Wealth Building for Beginners (Even if You Are Not Young Anymore)*

1.- Wealth Matters: You Decide How Much

Making money is not the most important thing in life. And getting rich shouldn’t be your number one goal.

But money does matter. And building wealth is necessary if you have any hope of (a) living well and (b) retiring one day.

This is true for just about everyone. And what’s equally true is that nobody – not your parents, not your spouse, not your children – is going to care about your financial comfort more than you.

That’s the way it is. Forget about the mental bullshit you hear from social idealists: that everyone deserves a “living” wage and that it’s the government’s job to “even out” the wealth gap.

The truth is that we are all born into this world naked, nearly helpless, and without any guaranty of being taken care of by others. As soon as we are able, we must learn how to fend for ourselves.

You may not like to think about money. But like it or not, you and you alone are responsible for your financial situation. And your financial health will affect your ability to enjoy every aspect of your life.

This series of essays is meant for relatively young people, and the younger you are the more powerful the secrets you learn here will be. But it applies to older people too – people in their 30s and 40s (and even 50s) that have not been successful at building wealth and want to start fresh with a proven plan.

The strategy I’m going to give you is not remarkable in any way. And there will be few aspects to it that will strike you as especially clever.

The reason for that is important. “Clever” financial strategies are almost always complicated and expensive. They work very well for the financial professionals that sell them to you. But they rarely if ever work for you.

I sometimes talk about financial “secrets.” But the truth is, there are no secrets to building wealth. There are universal principles – powerful, eternal principles – and there are tried and true practices that work. The thing is that 98% of the investing population ignores them.

It’s true. If you have the good fortune to be under the age of 40 and are of average to above-average intelligence, the “secrets” to becoming wealthy are no more difficult to grasp than the secrets to playing poker. Or playing the trumpet.

And that’s why, as you read what I have to say here, you may find yourself thinking, “I’ve heard that before.” And “I know that.”

Well you probably have heard it before. Because if you’ve been reading about wealth building for any length of time, you’ve been hearing about the most successful wealth builders in history.

But hearing something and knowing it are two very different things. My purpose in writing this series of essays is not just to teach you what I’ve learned but to tell it to you in a way that will motivate you to do something with it. To try out some of the strategies and techniques I’ll be recommending. To get the knowledge of them from your ears to your brain to your gut.

I want you to know the truth of these principles and strategies deeply – and eventually I want you to know them reflexively. So that your day-to-day decisions about your career and your investments will come naturally to you. So you will make the smart moves and avoid the most common mistakes.

When you get to that point, you will find that your net investible savings (my definition of financial wealth) will increase steadily. Somewhat slowly at first but at a more rapid pace as the months pass. And one day you will realize that you are making more money passively than you are making from working. That is the day you will look back and be glad you took this step.

This was my experience. And it was the experience of dozens of people I personally mentored, as well as hundreds of people that came to my lectures or read my books and wrote to me. People such as:

  • HP, who was stocking shelves in a supermarket when I met him and now earns more than $400,000 a year
  • SP, a recent college grad making $14,000 a year who went on to build a business that gave him a net worth of approximately half a billion dollars (and still growing)
  • RP, who had just gotten out of jail when I began mentoring him, and who now lives in a multimillion-dollar house and enjoys a fantastic lifestyle working less than 30 hours a week

(These are just three. I’ll tell you about dozens more in future essays.)

None of these people did anything extraordinary or had any special luck. They just faithfully followed the rules you will soon learn and found that their wealth increased almost automatically.

What I mean by “Automatic Wealth”

Some years ago, I wrote a book titled Automatic Wealth that made it to some of the bestseller lists. The thesis was simple. Most of the world – and I include doctors and lawyers and college professors in this group – work their tails off throughout their lives, struggling to make ends meet, and end up with little or nothing to show for it. But some people – including many that aren’t well educated and have no family connections – seem to find a way to escalate their income and their savings year after year so that it starts to build automatically. Like they have a printing press in the basement.

You might know people like this. If you do, I’m sure you would agree with me that some of them are not particularly bright or even financially sophisticated. They are plumbers and car salesmen and small business owners and people that make money by selling things on the Internet.

I know lots of these people and I can testify: Many of them have very ordinary minds. Ordinary in terms of academic intelligence. But they have learned something in their guts – a sort of emotional intelligence – that they apply to their careers and their investments. And it’s this reflexive knowledge that has allowed them to build the wealth they have built.

Again, I’m talking about a dozen or so principles and practices that you will find easy to understand and, if I do my job, easy to put into practice until they become automatic.

When you get to the automatic wealth building stage, things get much easier. I don’t know when I got there exactly. I’m sure it took me longer than it will take you. But I can tell you this: When I got there, I no longer thought about making money. I no longer had “make more money” on my to-do-next-year list. I was able to pay attention to other things – my family, my friends, and my hobbies. And the machine kept on going.

