Lately I’ve been thinking quite a bit about a mindset that bothers me. These thoughts have been rolling around in my mind for while now, and didn’t really come to the surface until we were having a great day on the lake, and one of our boating companions commented on how they appreciated being out seeing the lakeside homes and all the toys that went along with them since they would never be able to afford those things themselves.
This comment was so blatant that it was like a slap in the face for me. My first reaction was to say “well with that attitude..” But then I looked around at our other companions. It was said so nonchalantly and matter-of-fact and it was almost like everyone agreed.
I was really impacted by the comment. Partly because this apathy was accepted in such a casual fashion, and partly because I realized I’m obviously not doing a very good job of communicating with the people I’m close to how EVERYONE can build wealth. So let’s clear things up shall we?
Perceived wealth vs. real wealth
There seems to be a misconception that wealth is shiny, fast and flashy. That most wealthy people are high profile and are either lotto winners, musicians, sports professionals and app designers. They made it big, and fast. It was an unprecedented stroke of luck, the planets aligned and the universe bestowed this wealth upon them. And that my friends, is how people get wealthy.
In one of my favorite books, “The Millionaire Next Door”, the late Tom Stanley shares his research on what getting wealthy really looks like. And I hate to break it to you my friends, but it looks like a lot of hard work, sacrifice, and it usually takes decades. He goes into detail about how most millionaires live modest lifestyles, buying used cars, living in older mid-level neighborhoods and investing well.
We’ve all heard of get-rich-quick schemes, but it’s far more likely that those lakefront homes we were admiring that summer day are a product of a get-rich-slow process. This may not be the jet-setting excitement that you were hoping for in an article about wealth, but the exciting thing about it is that it’s anyone’s for the taking.
Creating margin in your life
I want to let you in on the magic of financial margin in your life. Margin is the difference between your income and your spending. The bigger you can make this gap the better. Whether it’s by tightening up your spending or maximizing your earning potential, if used appropriately, this gap can make you wealthy over time.
Depending on your personality type, how you create a greater gap for wealth building will vary. Some people do well on a detailed budget, while others find that setting up automatic transfers does the trick. It’s important to intentionally carve out those funds because the default is almost always just to let your lifestyle adjust to any gap in your income vs. expenses.
Now that you have money to invest, where do you put it?
It seems like every corner you turn, someone has a great new “opportunity” for your hard earned money. As exciting as the prospect of investing in a young company on the “ground floor” can be, try to limit very high risk/high reward opportunities to a tenth of your portfolio. And for goodness sakes, you should not be putting money into anything you don’t understand. Most worthwhile investments can be understood by most if a good communicator is explaining it to you. Don’t buy into the lie that good investments need to be complicated. Keep it simple.
The bulk of your investments should be in quality businesses that are hard to compete with, hard to live without, and are already paying their investors dividends. The best way to do this is to invest in quality funds where the diversification, research, and shopping for the best value is done for you. Unless you can afford to quit your job to do all that work yourself. But if that were your situation, I doubt you’d be reading this.
Your behavior over time is key
Now that you have created margin in your finances and can make healthy monthly contributions to your great investments, the final ingredient is time. The more time you have to let your investments compound and grow, the greater they will be. Once you’ve found a place to put your money you are comfortable with, it’s instrumental to stay the course and let your interest compound. Think of the value of your investments just like you would the value of your home. It may go up and down depending on the economy, but you only lock in your loss or gain when you sell.
Over time, this process of creating investments that will work for you will allow you to begin to draw income without deteriorating the principal amount (think taking the golden egg and not killing the goose). That is how people get money to work for them.
What is wealthy to you?
So you’ve probably figured out by now that this is not a recipe for easy millions that will land everyone as the feature on the lifestyles of the rich and famous. That’s ok. When you really get serious about asking people what wealth means to them, they will often say they see wealth as not having to worry about expenses, being able to indulge in little luxuries, and having time freedom so they can be with the people that matter most to them. That is real wealth.
If it were easy, everyone would be doing it. It’s amazing what you can do when you make investing in your future a non-negotiable , like a car payment or mortgage. Bottom line, real people can create wealth with a good plan and by giving it time.