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


3.-Your Invitation to the “$150,000 Club”

In the last installment https://www.markford.net/wealth-building-for-beginners-even-if-you-are-not-young-anymore-2 of this series, I told you how I got started on my own wealth-building journey. I hope it amused you. Looking back at it now, I can see that the ratio I kept between foolish and sound habits was about 2 to 1. But that was enough. I hope it comforts you to know that you can do most things wrong (as perhaps your parents and teachers always reminded you was your habit) and still become as wealthy as you need to be!

The second thing I did was to introduce you to a very simple and crazily powerful wealth secret that most high earners never follow: As your income increases (and it will!), you must resist the urge to ratchet up your spending accordingly.

And thirdly, I shared with you one of the most important insights about wealth that I ever learned. Luckily for me, I learned it when I was still relatively young. (In my early thirties.)

That insight was this: You need a lot less than you probably think to live a rich life: A lot less wealth. And also a lot less yearly income to acquire that wealth.

As for income… If you can get your income above $150,000 a year and simultaneously curb your enthusiasm for expensive toys, your chances of one day retiring wealthy are about 99.9 percent.

As for how much “money” you’ll need to sock away… A very rough number would be about 12 to 15 times the amount of money you’d need right now to lead a rich life.

If you can get your income up to $150,000 or beyond (and as I will show you that is quite easy to do if you are willing to put in the right sort of time) and if you can save 20 percent to 30 percent of that (which is very possible if you manage your finances as I’ll suggest), you will arrive one day at a net worth of between $3 million and $30 million.

And that – if you know how to spend your money – will be enough to provide a great, rich life for you and your family.

Before we move forward on that, you have to answer one question…

How much wealth will you need?

There is an arithmetic formula for figuring out how much money you will need to retire rich, independently, and worry free.

It’s not a complicated formula. But it does require figuring out what sort of income and/or appreciation you can get from a number of asset classes. (Stocks, bonds, private lending, rental real estate, etc.)

Let’s start with the stock market. Historically, stocks have given investors average returns of about 10 percent. There are plenty of stock promoters out there that will promise you greater returns – two to five times the norm.

But I can guarantee with 90 percent certainty that if you follow them you will discover that your actual gains are likely to be less than 5 percent, if not zero… or worse!

Here’s a very powerful secret about wealth building that took me decades of active investing to learn. Every asset class has its natural, long-term historical rate of return (appreciation plus dividends). You can try to beat that average by 20 percent or even 30 percent if you are diligent, disciplined, and intelligent. But if you try to double or triple it, you will end up very much poorer than you were before you started.

So for stocks I’d say your goal should be an ROI of between 10 percent and 15 percent. If you are both busy with earning income and also loathe losing money on your investments, I’d go for 10 percent by investing in a no-load index fund designed to give you, over the long term, the historical 10 percent yield of the stock market. (Including equity appreciation and dividends.)

Traditionally, tax-free government bonds have given investors about a 5 percent return, which equates (factoring in the fact you don’t have to pay taxes on these every year as you do with stocks) to about 8 percent if you are in a medium- to high-level income bracket.

Why do people invest in bonds when the yield is historically about 2 percent lower? Because they are theoretically safer.

If your retirement saving portfolio consists of 50 percent index funds and 50 percent tax-free bonds yielding 5 percent, your average pre-tax rate of return will be about 9 percent.

I said before that to acquire the wealth you need to retire rich, free, and happy, you need to sock away 12 to 15 times what you are spending now to live well. If your perfect retirement lifestyle would cost (in today’s dollars) 150,000 net dollars a year, your target would be 12 to 15 times that or $1.8 million to $2.25 million.

If you are saving $30,000 a year, you’ll reach those goals in less than 20 years. If you are putting away $50,000, you’ll get there even faster.

We’ll get into this in greater detail later. My point in putting this before you now is simply to show you that you can indeed get rich (become comfortably financially independent) in less time than you might have guessed.

Here’s the thing. You can speed up that process considerably by doing two things:

  1. Investing in rental real estate, which could easily give you a higher safe return – in the range of 15 percent to 25 percent.
  2. Investing in your own businesses, which could possibly give you a few years where you are doubling your cash flow and rate of return and increasing your net worth as you do.

By combining real estate and small businesses into your investment mix, you could, I believe, easily achieve an overall ROI of between 15 percent and 25 percent.

But right now, let’s figure out how much income you will need to maintain your ideal lifestyle. Then we’ll determine what kind of ROI you feel comfortable expecting from your savings.

Let’s do the math

Here’s a shortcut to help you figure out the ideal income level for you.

* Less than $50,000 – It’s tough to make ends meet.

* $50,000 to $150,000 – You are getting by. Your bills are paid and you can afford some small luxuries, but you have to be careful.

* $150,000 to $350,000 – Welcome to the club! You have all you need and all you want. Your toys are modest. Your vacations are great.

* $350,000 to $1 million – You have everything you need and want. Your toys are elaborate, and your vacations are insane.

* $1 million or more – You have too much income.

In picking your income goal, keep in mind that you may have to work harder – and you will almost certainly encounter more stress – as you move up the income ladder. So aim for a number that is on the modest side of what you are willing to accept. Personally, I don’t think anyone needs a lifestyle that’s richer than what he or she could enjoy on an income of between $150,000 and $350,000.

But you decide. Write that number down on a piece of paper. Now take that number and multiply it by your projected ROI:

* If you are conservative and pessimistic by nature, project 8 percent.

* If you are aggressive and optimistic, project 18 percent.

* If you are somewhere in between, project a figure between 9 and 17 percent.

When you multiply the first number (the amount of income you figure you’ll need to enjoy your ideal life) by the second number (the ROI that feels right to you), you’ll come up with the amount of money you will need to have in savings in order to achieve financial independence.

This is a somewhat oversimplified formula, but it will do for now. At this point, your main goal should be to establish your major financial goals and get to work on achieving them. There will be plenty of time later to tweak our formula to account for inflation, taxes, and so on.

But by completing this initial calculation, you have already accomplished more – in term of wealth building – than most people ever accomplish. Congratulations!

Now we’re going to move on to the really fun stuff – discovering the secrets of making wealth automatic!

* 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.