Near as I can figure, it takes some time to become wealthy. There are those who manage to do it very quickly, and they generally fall into one of these three camps:
- Being born into wealth.
- Winning the lottery.
- Inheriting money from someone else.
And I have to give an honourable mention to those who, every so often, invent something that’s so valuable someone pays lots of money for it. Yet, this isn’t always a “quick” way to make money. Usually, it takes a little while … but the possibility of doing it quickly still remains.
For the rest of us who don’t fall into these categories, building wealth is an activity that doesn’t occur overnight. Even for the adherents of Mr. Money Mustache and other FIRE followers, a commonly touted timeframe for building the kind of wealth that allows for early retirement is anywhere from 5-7 years depending on how much money a person has already accumulated.
If you’re not willing or able to live a very frugal life for 5-7 years, then you’re probably looking at 2-3 decades to acquire sufficient wealth that will allow you to live the way you want without having to earn an income. No matter how you slice it, 20-30 years isn’t a short period of time. Yet it’s definitely a sufficient amount in which to build wealth.
Okay, Blue Lobster… so what?
I’m going to suggest that you figure out what best makes you happy and find a way to do that for money. It seems obvious, but the truth is that most people don’t love what they’re employed to do. They do it for the paycheque. I’m not knocking that path. It’s a valid one if you’re a fan of eating, sleeping indoors, and having some measure of comfort in your life. Working for a living has been a time-tested method for ensuring that you can earn money.
Whether your employment brings you joy or not, I’m going to urge you to have your money do the heavy lifting for you. Every time you get paid, you save a portion of your paycheque and you invest it for the long-term. You’ll re-invest the dividends and the capital gains along the way. In the first 10 years or so, these contributions from your paycheque are going to do the heavy lifting of building your wealth. After that, the dividends & capital gains that your investments generate will exceed the contributions from your paycheque. So long as you don’t interfere with the Money Machine, you’ll be creating a very nice cash flow for your later years.
And just to be blunt – “interfering with the Money Machine” means siphoning off your dividends and capital gains instead of automatically re-investing them. The phrase also covers any interruption in your commitment to send a portion of every single paycheque to your investments. Finally, these words also encompass any strange desire you might have to temporarily halt your investment contributions during times of extreme market volatility. Further, the more you save at the beginning, the faster your wealth pile will grow.
The only catch is that it will take some time before you can stop depending on your paycheque.
Simple? Yes. Easy? No.
Not easy, not at all! It has never been easy to save money consistently over a long period of time. There is always a temptation to spend. Saving money is downright boring compared to vacations, concerts, vehicles, clothes, socializing, hot air balloon rides, jewelry, collectibles, camping, road trips, golfing, theme parks, shoes, massages, new furniture, artwork, streaming services, coffee, etc… Saving money reflects a pessimist’s viewpoint because it means that you don’t trust the universe to provide for you in the future. Saving money is viewed as selfish when someone important needs your income, i.e. someone has to make a rent/mortgage payment, a sibling lost their job, a parent needs a medical device.
Building wealth… it takes some time. In some cases, it takes generations. If you’re the first in your family to graduate and earn a higher than median income, are you going to say no to helping younger siblings on their way through school? Will you turn your back on your parents if they need your help?
It’s easy to encourage people to give up the luxuries, the nice-to-have’s, the fun-stuff in order to build wealth for the future. Lately, however, I’ve started thinking about the harder choices that people face when having to choose between spending now and spending later.
A very simple definition of poverty is that it is the state of lacking of wealth. From my observations, poverty affects entire families, sometimes over generations. Few of us would put saving for retirement or a home ahead of paying for a sibling’s groceries, if push came to shove. For the majority of us, the familial bonds are stronger than the need to save for our futures.
Where families have financial wealth, there is less need for financial interdependency. If each adult child can pay their own way, then they need not look to their parents or siblings for assistance. As a result, all of the adult children and the parents are free to save & invest some of their money for the future. The invested money, aka: wealth, can be left to grow because there are no other immediate demands on it. In addition, the adult children will more than likely inherit some portion of the parents’ money once the parents are gone. The wealth moves from one generation to the next, compounding over time.
The less money a family has, the greater the interdependency among its members. When parents can barely keep the lights on, they will turn to the adult children for assistance. This limits the adult child’s ability to build wealth because the money that goes to helping their parents is money that is not invested for the future. The same principle applies if one adult child makes good money but her siblings don’t. More than likely, she’ll feel obligated to assist her siblings and that means less money is available for investing. This family doesn’t get to benefit from intergenerational wealth because all of its wealth is spent in order to survive from one day to the next.
The money is needed now, which means that its owner doesn’t have the privilege of letting it compound to be used at some point in the distant future.
Realistically speaking, building wealth from a position of poverty creates untenable choices for many. When your family needs financial help to survive, are you obligated to sacrifice your financial health? Does your paycheque belong to you or to your family?
And the answer is…?
I wish I had the answer. I honestly and truly do. One of the saddest observations that I’m seeing as I get older is that wealth is funnelling from the many to the few. More and more people are barely making it from one paycheque to the next, even when they make the so-called right choices about how to spend their money. It’s happening at such a fast pace that I wonder if the trajectory can be changed.
Marketing machines are working non-stop to get people to spend money. Sure, we’re in a pandemic (at the time of this post). However, pandemics do not last forever. The advertising industry will go into overdrive once the pandemic is over in an attempt to get people to open their wallets.
And if the pre-pandemic situation is a good predictor of behaviour, people will spend. It might be slowly at first but then they will gradually “forget” to put money into their emergency funds, to only pay with cash, to decline offers for credit.
I don’t have all the answers. What I have is a theory and it is this.
Once the not-rich are barely making it from one paycheque to the next, they reach for a lifeline to maintain the illusion that they’re living comfortably. For a great many people, appearing poor is just as awful as actually being poor. The anchor-disguised-as-help that is offered to those in this particular situation is called credit. So the paycheque that barely covered the necessities is now most definitely incapable of covering the interest charges on the debt. Remember! Once you’ve used credit, you’ve simultaneously created a debt.
The not-rich person (or family) has taken the first step towards becoming trapped in a cycle of poverty. After all, if one cannot survive before taking on debt, then how is one to use the same insufficient paycheque to pay off that debt?
Then there’s the little pesky, incidental problems such as rents eating 50% or more of a household’s income in some cities. Trust me – the high income household aren’t the ones paying the majority of their income on rent. Another pesky problem is the fact that some mortgage are over 7x the household’s income. Again, households with higher incomes can manage to get mortgages which are less than 3x their income.
So going back to where we started, the steps for building wealth are the same all of us who aren’t born rich, who haven’t inherited money, and who haven’t won the lottery. Earn an income. Save a portion of that income and invest it for long-term growth. Re-invest the dividends and capital gains for many, many years. It will take some time, but these steps will build wealth.
The reality of the situation is that not everyone has the advantage of having financially-secure loved ones. The steps to building wealth are grounded in the assumption that investing for wealth is your highest priority. When there are competing and equally important uses for your money, then the choice to save and invest gets much harder.
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Weekly Tip: Keep your emergency fund separate from your other savings accounts. Segregating your money by its intended use solidifies the line between what can be spent today and what can be spent in a true emergency. Emergency funds nestled in their own dedicated account decreases the likelihood that you’ll somehow spend the money on something that isn’t an emergency.