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The Secret to Building Wealth

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Wealth of the NationThe secret to building wealth is no secret at all: work hard, spend wisely, save, and invest.

Of course, there are other ways. Some people are born rich. Some start successful businesses. Others possess talents or skills that command high pay. Still others have the good fortune to be at the right place at the right time, such as Matt Cohler, the tenth Facebook employee, who now has a net worth of $700 million. Some, like Chris Shaw, the sole winner of the $258,500,000 Powerball jackpot in 2010, are just plain lucky.

But the vast majority of people with money are good money managers. They earn it the old-fashioned way, spend less than they make, save, and invest the rest.

With so much focus on celebrity culture and its trappings, it can be hard to remember that reality TV stars and their posh lives are no more real than their injected lips and fake eyelashes. While there may be a chance that you’ll invent the next Instagram or cash in your stock options when your employer takes his start-up public, there’s a better chance you’ll work for a living and earn your money one day at a time.

While this may not be a glamorous proposition, it’s a hopeful one, because every young person who works for a living and earns more than he or she spends can win the race to financial independence. The key is to plan ahead by paying yourself first. Before you pay your bills, buy tickets to hear Adele in concert, or try the new local sushi bar, deposit a fixed amount from every paycheck into your savings account.

If you work for an employer who offers a 401(k) retirement plan, your best bet is to deposit your savings (through automatic payroll contributions) into your plan. (Read my article on 401(k) plans to find out why.) Ten percent of your gross salary is a worthy objective, but if that’s too much, start with less. The important thing is to establish a consistent savings habit.

Because of the power of compound interest (interest paid on interest), even small amounts add up over time. You’ve probably heard that if you invest the cost of one cup of gourmet coffee – about $4.50 – it could be worth over $100 if you let it sit for 40 years at 8% interest. If you invest one year of coffee money, about $1,500, it could become worth $36,400. If you invest your coffee money every day for the next 40 years, it could become a whopping $436,400 (before account management fees and taxes).

Imagine that. Without any additional planning, a daily investment of $4.50 could very comfortably pad your retirement nest.

Building WealthWhile interest rates vary, the math doesn’t lie. As every journey begins with a single step, slow and steady wins the race to financial independence. The determining factor isn’t the length of stride or the size of your deposit; it’s time. As we’ve just seen, small deposits, like small steps, add up mightily when given the time to grow.

The good news is you don’t have to wait forever to see results. Something wonderful and exciting happens about 12 to 15 years out. If you invest regularly (through your 401(k) or private investment account), your portfolio hits “critical mass” when it starts to grow appreciably on its own, independent of your contributions.

If there is a secret to building wealth, it is to use your time wisely.  With time, you can make your money grow.  If you lose your money, you can make it back in time, but no amount of money can buy back wasted time.


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About Steve Lome

Steve Lome and Dave Kramer are the guys behind "The $500 Cup of Coffee, a Lifestyle Approach to Financial Independence, Especially for Millennials and the People Who Love Them". We are not professional financial advisors, but we have lots of money experience. As a mortgage broker, Dave reviewed the personal financial statements of thousands of customers. As a developer of affordable housing, Steve learned it was easier to build a house than a mortgage-ready customer, because so many of his prospects were wearing or driving their wealth. They both realized that no matter how little or how much people make, most do a lousy job of managing their personal finances. Dave first conceived of “The $500 Cup of Coffee” as a way to help his clients save their money. Working with Steve, he re-imagined it as a roadmap to financial independence that almost anyone can follow. The final result is a well-balanced blend of Dave’s straight forward thinking and Steve’s expansive worldview that encourages a commonsense, relatively low pain approach to wealth accumulation, emphasizing conscious consumerism, steady saving and regular investing.