Wealth Building

I’ve written about this topic previously. In this post, I want to keep it as simple as possible. We pretty much all know how to build wealth.

Simply spend less than you earn; then, save and invest the rest.

The concept is simple. Putting it into practice is not so easy.

The problem is that we live in a world where marketing professionals are VERY GOOD at getting us to spend our money.

We actually don’t NEED much to live a decent life. We need clean air to breathe. We need water to drink. We need food to eat. We need some sort of shelter. We need decent health care. We need at least a few friends. And we need to be able to learn.

Apart from that, almost everything else is something we WANT. We want a nice home, where we can live in a nice neighborhood. We want a nice vehicle so that we can drive where we want to go. We want to travel to exotic locations for impressive vacations. We want to watch good movies, and we want to wear comfortable clothes.

There’s nothing wrong with wanting these things and more. We get into trouble when we go into DEBT for the things we want.

Some debt is not so bad. It’s not unusual to go into debt to get a good education. We have to learn a lot as humans, not just to make money, but also to live a meaningful life. It’s not unusual to get a mortgage for a decent home. Sometimes, we can get a good interest rate, which is much better than trying to use credit cards to purchase a home!

I’m not suggesting that it’s a good idea to avoid debt entirely.

However, the only way to build wealth is to find ways (on average) to increase your NET WORTH. Here are my suggestions.

1. Calculate your NET WORTH monthly. (You want it to be going up.)
2. Before you spend any money you make, put at least 5% into savings.
   • Ideally, you want to use a “high-yield savings account” (HYSA), where you can earn at least 3% more than by putting your money in a traditional savings account.
3. Before you spend any money you make, invest at least 10% in index funds.
   • The fact that you are investing in index funds is more important than which index funds you choose. If you have a traditional 401k, start there. Be sure to get your company’s match, if applicable. Next, consider investing in a Roth IRA. Finally, after reaching the maximum in each, invest your after-tax dollars in a brokerage account.
4. Only take money out of your savings account for emergencies. If at all possible, never take money out of your investment accounts until after you’ve retired. (After retiring, try not to take out more than 4% from your investment accounts during any year.)
5. Avoid going into debt after completing the previous steps. Prioritize eliminating any debt you do have, starting with your highest interest rate debt.

Again, the approach is simple. We get into trouble because it’s not so easy to do this in practice. Housing and grocery costs are so high that it’s a real sacrifice to avoid spending 15% or more of the money you make.

This post is about how to manage your personal finances. In a separate post, I’ll explore how “the system” is making doing this difficult at a societal level.