Top 3 Secrets to Building Wealth
What are the top three secrets to building wealth? This is what we’ll be talking about today. They aren’t really “secrets” per se, but they aren’t practiced often enough to be considered common knowledge, either, in my professional opinion.
Sometimes we reach a place where we feel like financial success is out of our reach. It starts as an idea, and either our money story or the people around us fuel this idea until we begin to believe it’s true. We start to see evidence to support it. It sounds something like this:
Some common lies and myths we allow ourselves to believe…
Other people are good with money.
Building wealth comes from growing up in a wealthy family and knowing the right people.
It takes money to make money.
Maybe you’ve done the right things with your personal finances but had a series of setbacks. Everytime you think you are making progress, something seems to come up—an expense you weren’t anticipating or a change in your health.
You bond with friends who are in a similar situation with money. Making plans to get your act together while they struggle seems unloyal and out of reach.
The way we spend our money and navigate our financial life is as routine as drinking coffee every morning or brushing our teeth at night. We hold the power to change our habits, but a lot of times we think we don’t. We give them power over us instead, and bemoan our situation when we don’t see progress happening quickly enough.
Three concepts will help you build wealth. Because they sound simple, people think they can’t work. Because the payoff isn’t immediate, people start but quit because it seems like it’s not working and we fear failure. We don’t want to look silly for thinking we could rise above where we are now when we can’t. Giving up fun things in the short term without seeing the benefit is demoralizing. We don’t want to admit that we are in the situation we’re in because of our own actions and reactions.
#1 Secret to Building Wealth: The Connection between Self-worth and Net-Worth
The first secret to building wealth is that high self-esteem is a necessary driver of wealth. You know how important your money story is, the identity you have created from your experiences and what your parents told or showed you about money. But many people don’t understand that this identity you carry is both self-perpetuating and—most importantly—can be changed. Who you were is not who you have to be.
If your money story tells you that you are bad with money, that you are lacking some internal trait that makes you worthy of managing money, the resulting shame is at odds with your self-esteem.
What does your “money story” say about you?
Your money story may tell you that if you have money, you will spend it too quickly on the wrong things, and so you do. Then you feel shame that you were right about this…about yourself, so you spend money to make yourself feel better. You buy something nice. Then, you join a club that your friend is in so you can buy their attention. Finally, you buy your kids what their friends have so they aren’t tainted by this shame. This need to compensate is mostly in your head and it’s a vicious cycle.
Healthy self-esteem gives you the confidence to make better financial decisions because you are able to separate your decisions from who you are.
I know first-hand that money shame can be life-threatening. You may be embarrassed about your spending, but be thinking, “Whoa, Tammy. I’m not in that deep. I just want the kids to have what their friends have, and I’ll find a way to pay for it later.”
Spending without limits comes with guaranteed consequences that you really don’t want.
But as you build a persona of someone who spends without limits, you include your family and friends in the lie. By the time you realize your spending is out of control, it seems impossible to stop. You are too embarrassed to admit to other people how bad it’s gotten. Your identity is tied up in the lifestyle and the major financial sacrifices you have made to build it. Giving up now means the balancing act will have been for nothing. Having to admit it was a lie to the friends you have worked so hard to impress seems like an unbearable embarrassment.
Self confident individuals know they don’t have to “prove” anything to anyone. That’s not money’s purpose, and they don’t let money have this power. They also know that poor decisions in the past don’t determine future decisions.
People with high self-esteem are forward looking. Focusing on past mistakes is a waste of time and doesn’t define you. You always have choices on how you handle your money.
Let’s talk about the future for a minute. Riding your debt out to foreclosure will likely be more embarrassing than trading in your car or having the kids change schools. Is the life you are living now stealing from your plan to retire later? Remember, the first secret to building wealth is highly connected to your self-identity, self-image, and ultimately your self-worth.
There are many mental health benefits to managing your personal finances. The people most important to you would choose your health over the toys. Your closest friends won’t care what car you drive. Self-confidence and maturity means you do what’s right for your family and your future.
Your social group or “crowd” can result in negative peer pressure.
The company you keep can make a huge impact on how you spend.