That’s what I mean by automatic.

Now let’s back up for a moment and deal briefly with the other word: wealth. What does it mean to be wealthy?

I’ve asked countless people for their definition and have received many interesting answers. Among them:

* Having everything you want

* Having more than you need

* A million dollars in the bank

* Ten million dollars in savings

* Making a million bucks a year

* Making a hundred thousand dollars a year

* Living the life of a rock star

As you can see, each of these definitions makes some sense. That’s because wealth is an imprecise term. But in order to talk about it productively, we must agree on a single definition. For our purposes, then, I’m going to ask you to accept this one:

Wealth is a store of something valuable, something you can use or enjoy later. Financial wealth, therefore, is the net savings you have put aside for spending in the future. Net investible savings, for short.

Note the phrase “net investible savings.” That’s very different from “net worth.”

Net worth is a term that is more commonly associated with wealth. But net worth includes such things as houses and cars. In calculating my own wealth over the years, I never included the value of my home or my car because I figured I’d always need a home and a car.

If you calculate your wealth this way, you will be erring on the side of conservativeness. That’s a good thing. It means you will always be richer than your numbers say you are.

Even if you would rather use the standard net worth formula, you must still recognize one important fact: You need more than a high income to be wealthy. It’s amazing how many people don’t understand this. Too many folks equate making lots of money with being rich.

To be rich, you need lots of money set aside for future use. For your kids’ college. For your retirement. A big income can give you a great lifestyle. But if you are spending it as fast as you are making it, you’ll very quickly find out how un-rich you really are when you stop working or a financial emergency arises.

The sad story of Mike Tyson, a spending fool

During the 20-year span of his boxing career, Mike Tyson’s income exceeded $400 million. Yet in 2004, before his thirty-ninth birthday, this amazing moneymaker was $38 million in debt. He had some assets – equity in some mansions, some cars, and some jewelry. But insiders speculated that their total value was less than $3 million. Let’s assume it was twice that much. That would have put his personal net worth at minus $32 million.

Think about that. Minus $32 million!

How could that have happened to a man who could still make millions every time he fought?

Stories about Tyson’s profligacy during that time are legendary. The faster the money came in, the faster it went out. He employed as many as 200 people, including bodyguards, chauffeurs, chefs, and gardeners.

He spent:

* nearly $4.5 million on cars and motorcycles

* $3.4 million on clothes and jewelry

* $7.8 million on “personal expenses”

* $140,000 on two white Bengal tigers and $125,000 a year for their trainer

* $2 million on a bathtub for his first wife

* $410,000 on a birthday party

The purpose of this story is not to shake a finger at Mike Tyson for the way he handled his money in those years. (He has since reformed and appears to be making a heroic recovery, appearing in movies and selling various products.) It is to alert you to the dangerous temptation to spend more when you make more. As someone who grew up drinking powdered milk and wearing hand-me-downs, I understand the strength of that temptation.

But I also know that if you want to become wealthy – in terms of having lots of money put away for a rainy day or money to spend after you stop working for it – you are going to have to learn how to save and invest a significant portion of your income.

And if you get yourself into the habit of doing that now – when you’re young – you’ll be rich before you know it.

A bit later, I’ll tell you exactly why being young gives you such a great advantage when it comes to building wealth. I’ll explain why every dollar you save is worth five or 10 dollars more than every dollar your parents saved. You’ll discover the true power of compound interest, and find out how to make it work for you.

But let’s get back to the idea of how much money you will need to consider yourself wealthy…

The beginning of a plan to get from you are right now to where you want to be

Most people dream of being able to quit work and live comfortably off the passive income they get from their savings and investments. This is what is commonly called “financial independence.”

If, for example, your lifestyle costs you $70,000 a year, you will want to have a million dollars set aside in some sort of assets that yield 7% a year, giving you the money you need to retire.

No, check that. Your passive income will be taxed, so you’ll need more than a million. Let’s say $1.5 million to be safe.

Or maybe you have a fancier lifestyle and you “need” $700,000 a year to support it. Now you know you’ll need to sock away about $15 million.

How the heck do you do that?

Well, that’s exactly what I’m going to show you. We’re going to create a plan that will get you from where you are today to your version of financial independence – whatever that is.

How does that sound?

Before we get started on the details of your plan, I’m going to give you an assignment. I’d like you to spend some time thinking about how much money you would need, in today’s dollars, to feel rich.

To help you think about it, I’ll tell you a little story about my early years – when I knew even less about money than you probably do now.

* In this series of essays, I’ll be updating and revisiting ideas from several of my books on wealth, including two first published by John Wiley & Sons: Automatic Wealth and Automatic Wealth for Grads… and Anyone Else Just Starting Out. Plus several hundred essays published over the past 17 years in a variety of financial newsletters, magazines, and books.