To Reliably Build Wealth, Simplicity is Beautiful

If you’re like most people, you’d like to achieve financial independence before it’s too late to enjoy life. Let freedom ring clear…financial freedom, that is.  Too much American figurative symbolism for you? 


We can all agree the best types of workdays are those that are work-optional.  At this point, the only reason you’re working is because you’re doing what you love.  So how do you arrive at this sunny destination? A good first step is to automate savings.  Your savings rate, after all, is likely going to be more determinative of your long-term success than any investment acumen. 

About a decade ago, I was having dinner in Palm Beach with a good friend and her new husband, who wanted to know if I could turn his $5,000 into something more significant.  After all, I had been on Wall Street for more than a decade and as a fiduciary, he knew I’d have his best interests at heart.  Even if I was able to earn an abnormally high return, perhaps something like 30%, that type of windfall wouldn’t have been enough to pay for the exciting weekend holiday he had in mind.  When I told him about a long-term, less exotic process for successful investing, he lost interest.  “No thanks,” he said.  What was he hoping for, a ten-bagger*?

A few years earlier, I was visiting with my uncle at a family reunion and told him about the stellar returns our investment team had earned in the prior two years, in which the S&P was up about 20% annualized.  He told me he wouldn’t get out of bed for anything less than 40%.  I nearly spit out the hors d’oeuvre I was nibbling on.  Good luck with that strategy, I thought.  Maybe Bernie Madoff could be your advisor if you believe those returns are likely or even sustainable? 

Fortunately, freakishly high annual returns aren’t necessary for one to be a successful investor.  Anyone who has done the heavy lifting by living below their means has amassed a pile of capital and is in an excellent position to take advantage of the market’s rewards for those willing to embrace delayed gratification.  Note that I said, “those willing” and not, “those financially capable of.”  There’s a BIG difference.  Like my doc says, diet and exercise.  Easier said than done!  But for those who’ve chosen this path, the psychological rewards are just as amazing as the financial ones.  As Charles Dicken notes:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income, twenty pounds, annual expenditure twenty pounds ought and six result misery.
— Charles Dickens, 1850

In fact, it doesn’t matter if you can pick stocks like Warren Buffett.  He wouldn’t have much in the way of wealth unless he could first save some initial capital to exert his intellectual prowess against.  After all, a zero-dollar balance multiplied by a 100% return is still zero. 

You see, your income has nothing to do with your wealth.  Surely, it’s easier to save with a higher income.  In theory, yes.  But once you’ve reached a new and higher financial plateau, most folks strive for the next rung on the ladder and neglect to bank any of their windfall.  It’s just human nature.

Still, there are many more “millionaires next door” hiding in plain sight than you would ever imagine.  We see them all the time and help them put their hard-earned income to productive work.  Perhaps their parents taught them good financial habits, but at some point along the way they learned the easiest and most surefire way to build your net worth:


(income = expenses + savings)

The cardinal rule of personal finance is to spend less than you make, and the easiest way to save requires you to short circuit the process – you simply must pay yourself first.  It’s too easy to spend what’s in your checking account if you don’t do this.  If you’ve had trouble with budgeting in the past, consider setting up an automated investing program and using the best vehicle to accomplish the goal you’re after: 401ks and IRAs for retirement, 529s for education, or HSAs for healthcare!

While doing so, just picture any short-term financial sacrifice you make as an investment in the elderly YOU [insert your name here].  You may even want to picture how you might look at that age and show some sympathy for the hard-working individual that wants to enjoy the grandchildren before she’s too frail to chase them around anymore. 

If you don’t know how much to start with, pick a figure like 6-8% of your salary and boost it over time by half a percent each quarter, and especially with annual merit raises. 

Make it work optional and strive for financial independence by cultivating these habits starting today!

*A "ten bagger" is a term used by investors to describe an investment that is exited at 10 times the initial investment. The number can be changed to describe a different exit for the investment. For example, a "four bagger" describes an exit at four times the initial investment.



[Rule #2 for achieving Financial Freedom will be covered in my next blog post…]