If you build your social network by buying into an exclusive club or neighborhood, the pressure to maintain these connections through money is going to be constant.
If you have to change homes or schools to downsize, people might talk for a minute, but then they will move on. Let them. You may not see some of your friends as often. They are probably paying less attention to your actions than you think.
On the other hand, if everyone around you is barely getting by, or partying with their money or just likes to wallow in the injustice of life in general, it’s easy to agree that this is the best you can do.
Healthy self-esteem is not fueled by self-doubt or naysayers. It requires you to believe that change is possible and worth it. People with healthy self-esteem guard their time and energy against people who don’t believe this.
Being successful requires a degree of autonomy.
Being successful with money requires comfort with a degree of autonomy. Making a personal decision to save money instead of having fun with it now. You accept that changes do not happen overnight. Delayed gratification means you set aside money instead of blowing it on a night of indulgence and a week’s worth of guilt over what could-have-been with that money.
Maybe most importantly, the risk that others will think you are trying to rise above your station.
But the only reason someone wants you to stay in your struggle is to make them feel better about their own. Your success doesn’t hurt anyone. It is not your job to make someone else feel better about their own poor life choices.
Working with a money coach can really help you get a clear picture of your financial reality. A lot of times, you know what needs to happen, but you need someone in your corner to help get started. After all, you may know all the secrets to building wealth – but if you don’t use them, what good does that actually do?
#2 Secret to Building Wealth: Live beneath your means
The second secret to building wealth is to live beneath your means. Warren Buffett bought his home in Omaha in 1958 for $31,500. He still lives there. It’s a nice home…worth over $600,000 now from inflation. But consider that this is a tiny .001% of his net worth. The billionaire says if he thought he’d be happier somewhere else, he would move. This is maybe the biggest marker of his success—he understands that spending more money doesn’t make you happier.
Another great example, Thomas J. Stanley’s book the Millionaire Next Door was published in 1996 but remains relevant today. It was written from a series of interviews the author set up with millionaires. He went into it knowing very little about the people he was going to meet other than their net worth, and found that his assumptions about who has wealth were off the mark. Most the individuals he met lived frugal lives and amassed their wealth slowly, over time, often in blue collar occupations. They weren’t flashy. People didn’t know they had money.
Having fun with money vs. Having money to have fun
But Tammy, you ask, what fun is having money when you can’t spend it and have fun?
The secret is that these people didn’t spend the money before they had it, and by the time they had money, the spending wasn’t so important to them. There’s something about feeling like you shouldn’t that increases the appeal of spending. Once you can, you may find the draw isn’t so strong.
The people in his book had built satisfying lives, felt stable, and they had nothing to prove to anyone else.
So many of us think we need a bigger house to show how far we’ve come (even before we’ve arrived). Outward appearance is a poor predictor of net worth, and keeping up with the Joneses is a sure-fire way to fritter away money. Your income is your stepping-stool to wealth. You can increase your income, you can work another job, you can win the lottery. But the easiest way to build wealth is to keep a portion of the income you already have.
The negative impact of high-interest debt.
It’s really hard to save and save enough to move the needle if you have high-interest debt. Look at your monthly spending. If you are paying the minimums on credit cards or other high interest debt, you have to address this first.
You can probably tell me right now if you can afford the lifestyle you are living. If you are scared to answer the phone and you get nervous in the grocery checkout when they swipe your card, it’s time to do the work. Until you get your debt under control, you are in a spiral that takes a toll on your credit score, your relationships and your health. Money should not have this power over you!
Note: Financial stability does not depend on a growing salary.
While an increase in income is always nice, your financial stability does not depend on a growing salary. Aside from the practical implications of living within your means, it is an exercise in self-control that will serve you in other areas of your life. If you can learn not to inflate your lifestyle to match your income, you can grow very wealthy.
It’s so easy to scale up your lifestyle. Imagine if you live comfortably, but each time you have a salary increase, you put at least some of that increase to savings. Of course, you enjoy your successes! Of course you take vacations and save to buy the things you want. But be choosy about your splurges and choose to spend your money on things that are important to you. Don’t spend the money to show everyone else how far you’ve come.
