Building Wealth, the Unexciting Way

My image of a rich person used to be someone who struck it big with a single, lucky investment. But in recent years I’ve realized that most people grow rich slowly, over decades, with steady investing and by sticking to a few important core principles.

This is great news for the masses! You don’t have to be the smartest or richest person in the room to grow wealthy. And you don’t have to spend all your time reading financial news or worrying about economic trends. You do need some basic knowledge of the tools available, but beyond that, what really matters is how well you play the psychological game of managing your own emotions and those of your spouse (as my wife and I have learned firsthand).

That puts building wealth firmly within the reach of anyone who has the desire to get there. Below I’ll share some lessons that I’ve picked up along the way.

Clearly define what wealth means to you

In order to pursue wealth, you first have to define what it means to you. My own definition includes having more than enough money to afford a high quality of life (as I personally define it), as well as the flexibility to prioritize my time on the things I care most about. Your philosophy may differ, and that’s ok, but what’s important is that you have an idea in your head of what you’re aiming for—that way you’ll know when you get there.

If you don’t set this goal ahead of time, what’s likely to happen is that you’ll put one of your primary values in life (more money) and never feel like you’re rich enough to start enjoying your wealth. This is a trap that so many people fall into. Don’t be one of them!

Spend less than you earn, for a long time

I told you this article was going to be full of interesting wealth-building tips, but here is my most interesting trick of them all: spend less money than you earn.

In all seriousness, what every person who gets rich quickly or slowly will tell you is that growing wealth itself is not really that hard to do. The hardest part, and the most important, is in setting aside money to invest in the first place. And the only way to do that is to spend less money than you’re bringing in.

When it comes to investing, so many people get caught up in the latest trends and news, but they should be focusing instead on the single biggest variable in the equation: how much money they set aside each year to invest in the markets.

Live minimally, but not too minimally

It’s tempting to create rules and policies in our lives that we think will be good for us. For example, you might decide that you’re going to live as minimally as possible while you’re young so that you’ll have plenty of money when you’re older. But I would caution you against any extreme decisions like this. It’s really difficult to know what you’ll want in the future, and a life of minimalism might leave you with some regrets that you didn’t live a fuller life and make more memories when you were young.

Instead, find a way to balance both. If you decide to embrace minimalism, be sure that you’re doing it for other reasons than just saving money. And be sure to leave room in your budget for the occasional indulgence so that you don’t burn out entirely.

Avoid lifestyle inflation (but not all indulgences)

A classic trap that many people fall into is that as they begin to make more money, they instinctively and habitually begin spending more money as well. What this does is leaves you with the exact same ratio of spending to saving, and so not much progress is actually made.

To make real financial progress, you need the intention to spend less of your new money and invest it for future return. Do this for long enough, and the nest egg you build will give you far more options and freedom in life than a slightly better standard of living would.

Stay out of debt, if at all possible

Debt is like an anchor that keeps you from rising too far above the surface of the water. There are some scenarios in which debt can be good, and you’ll want to be well versed in the particular laws and policies of your country. But generally speaking, debt keeps you from growing wealth, and it’s better to stay out of debt if you want to be financially independent.

This is because debt puts the loaner in charge of your future decisions and takes away your ability to freely choose. My wife and I have always been very cautious of debt and have limited the amount that we were willing to take on or even consider across a lifetime.

Master the emotional side of investing

The emotional side of investing has been one of the most fascinating aspects of my personal financial journey. I was surprised to learn how tempting it is to want to sell your investments when things are going down and to buy more when things are going up. This seems so obvious on paper, but there’s something about the real world in which it’s hard to go against the momentum of the markets.

What you ultimately need, in order to grow wealthy, is a strategy that works and then the self-discipline to stick to that strategy through thick and thin. You need to be able to stick with it when times are good so you’re not greedy and then stick with it when times are bad so you’re not fearful. As I mentioned in the introduction, this is far more important than any particular stock-picking knowledge that you can have.

Take a keen interest in wealth creation

In my experience, most people are not really that interested in financial topics. They don’t know much about investing or a whole host of other related disciplines, such as economics, accounting, and behavioral finance. I would encourage even the everyday person who doesn’t want to work in these fields to at least take a mild interest in them.

Learn about how money works and how wealth is created. Find out what wealthy people are doing with their money and what kind of financial advisors exist to offer help. The more you know about these subjects and how they work, the more likely you are to be able to apply this knowledge in your own life when the time comes.

Reinvest your money like a business

You’ll notice that many of the wealthiest companies on earth today started with just an idea and a small chunk of capital. The way they grew wealthy was by reinvesting the money they made back into the business. Generally speaking, if you have a good business model, the best thing you can do with your profits is to put them right back in rather than paying them out to owners and employees. There will come a time and place for that, but the quickest way to grow wealth is to let compounding take its effect and to minimize your spending.

The same rule applies in your own finances. Early on in your earning years, you should be reinvesting as much money as you can into more investments. Instead of splurging on frivolous purchases, put that money back into your investment accounts and let them grow over time.

Leverage the power of compounding interest

Compounding interest is a concept that many of us learned early on in life but fail to fully grasp until well into adulthood. The basic idea is that once you earn interest on your investments, you have more money to invest, and that amount of money can be invested going forward as well.

The compounding part occurs because each time you add money to what’s already there, you are multiplying its future value by a significant amount. This means that your money grows faster and faster over time and that the best years for investment returns are often the latest years of the investment.

Create a budget that you’ll actually use

Throughout my life, I have tried countless different budget ideas and philosophies. I’ve tried every app and gadget you can think of to help me create a budget and stick with it. While these tools can be useful, what I’ve found to be the most helpful of all is to have a philosophy that you’re willing to stick with over the long-term.

In our family, we have a very easygoing philosophy of budgeting that ensures we’re spending less money than we earn and that we’re setting aside some money each month for investing. Those two pieces of information are all we really need to know; the rest we figure out as we go along. For us, that has worked well, but you might find a different approach is best for you.

Don’t jump from one trendy investment to the next

One thing you’ll notice in the financial world is that there’s always something new and exciting happening. There’s always a new company to pay attention to or a new investment vehicle that people are talking about. These can be helpful, but what’s more important is to have a consistent strategy that you follow for the long term. The best investment strategies tend to work over decades, not just a few years.

If you’re constantly chasing after the next hottest fund, chances are you’ll be getting in late, after a quick return has already been made, and then get out in a panic as the asset in question begins to decline in value because of overselling. It’s better to have a simple strategy in place that you can stick with rather than jumping from one promising idea to the next.

Be an investor in the economy

I like to think of myself as an investor in the real economy. What that means is that I’m not engaging in speculative trades or trying to outsmart the rest of the market. My entire approach is to take a relatively low-risk investment and let the economy as a whole do its work. As the whole economy grows, so will my investments over time.

There are many different ways to invest in the economy, for example, by buying mutual funds or index funds that represent different baskets of stocks. The key is to think of yourself as a long-term investor rather than a short-term trader. Not only is this a more sustainable approach, but it allows you to let compounding do its magic and help your wealth grow over time.