Good morning shoppers. Today is your lucky day. Yup, together we are going to learn that building wealth doesn’t need to be complicated. It’s downright simple. In fact if you can build your skills in just three areas, you will put yourself on a path that leads directly to Financial Independence.
Complexity is your enemy. Any fool can make something complicated. It’s hard to keep things simple.Sir Richard Branson
Quick side note. Mr. C likes to challenge the notion that money is complicated. But at the same time he recognizes that simple does not necessarily mean easy. We all have our own unique circumstances and the burden of overcoming them. Think of this article as a “mental model” to help you create greater focus in three areas. Knowing where to focus your efforts can speed up your journey towards the goal of financial freedom.
James Clear has a great article about Mental models here.
Lever 1 – Income
News flash, earning more money makes it easier to grow your wealth. This is not a surprise to anyone, but it deserves to be repeated. “Earning more money makes it easier to grow your wealth”.
“But Mr. C, i’m not smart / talented / educated enough to be a high earner.” First of all, that’s probably not true. You may not be capable today but with time and intention, the majority of people can learn more skills and become more valuable in the marketplace. A lifetime is a long time. Don’t limit yourself by thinking how your life is today will always be that way.
Second of all you don’t need to be a “high earner” to build wealth. Earning just 10% more than you do now can make the difference between retiring at 65 or not at all.
Check out the difference that an extra 10% can make:
- According to the Bureau of Labor statistics, the median U.S. wage in 2019 was $47,060
- 10% more = $4,706 per year ($392 / month)
- S&P 500 average return since 1957 = 8% (source – Investopedia)
If you could increase your take home pay by $392 per month and invest it for an average 8% return for the next 40 years, you would end up with somewhere in the neighborhood of $1,377,598. That extra $392 per month is less than the average new car payment in 2019. Imagine what you could do with an extra $1000 or $5000 dollars a month? Try the free calculator at Nerdwallet to see how far your extra dollars can go.
Lever 2 – Saving Rate
The quickest way to double your money is to fold it over and put it back in your pocketWill Rogers
“Mr. C I make the big bucks. I’m already wealthy right?” Ummm, no. Earning a six figure salary or business income does not build your net worth unless you actually save some of it. If you are spending everything you earn, then you are a slave to your job / business. Regardless of your income level.
I’m sure they are out there, but Mr. C does not know anyone that is looking forward to working right up until the day they die. Most of us would enjoy some freedom to not work, or pursue more meaningful opportunities that may or may not include getting paid. Your saving rate can help you get there.
Why does my saving rate matter?
If you save 0%, you will need to work forever. You wont have any way to support yourself without a paycheck. Not only that, but you will miss out on the massive power of compound interest. If you are able save 100% of your income, congratulations! You are already financially independent (wealthy).
Mr. Money Mustache has a handy chart in his article “The Shockingly Simple Math Behind Early Retirement”. It shows the relationship between saving rate and the number of years until retirement (also known as Financial Independence).
As you can see on the chart, saving a higher percentage of your income reduces the length of time you need to keep working. Financial independence means you don’t rely on a paycheck to survive. Your investments produce a return that is enough to cover your expenses.
Increasing your saving rate accomplishes two things. The first is that you will have more money to invest. Secondly it means you are reducing spending. When you reduce spending, the amount you need to achieve freedom goes down. Remember, you only need enough investment return to cover your expenses. Lower expenses means lower net worth required.
Lever 3 – Investment Returns
The stock market is a device for transferring money from the impatient to the patient.Warren Buffett
Currently the highest rates for savings accounts are around 1.8%. A quick check of the Consumer Price Index (the most widely used indicator of inflation) shows that for the last 12 months the Index has risen….1.8%. “So what Mr. C? What does that even mean?”
It means that keeping money in a savings account, even the highest paying ones will not grow your wealth. In a time of high inflation, money in a savings account may be worth even less in the future. Savings accounts are for money you intend to spend within the next five years. They are not an efficient way to build wealth over the long term.
To grow your wealth and attain financial freedom, your investments need to generate a return that is higher than the rate of inflation. Preferably a lot higher. For reference, the popular index fund VTSAX (from Vanguard) has a cumulative return of 258.76% for the 10 year period ending 10/31/19. That’s more like it.
Investing is a big topic to cover in one article. That’s probably why many people choose to ignore it or feel intimidated by it. But you’re too smart to ignore it. You’ve worked hard to increase your income and savings. You’re ready to invest and take advantage of compounding growth. But where? How?
If you are looking for the “easy” button, many people would be well served to invest in a Target Date Retirement Fund within their employer sponsored plan. Choosing one with a year near your expected retirement date is all you need to do. These funds automatically change the blend of securities to reduce risk as you age. The ultimate in set it and forget it.
If you’re anything like Mr. C you’ll want to learn more about investing so you can make informed decisions with your money. Below are some of the best free resources out there.
“The Stock Series” by JL Collins – This group of 35 articles is the basis for the book “The Simple Path to Wealth”.
The “Early Retirement Now” blog is famous for it’s Safe withdrawal rates studies. But it is also jam-packed with well written articles focused on retirement and investing. The Author Karsten, has a PhD in economics and is a former Financial Analyst.
Friends, that’s it. Earn more, Save more, Invest for higher returns. If you can work to improve in these areas, you will be on the path to wealth and financial freedom. I know you can do it!!