The only “secret” you’ll ever need to know about building wealth
Here’s the secret: There are no secrets.
No tricks. No hidden manuscript somewhere that only rich people have access to. There isn’t a handshake or cryptic passphrase, either. This isn’t some super-exclusive cigar club. All this stuff is out there and ready to be consumed.
The problem is our education system does a terrible job at teaching the basics of personal finance and building wealth. Or the stock market, compound interest, budgeting and investments.
A great many of us have a ton of potential to build serious wealth, but we just aren’t exposed to how it all works.
It’s not a secret, but it’s not well-taught, either.
I learned the basics of building wealth from my dad at a very early age. In my teens, he bought me a book by The Motley Fool about how investments work. You know, things like 401ks, Roth IRAs, money market accounts, brokerage accounts and how money builds (read: compounds) over time into huge collections of benjamins.
I may not have completely absorbed every word at the time, but the lessons were invaluable.
Here are three lessons I learned along the way that distills down what it takes to build wealth over time. But, here’s the kicker: these lessons aren’t in some hidden book somewhere. In fact, they are quite common. There is lots and lots of research available that helps reinforce how these lessons work.
Are you ready to dive in?
Lesson #1: Building wealth requires risk
Your money won’t grow [fast] unless it’s put at risk.
Stock-piling your hard earned money in a bank is a one-way street to being poor. Why? The power of inflation, over time, meticulously eats away at the spending power of your money.
These risks include starting businesses, investing in real estate or in the stock market. While there is a potential to lose money, there is also a potential to gain a considerable amount of wealth. Short of winning the lottery or getting a large inheritance, smart investments get people rich.
I am a huge fan of maxing out your retirement contributions at work. Your 401k will lower your taxable income, and Roth IRAs will enable tax-free withdrawals when you’re no longer working. Paying yourself first and making this automatic sweetens the deal, big time.
Lesson #2: Being rich and acting rich are very different
Thomas Stanley’s “The Millionaire Next Door“ taught us that the large majority of rich people (those with considerable wealth, not just big incomes) don’t tend to live in rich neighborhoods, drive nice cars and go out for expensive dinners. Instead, they live like regular people.
They hold normal jobs. Drive Jeep Cherokees and Toyota Camrys. Live in [often paid-off] normal homes. In fact, the majority of millionaires we probably wouldn’t be able to pick out of a line-up!
Don’t envy people who act rich because, in many cases, they aren’t. They might earn high incomes (and that’s great!), but without a substantial savings mechanism in place, the large majority of their wealth simply disappears.
I like to call high income + high spenders pseudo affluent.
The pseudo affluent are high income earners who spend the majority of what they earn on luxury items designed to make them look, feel and appear rich and successful.
The pseudo-affluent generally:
- Earn a high-income, but spend the majority of what they make
- Wear expensive suits or carry Louis Vuitton purses
- Drive high-end luxury or sportscars like BMWs, Porsches, and Mercedes
- Genuinely believe that rich people act rich
Naturally, this does not mean that everybody who drives a BMW is pseudo affluent. The world isn’t black and white enough to make such a concrete statement.
However, those who do spend the vast majority of high incomes DO tend to drive these cars and live in wealthy neighborhoods to display their wealth.
Lesson #3: Building wealth can be very, very boring
Think of building wealth like a well-oiled machine. It does its thing while you do yours. Really, it’s that simple.
We aren’t driving around in $100,000 cars and buying expensive stuff to make ourselves feel rich. Instead, we’re driving our 2007 Toyota Corolla because it still gets us from Point A to Point B just as effectively as that $100,000 ride. We take calls on our two or three year old phones rather than the very latest in expensive cellular technology.
We begin thinking in terms of value rather than price.
This isn’t about being “cheap”. This is being frugal. Frugality builds wealth.
I don’t think anyone would label “frugality” as exciting! But, that’s okay. Well-oiled machines aren’t exciting. But, they are effective. Meticulous. Close to perfect (though, you don’t have to be anywhere near perfect to get rich!).
