 and 2 early and often.

Tip #5: Keep it simple and be patient. Let your money, the markets, and compound interest work for you.

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