The “Haves” and “Have-Nots”
Most people, either through necessity or a “spend now, worry about it later” attitude, never save and reap the benefits of growing world economies.
I call these the ““have-nots.” Living from paycheck to paycheck, they fail to seize the chance for their money to build upon itself and to create some wealth and security. This lack of savings never gives them the freedom to be unshackled from money concerns and to have money for its real purpose, which is to feel secure, take care of loved ones, and to live their one best financial life.
Those who can save are able—through their 401ks, IRAs, and other investments—to accumulate enough money to protect themselves from unforeseen life events such as bad marriages, health issues, or children’s weddings, for example. These are the ““haves”.” These are people who have been and will probably continue to be the beneficiaries of long term trends of stock market advances.
While I grant you that ideas of happiness, success, and wealth vary widely within individuals, families, and communities, it seems safe to say that most of us want to be in the “have” category. Few of us want to struggle through life and retirement without any savings or assets to fall back on. Unfortunately, the stark reality (even in a wealthy country like ours) is that only a minority of people accumulate enough retirement savings needed to maintain a comfortable lifestyle into their 90s. The good news is that it doesn’t have to be that way for you—and a few simple changes and re-thinking can help you climb your way into the “haves” class.
How To Build Wealth: Owning Equity
To start, begin putting aside a piece of your working income and investing it. This is the main way to build wealth because you gotta have money to make money.
Next is to understand something very basic. There are really only two types of investments:
- Owning something, like a home, a business, or shares in a stock or a mutual fund
- Lending money, like investing in a CD, a money market, or a bond
Of the two, owning something is the only way to true wealth and financial independence.
Another word for owning something is equity; the equity in your home is a good example. Your home equity is the difference between the worth of your house and the amount remaining on your mortgage. If the house rises in value and your mortgage stays the same or goes down, you gain wealth. Earning wealth this way does not require you to sit at a desk all day working. Your equity becomes more valuable over time, even while you sleep.
That is why, for most people, owning a home will be their greatest wealth creator.
Owning stocks is the same. As the company or group of companies you own (such as index funds or mutual funds) become more valuable, your share ownership becomes more valuable too. This process takes many years to work, but it works nevertheless. Owning stocks for 10, 20, or more years has been shown to beat inflation by a wide margin. Long-term stock ownership has created wealth for millions of investors.
Building Wealth Begins with Saving
Another main difference between the “haves” and “have-nots” is that most “haves” first developed a habit of saving and investing during their working years. The earlier you start saving, the better the probability to develop wealth down the road. There are two main reasons for this wealth effect:
- The rate of return on the stock market has averaged about 8-12% annually since the early 1900’s—yes, in a very up and down way with some years higher and some years wrenchingly lower, but over time the approximate 8-12% has been the average.
- The miracle of compound interest allows the money you’ve invested to build on itself. As an example of compounding, consider a retirement account where you’ve chosen to purchase an index fund. When that fund pays dividends, the dividends are reinvested back into the same fund so you buy more shares, and the next dividend is a little greater because you now have more shares, and that builds and builds. Future earnings then are based on the sum of the principle (the money you’ve paid in) plus all the money earned and reinvested, and this results in a gradually steeper and sweeter rate of appreciation in your account. Note that while you also receive the benefits of compounded interest from other investments, the low returns you’ll get these days from money market funds, bonds, and CDs means you won’t get very far with compounding. On the other hand, after several decades of regular deposits made to your savings, the average returns from your stock investments, and the math of compounded dividends, the results can be truly phenomenal.
It’s worth touching on a few details about retirement accounts since they, along with your home, are the best ways to create and grow equity. 401(k)s and the various IRA plans should be designed to grow your money. Here’s a tip: Make your investments boring. Nothing sexy, no hot stocks. Just plain vanilla index funds that are invested in a boring way. Why boring? —because fortune favors the patient investor. So, embrace the boredom!
Also, if your 401(k) plan includes matching funds from your employer, this is one of the best deals you’re going to find anywhere, so it would be foolish not to take advantage of it. Who in their right mind would give up free money?
Here a few more tips your investments:
Keep It Simple & Minimize Fees And Taxes With Index Funds
Invest in a small number of low-cost index funds or ETFs, which are more naturally tax-efficient and have very low fees compared to actively managed mutual funds.
Forget About Beating The Market
Putting all your money into a mutual fund because it had a great run and beat market returns for the past 2 or 3 years is not a good strategy. Most of the time, these funds end up being below average anyway, so you might as well stick with a good low-cost index fund.
Don’t Chase Market Trends
Timing the market is a job for wishful thinkers, chart technicians, and many charlatans, not for value-minded, long-term serious investors. Unfortunately, the greed and fear which drives intellectual crowd psychology lead otherwise intelligent investors to buy high, sell low, and repeat until broke.
Make Retirement Savings Automatic
Automate transfers from your paycheck into your retirement or savings accounts. If you don’t see the money first, you’ll grow accustomed to managing your life on a lower monthly budget.
The bottom line is to position yourself to become a “HAVE” and the only way to get there is to start building equity. Buy a home, start a business (and succeed at it), fund an IRA or 401k, or just start putting money into a low-cost index fund month after month for year and years. This will separate you from the woes of constant worries and the month-to-month cycle of struggle.
Finally, to all of you listening: This is something you have to do for yourself. You have to make it a priority, and you have to do it now. Time marches on and the wealth accumulation is reduced for every year that you wait.