The internet is filled with books and articles that tell you that building wealth is all about the numbers. For many, it simply boils down to living beneath your means. If you can accomplish this, you can build wealth plain and simple. 

To a degree this is true but it is an oversimplified view that doesn’t take into account the realities that many people face today. In many respects, building wealth today is harder than it was 20 or 30 years ago due to the rising cost of housing, healthcare, and education. 

Let’s discuss the realities of building wealth and what it takes to achieve this goal. 

You Have to Control Your Costs

The entire personal finance industry at its core is aimed to help you strike a balance between two philosophies: controlling your expenses and outpacing your costs. For example, increasing your income and picking up a side hustle primarily exist to lessen the burden from the cost of credit card debt, student loans, and other living expenses. On the other side, the more you can limit your costs and the money you spend the easier it can be to create wealth. This can come in different forms. 

For some this means going to community college for a few years, for others, it could mean living with family to pay down student loans or taking on roommates. Others may choose to live in an inexpensive area to control the cost of living instead of larger urban centers. That extra money can help accelerate debt payoff or increase the amount you can invest in the stock market in other places. If you can control, reduce, or even eliminate some of your biggest monthly expenses like rent/mortgage, student loans, this can often be the biggest predictor for how quickly you can build wealth.

For example, according to Business Insider, the median one-bedroom apartment in New York City will cost $2,650 in 2019 but in Dallas, a one-bedroom is only $1,375. That is a difference of $1,275 or $15,300 per year. If you had invested that money in the S&P 500 over the past five years you would have more than $103,000 today. Going back 10 years to 2010, that would have been $253,000. This is all before accounting for other things that could be more expensive such as taxes or groceries. 

Your Income Matters 

There are two sides to the personal finance coin. There is the frugality side, in which you focus primarily on cutting and controlling your expenses. On the other side, the is focus on bringing in additional income. However, even when you control your costs you can only cut them but so far. At some point, you need to increase your income in a way that allows you to allocate enough money to invest and compound your wealth. That doesn’t always mean that you need a six-figure salary — although it is much easier to live on half of your income when your salary is $100,000 per year. Things are different if you make $45,000 per year. After taxes and other living expenses, this leaves significantly less money to grow your wealth.

Let’s go back to our New York City example at $2,650 per month in rent, that is $31,800 per year. For someone making $100,000, it would be 31.8% of their gross income. But for someone only making $45,000 per year, it is 70.6% of their gross income! 

The reality is, you’re going to have to focus some portion of your time creating multiple streams of income, owning a business, or moving up the ladder at your job to build wealth. Without this, it is not impossible to build wealth but it can significantly extend the length of that journey and the difficulty. 

It Takes Time — and it Might Be Boring

According to research by author Thomas C. Corley, it takes the average self-made millionaire a minimum of 32 years. For some, this may be a discouraging statistic because 32 years isn’t a short amount of time. However, my argument has always been this: The time is going to pass anyway. It is better to pass the time growing your wealth, than passing the time wishing that you had. 

Even small amounts during that time span can have a significant impact on how much wealth you can accumulate. In my generational wealth article, I discussed how just $1,000 per year could have generated more than $800,000 by the time I turned 30 years old. Whether you are trying to max-out your 401(k) or choose your own stocks, you have to be extremely consistent and disciplined for decades. It’s not always the most exciting thing but if done correctly it can be worth it. It is also important to note that with automated deposits this can be much easier than what it was 15 or 20 years ago. 

Luck Does Play a Factor

Luck plays a major factor in creating wealth but perhaps not in the ways that you may think.  When you hear the words “luck” and “wealth” in the same sentence you may be tempted to think about casino or lottery winners. But the reality is that luck in this context is more about your health and the situation you were born into. Both of these factors can significantly affect your ability to create wealth. 

One glaring example of this is the current coronavirus pandemic. I was lucky enough to graduate college in 2012, after the 2007 financial crisis and before the 2020 coronavirus pandemic. I started my career during the longest bull market in history. That has more to do with the time that I was born than how smart or frugal I was.

With more than 40 million people in the United States currently unemployed, it is a function of luck that some businesses were deemed essential and some jobs were allowed to work from home. Unfortunately, not everyone was so lucky and got laid off.

I was also lucky to be born to middle-class parents. In 2017, MIT Economist, Peter Timin argued that it takes 20 years with almost no mistakes to escape poverty. There are 11 million children today in America living below the federal poverty line, according to the United Way. For this segment of people, small setbacks like car trouble, a parking ticket, a health scare, or temporary loss of income can be devastating. While it’s not impossible to move beyond those circumstances, the lack of those obstacles makes it significantly easier to build wealth. 

Building wealth isn’t simply about the numbers. It is a complex product of your ability to save, the broader economic environment, and a bit of luck that will set the stage for you to build a stable financial foundation.

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1 Comment

David Karsann · August 7, 2020 at 9:59 am

Great info and very relevant to….money reality!

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