Just Keep Buying

To build wealth over time, save and invest consistently.

To build wealth, you have to save and invest. Whether you invest in the stock market, real estate or any other income-producing instruments, saving and investing your money consistently holds the key to creating wealth. Make investing a habit: something you do regularly, just like paying your mortgage or purchasing food. In the long run, your investments will yield a far greater sum than your savings.

When you don’t have much money to invest, focus on building your savings until you do. As  long as the amount you can easily save far exceeds the amount your investments produce, saving should remain your priority. For example, suppose you’ve determined you can painlessly save $1,000 a month in the coming year, so your total expected savings will amount to $12,000. Suppose you also have $10,000 in investments that you anticipate will grow by 10%, providing an expected investment growth of $1,000. Since the first number far exceeds the second one, you should save more and thereby increase your investments. If the expected growth in your investments exceeds the amount you can easily save, then focus on how best to invest the money you already have in your portfolio.

“Regardless of where you currently are in your financial journey, your focus should shift from your savings to your investments as you age.”

To accumulate a solid financial base, saving money in your early years is crucial. As you grow older, shift your focus from saving your money to investing it. After you’ve saved and invested for about 40 years, almost two-thirds of your total wealth will come from investment gains.

Choose saving options that fit your individual circumstances.

Traditional advice on how much money you should save – for example, to save 20% of your income – fails to take into account two key issues: First, income often fluctuates over time; second, people’s saving rates depend on their income level. The lowest-income earners – those in the bottom 20% – save only 1% of their yearly income, on average, but earners in the top 20% save nearly a quarter of their income. Nearly half of American adults report feeling high or moderate anxiety about their level of savings.

Don’t feel obligated to put away a predetermined amount. Save more when your individual circumstances allow it and less when they don’t. Following this strategy will relieve much of your angst.

To figure out how much you can potentially save, subtract your monthly spending from your monthly income. Calculate your monthly fixed spending – the spending that stays the same from month to month, including mortgage or rent, car payment, cable fees and so forth – and then estimate your spending that varies each month. To get a more precise figure for your variable expenses, put them on one credit card and pay the total debt off fully at the end of each month.

“Saving more is only beneficial if you can do it in a stress-free way. Otherwise, you will likely do yourself more harm than good.”

You can save more money by either reducing your spending or increasing your income. While both methods work, cutting spending can only go so far. The bottom 20% of US earners can’t afford basic necessities, such as housing, health care and transportation, so these people have no real option to save. Those between the 20th and 40th percentiles aren’t faring much better. Even though their average after-tax income rises to nearly three times that of people in the bottom 20%, they spend nearly every dollar on necessities. The highest-earning 20% of US households spend less on essentials relative to their income.

Ignore the media’s false narrative about frugality: You won’t get rich if you stop buying a daily coffee or reuse your dental floss. It’s smart to limit spending wherever possible, but achieving wealth depends on increasing your income. Tracking expenses and setting goals can’t compensate for a lack of sufficient income. However, many people have become stuck in a vicious poverty cycle: They work low-paying jobs to survive and can’t afford training that would help them obtain a higher-paying position.

Learn how to spend wisely and without guilt.

Financial media personalities such as Suze Orman and Gary Vaynerchuk excel at making people feel guilty about their purchasing decisions. These celebrities’ advice generates anxiety about spending money, even for affluent people. In one survey, 20% of respondents worth between $5 million and $25 million expressed concern about whether they would have sufficient funds for their retirement. Don’t buy into guilt trips about spending. If you tend to hesitate over purchases you can afford, you might need to adjust how you think about spending.

“Money is important, but it shouldn’t alarm you every time you see a price tag.”

To reduce guilt feelings over spending, consider applying the “2X Rule”: If you have the urge to splurge $400 on fancy shoes, for example, require yourself to invest the same amount of money in the stock market or another income-producing vehicle. This rule forces you to think about how much you really value the product or service you’re considering. If you decide to go ahead with the purchase, making an equally high income-producing investment will alleviate your guilt about treating yourself. You could also choose to donate the matching amount to charity.

Another tactic to defuse guilt feelings: focus on fulfillment. Determine whether a purchase you’re considering would only make you temporarily happy or would produce genuine fulfillment. Taking an exotic trip, for example, might make you happy, but it probably wouldn’t create fulfillment. Long-term fulfillment stems from purchases that increase your autonomy, give you a sense of purpose or help improve your skills. Buying coffee in the morning might help you perform better at work, and that makes it money well spent. If you can’t find a valid reason behind a potential purchase, don’t make it. Move on.

Avoid debt if it disturbs your peace of mind. If not, don’t demonize it.

Many financial advisers suggest steering clear of credit card debt, mainly because of high interest rates. Some low-income earners, however, choose to carry credit card debt even though they have the savings to pay off the debt. This approach might seem counterintuitive, but it does provide a safety net for individuals who worry about having accessible funds in the future. Low-income borrowers often prefer to pay interest on debt now so they’ll have savings available down the road.

