I don’t have a list of steps to double your net worth by next year. I can’t give you a recipe to retire early with a huge nest egg without making any sacrifices. I don’t know how to beat the market or get high yields with no risk.
For most of us, it doesn’t work that way.
Sure, some people are going to experience life-changing increases to their wealth overnight. Perhaps you work for a company that goes public and your vested options make work suddenly unnecessary. Perhaps you will invent something that explodes in success. Perhaps you have a rare gift or talent that you can monetize quickly.
Those things happen, but not very often.
What I can tell you is that the boring way works. Spending less than you earn and investing over a long time period leads to wealth almost every time. Have you read the articles about the janitor who retired with $8 million? There are many out articles there. It is a story worth a read.
You might also enjoy this 2018 blog post by author Morgan Housel. The opener is here:
“Let me tell you the story of two investors, neither of whom knew each other, but whose paths crossed in an interesting way.
Grace Groner was orphaned at age 12. She never married. She never had kids. She never drove a car. She lived most of her life alone in a one-bedroom house and worked her whole career as a secretary. She was, by all accounts, a lovely lady. But she lived a humble and quiet life. That made the $7 million she left to charity after her death in 2010 at age 100 all the more confusing. People who knew her asked: Where did Grace get all that money?
But there was no secret. There was no inheritance. Grace took humble savings from a meager salary and enjoyed eighty years of hands-off compounding in the stock market. That was it.
Weeks after Grace died, an unrelated investing story hit the news.
Richard Fuscone, former vice chairman of Merrill Lynch’s Latin America division, declared personal bankruptcy, fighting off foreclosure on two homes, one of which was nearly 20,000 square feet and had a $66,000 a month mortgage. Fuscone was the opposite of Grace Groner; educated at Harvard and University of Chicago, he became so successful in the investment industry that he retired in his 40s to “pursue personal and charitable interests.” But heavy borrowing and illiquid investments did him in. The same year Grace Goner left a veritable fortune to charity, Richard stood before a bankruptcy judge and declared: “I have been devastated by the financial crisis … The only source of liquidity is whatever my wife is able to sell in terms of personal furnishings.”
Grace’s way of building wealth was boring. It is also nearly guaranteed to work (barring disasters or disability), and you can do it too. We work with many individuals and families who are building wealth this way, or who have built their wealth this way and are now enjoying the benefits for themselves and their families.
Here are the most boring rules in the world that happen to also be the most likely ways to build your nest egg:
- Get money the boring way… by earning it. Yes, increase your income when you can by increasing your skills, earning promotions, growing your business, but most people who have money got it by working.
- Spend money the boring way… after earning it. Avoiding debt and leaving extra cash flow for saving is key to building wealth over time.
- Save money the boring way… consistently over time. The power of compounding can not be overstated. Starting a regular pattern of saving from the very beginning of your career and avoiding the temptation to cash in retirement accounts before retirement is always going to pay off.
- Invest money the boring way… in diversified low-cost investments. Timing the market and picking winning stocks may pay off sometimes, but almost no one can do it successfully over a long period of time. Use diversified funds and keep them a long time.
This is not to say that there aren’t tools and strategies to increase and optimize your wealth with planning. The tools change over time, and new opportunities present themselves. As Morgan Housel points out in the blog post linked above, the 401(k) didn’t exist until 1978. Roth IRAs didn’t exist until 1997. Lower cost index ETFs didn’t exist until the 1990s. Taking advantage of these seems obvious now, but your grandparents didn’t have the chance. Would you rate these as boring? They are certainly not as exciting as winning the lottery, but the upside is that almost everyone can take advantage of them.
Tax planning is another area where the rules change often and new strategies emerge to reduce your lifetime tax burden. Like the invention of the Roth IRA and the Health Savings Account, the changes in the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 and the SECURE 2.0 Act of 2022 created new opportunities for planning. I wouldn’t necessarily say it is exciting (seeing U2 at the Sphere in Las Vegas was exciting), but it is kind of like watching the paint dry faster.
I don’t mean to be a Debbie Downer here. I actually mean for this to be a message of hope. If it feels like your net worth is creeping up slowly despite doing all the boring things, you are probably right on track. Keep it up!
Losing half a pound a week on a diet also feels slow and boring, but you can look like a completely different person after a year.
If you are doing all the boring things, the progress will get faster over time. You will probably see your income increase as you gain experience in your career, so your raises will be bigger. You will have more invested each year, so the earnings from those investments will be more. As you near the end of your mortgage term, the payments are almost all principal, so your balance declines faster. Keep going!
Here are some ways that financial planning can help enhance your efforts and add a little excitement. Doing these things with our clients is how we live out our mission to help you enjoy more and worry less:
- Help you evaluate your options and make an exciting career change
- Make sure you get the most your of your employee benefits
- Choose efficient, diversified low cost investments in the right allocation mix for you
- Maximize the value of your business and then sell it
- Make a great decision about when to claim social security
- Add a defined benefit plan for your small business
- Get your estate planning in order
- Plan for education expenses
- Budget for big purchases
- Review your insurance needs and optimize your coverage
- Check in regularly to monitor and celebrate your progress
If you need help with any of these items, Together Planning is here for you!
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations may vary. Therefore, this information should be relied upon when coordinated with individual professional advice.