You see a lot of articles in regards to getting rich quick or success stories of young millionaires claiming that anyone can do it! The truth is that they’re correct that anyone can get rich, but the answer is in plain sight and it’s not as attractive as it seems. In fact if it was easy everyone would be rich. The truth is that building wealth can be quite boring and requires a practical slow and steady intentional approach. There are universal rules that apply to building wealth, much like gravity.
I will outline for you the simple rules and steps involved that apply to everyone who can successfully achieve wealth in their 40s. Depending on your level of success, you will be able to early retire or pursue a life of your own design skipping the traditional rat race and pursuing your personal dreams and goals instead.
Save Early and Save Often
The trade-off is that you have to discipline yourself and ”pay yourself first” and tell your money where to go. The Richest Man In Babylon, the ‘Millionaire Next Door‘, and potentially your penny-pinching sweet little old grandma have been paying themselves first for centuries!! You can pay yourself 10% and live off the remaining 90% and accomplish all your financial goals in this matter. Further, it’s argued that most people who pay themselves first do not delay gratification or miss out on fun, opportunities, etc. by doing so. The single most important thing that I wish I had practiced myself over 20 years ago was to start saving and pay myself first! ‘Save early and save often’ is a common saying but most people don’t heed its importance until much later on in life.
The compounding affects of investment interest on principal over time is one of the simplest factors that create wealth. To say it simply, your hard-earned dollars invested properly will earn you interest, which compounded together will then earn interest on the interest. This one factor alone can multiply your investment by 100 fold and often more! That is why it is so important to start saving as early as possible which means starting as soon as you’re in an income generating position. That could be in your late teens or early 20s after graduating university or starting your first business. You must start saving as early as possible and do not delay!
The second part to this is saving often. There are many ways to save but I will outline a few here for you which include dollar cost averaging into an investment like broad market index funds or ETF’s on a regular basis and be consistent without interruption. Dollar cost averaging is essentially buying an investment at regular intervals where the price will be fluctuating constantly and overtime you will average a lower price than if you lump sum purchased the investment in one shot. Purchasing lump sums of your investment is totally fine but it’s important to purchase your investment regularly. If you get paid biweekly, purchase units every time you get paid. Increase your contribution each time you get a raise, receive a promotion, or get bonuses and commissions, etc.
Maximize Registered Investments and Tax Free Accounts
The other goal you must keep at the top of your financial list is to maximize your contributions to your registered investments and tax free savings accounts every single year. Any additional income that you earn above and beyond your dollar cost average investing should go towards maxing out your registered accounts. Use any bonus money or commission earnings throughout the year to max out these contributions and any large tax returns/refunds you receive should also be steered towards matching out retirement savings as well. In this regard, be sure to always maximize any company savings plan to receive the highest return possible from your company match. Always be sure that you’re contributing enough to get the greatest return as this is essentially free money. Similarly use any restricted stock units or stock options that you receive to top up your registered investment or tax free savings, and use any additional money left over to pay down your mortgage debt or invest in non registered assets (stocks).
Stay out of debt!!! No debt other than a mortgage on your principal residence!
Diversify!
Building wealth requires a layered approach. Similar to building a house, you want to ensure that you build a solid foundation to your investment portfolio, and contribute the majority of your investments to this asset class. The majority of your investments should be in growth or high growth style investments, because you won’t need to access that money for the next 20 or so years, potentially longer. It’s wise to diversify a portion of your investments into the different asset classes: Growth and Income, Growth, Aggressive Growth, and International to create a balanced portfolio. The percentage you contribute to each class depends on your time horizon, goals, and your risk tolerance.
In addition, I highly recommend saving a down payment and purchasing a principal residence as early as possible. If your amortization to pay off the entire mortgage is 25 or 30 years, this will enable you to pay off your home in your 40s. The principal residence is also an asset that can greatly appreciate in value over time and further helps diversify your assets through periods of volatility. Buying an affordable home that allows you to keep paying yourself first, and building home equity at the same time is complementary to building wealth!
Look for low cost broad market index funds, exchange traded funds (ETF’s), or low cost mutual funds to build your portfolio. The S & P 500 for instance historically returns between 10-14% annually on average. Purchasing any of these types of investments allow you to diversify by spreading your money across multiple industry’s, which are not all highly correlated. When the banking sector is down, the commodities sector is up and so on. The S&P 500 for example means that you’re buying a very small amount of the 500 largest publicly traded companies in the United States. Investing in this index over two decades from your 20’s-40’s will net you a hefty profit!
Generate Income!
Income-producing assets such as a straight income fund, growth and income fund/ETF can return consistent and reliable returns between 6 to 8% in dividends annually. Look for high quality, low cost funds that pay dividends regularly and have a consistent track record of doing so. Dividends are cash that is paid out by the fund to its holders which you can reinvest and use the money to purchase more units, further compounding your returns. Similar to working a part time job, over time you will build sufficient income to that of having a separate part time or full time job! Producing as many income generating streams as possible is a great way to create wealth so investing your money towards dividend producing funds over time is key!
Its Never too Late!
Whether you’re just out of college, or already in your 40’s, the rules above still apply and it’s never too late to apply them! These extremely important tenets to all financial planning are not new and arguably quite boring! I need to iterate the importance of not over-complicating wealth building. By starting early and saving often intentionally by having your money work for you is everything! I have not mentioned cryptocurrency, buying or owning businesses, or making any ‘Get Rick Quick’ claims. I want to stress the importance that income and time have proven over and over again and can certainly work for you!
Lastly, I assure you that it’s of little importance how much your income is when you start to earn and invest for the very first time. You don’t need a high corporate salary to get your money working for you! It helps, but I promise that if you invest early on and consistently, and intentionally and DO NOT disrupt your investing for any reason: you WILL accomplish financial wealth by your 40’s. Live within your means and avoid lifestyle creep! Lifestyle creep and complacency towards your investments are your major enemies when approaching any financial plan but it is excruciatingly important to know as a young person how important and valuable it is that you start early, and save often! Even wasting a few short years will offset your goals drastically as a miracle of compound interest takes effect and is more significant the sooner you start. Then as you grow in your career, continue to pay yourself first as your earnings increase and you will continue to see your investments multiply!
-RAFI