Debt of any kind is a financial tool that can benefit or harm you, depending on how you utilize it. One benefit: risk reduction. Taking on debt can ensure a smooth cash flow and reduce the risk of illiquidity. For example, a homeowner might decide not to pay off a mortgage early in order to keep funds available for emergencies. And taking out a mortgage can enable the borrower to live in a desirable location and avoid the uncertainty of rising housing costs. A mortgage locks in the payment amount for the next few decades, so the borrower doesn’t have to worry about escalating rents.

Debt can produce additional benefits that outweigh its costs. For example, taking out a student loan to pay for education can yield great returns in the future in the form of a highly paid job. For all these reasons, taking on debt as part of a well-thought-out plan can make sense.

However, some types of debt can cause harm, not just to your finances but also to your mental health. Studies show credit card debt, payday loans and personal loans cause the most stress, often contributing to worry, depression and other physical ailments. Mortgages have the least stressful effects on borrowers. Debt can also become damaging when people become indebted because of emergency expenses. And for some people, debt disturbs their peace of mind. Consider yourself fortunate if you have the ability to ponder the possibility of taking on debt or not. Many people don’t have that luxury.

Invest to produce retirement income and to hedge against inflation.

In 1889, German chancellor Otto von Bismarck established the world’s first government-funded retirement plan, believing “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” Bismarck originally set the retirement age at 70; it was lowered to 65 in 1916. Bismarck’s concept inspired other countries to initiate similar programs, as lifespans were increasing around the world. In 1851, only roughly 25% of the population in developed countries lived to age 70. Some 40 years later, that figure had risen to 40%. Today, 90% of the population age past 70. The combination of retirement and longer lifespans means people need a financial plan for old age. 

“The concept of retirement didn’t exist until the late 19th century. Before then, most people worked until the day they died.”

Investing helps you save for when you’re no longer working. Research indicates people who prioritize saving for retirement will put away more money than those who don’t. To change your long-term investing behavior, imagine your future, older self and the needs and desires you’ll have. 

Investing also serves as a hedge against inflation. To illustrate, a $1 investment in 1926, to keep pace with inflation, would have to have grown to $15 by 2020. A $1 investment made in long-term US Treasury bonds in 1926 would be worth $200 in 2020 – 13 times greater than inflation over this period. A $1 investment in diversified US stocks would have grown to $10,937.

The stock market provides a reliable investment opportunity for building wealth, despite its volatility.

Like a roadmap, investing offers multiple routes to a destination. You can choose from among a diverse set of income-producing assets; there’s no one right path. Investing is truly a matter of personal preference.

Some people invest solely in stocks and bonds. According to Wharton finance professor Jeremy Siegel, US equities have yielded an average return of 6.8% per year over the past two centuries. The US equity market ranks in the top 25% of countries, though it lags behind the equity markets in Australia, South Africa and Sweden. Although profitable over the long haul, stocks typically experience volatility in the short term. So be prepared to see a 30% price decline every four to five years and a 10% drop even more frequently. If you give your investment enough time, the stocks will eventually – as history suggests – make up for their losses.

“Time is an equity investor’s friend.”

Bonds offer more stability than stocks. Investors lend money to borrowers, and the borrowers repay it over a predetermined period of time. Some bonds require the borrower to make periodic payments, called coupons, before repaying the entire balance at the end of the loan’s term. Investors most commonly purchase US Treasury bonds, which come in different denominations, with various maturities and interest rates. Some bonds mature in one to twelve months; others mature in 10 to 30 years. Because they fluctuate far less than stocks, bonds deliver a steadier income over time. However, they tend to offer lower returns than stocks.

If you decide to invest in the stock market, avoid picking individual stocks. Decades of data show that even professional money managers using sophisticated analytic tools fail to make money by picking stocks. According to one expert, roughly 80% of the nearly 29,000 companies that have traded on US markets since 1950 had ceased to exist by 2009. If you do choose to pick stocks, remember they will inevitably underperform at times.

Wealth, like beauty, lies in the eye of the beholder.

In December 2002, Jack Whittaker of West Virginia won $314 million in the lottery, the largest jackpot in American history. He decided to take a lump sum payment of $113 million after taxes. However, Whittaker’s luck ran out quickly. Within two years, he lost his granddaughter to a suspected drug overdose, became estranged from his wife and blew all his winnings on gambling, prostitutes and drinking. Ironically, Whittaker had been worth more than $17 million before he purchased the winning lottery ticket. Though he was already wealthy, Whittaker hadn’t felt rich.

“Most people at the upper end of the income spectrum think they are less well off than they actually are.”

Former Goldman Sachs CEO Lloyd Blankfein, a billionaire, has said he feels he’s “well-to-do, not rich. I can’t even say rich. I don’t feel that way.” People in the habit of comparing themselves to others rarely think they’re wealthy. Perspective makes all the difference. According to the 2018 Credit Suisse Global Wealth Report, “if your net worth is greater than $4,210, then you are wealthier than half the world.” If you have a net worth of more than $93,170, you’re in the top 10% worldwide.

People make financial decisions every day, hoping these decisions turn out to their advantage. Since you can’t rely on a crystal ball, educate yourself and make the best choices for your particular situation. Try to save and invest. Time is on your side.