Spending more is not the path to happiness, but for some reason, we tell ourselves it is. When we feel shame, we think, “if I only had more money, I could prove my worth.” It’s the other way around. When you know you are worthy (you are), you use your money in ways that honor your net worth. This is not only a secret to building wealth, but also to building self-esteem.
#3 Secret to Building Wealth: Invest in what you understand
The third secret to building wealth is to only invest in what you understand. While bitcoin may be blowing up or you may read that the fastest way to wealth is the latest “must buy” stock pushed by Motley Fool, speculative investments are just that – speculative. Yes, you can choose a greater level of risk and hope that it enhances your investment, but you are also more likely to lose money. After all, most people do not retire by gambling on the next Amazon.
So, while it’s okay to speculate a little bit depending on your age, risk tolerance, and overall portfolio composition – I certainly wouldn’t recommend putting all that much into speculation. If anything, I would minimize speculation to a very small percentage of your overall portfolio. You should go into it fully expecting that you will lose your entire investment. And even if your speculation does pay off, I would urge you to rebalance your portfolio sooner than later. Namely, take some profits on those speculative investments and put the cash back into safer and more reliable ones. Which brings me to my next point:
If you are new to investing, know that the most important part of saving is the habit of putting money aside now that you could have spent. That’s the big secret… delaying gratification.
Remember: Delaying gratification is where it’s at!
Review where your paycheck goes each month and come up with a plan to cover your needs and still save. If you have paid off high-interest debt, paying it off will be freeing. If you need help getting started with this process, check out my article on paying down debt.
You will gain confidence when you see how much your income “grows” without these monthly payments.
The ability to live within your means and consistently save for the future means you can benefit sooner from compound interest. Investing in an index fund or a retirement mutual fund means you can benefit from market inflation while minimizing your risk. The market will have ups and downs, but unless you are retiring very soon, you just need to keep pace with it.
Imagine if you put that money in a cookie jar in the kitchen instead. You may even feel like that’s safer than the market. But just as you can no longer buy a stamp for what it cost 10 years ago, if you keep $5 in your jar, it is not worth as much in five or ten years.
Invest for retirement to reap many financial benefits.
When you have money invested for retirement, there are many benefits.
First, the investment will likely match inflation. Second, you will benefit from compound interest. You may start with $100, and it grows by 5%. Even if you add nothing to it, the next year, you earn interest on $105. Because you put your money in an IRA or 401K, your money is protected from taxes. If it’s pretax money, you will pay fewer taxes because it is deducted from your taxable income. If you have a Roth, you won’t pay tax as it grows or when you withdraw the money. Retirement money is protected, even if you file bankruptcy.
What about financial schemes that are too good to be true? They probably are.
Ponzi schemes gain traction because people agree to hand over money to something they don’t understand in exchange for a large and guaranteed payback.
If someone claims they have cracked the code to the stock market and can give you the secret to fast money growth, they are very likely planning to make money off of you. Putting all your money into a PopTart kitty NFT…not a solid retirement plan. If it sounds too good to be true, it usually is. There are indeed secrets to building wealth, but there are no magic formulas to beat the stock market. Many have tried and all but a lucky few have failed. Most successful investors only invest in individual stocks after they have built their wealth through mutual funds. And if they are buying individual stocks, you can bet these investors do their homework.
401Ks, Roth IRAs, and more…
Most investors are best served by choosing large managed funds and keeping their hands off. These funds don’t have to have a lot of fees or large minimums. If your employer matches some of your salary in a 401K, take advantage! If you don’t have an employer retirement or you have met the match, you can open a Roth IRA and choose from funds that are already put together for your target retirement year. The stock market is not a game. Choosing one stock that you feel in your gut is going to do well is very risky. While it’s not as sexy to say that you made all your money by putting in a small amount, month after month, over several years, that’s how wealth is made.
I hope these these tips have made you think. If you recognize some of these roadblocks in your own financial journey, I’d love to hear about it. Sometimes knowing what needs to change doesn’t mean the first step is obvious. It can help to talk to someone who can help you formulate a plan to get you where you want to be. I’m always here with no judgement. Until next time!