So far we’ve touched on my philosophy towards money, been over a bit of my background, and even been slightly critical of the average American. I figured it was time to offer ways to take some action. There’s some good news, and some bad news. The bad news is, it is extremely unlikely to become a millionaire overnight or without having to work for it. The good news is, there is a foolproof and universal strategy to building wealth.
Spend less than you earn and invest the difference.
Sure, it may sound simple but it really works. In fact, the determining criteria in when you can become financially independent is your savings rate. The average American currently saves somewhere between 6-8% of their income annually, forcing them into a life of indentured servitude. I’d recommend shooting for 50% (roughly 16.5 years from 0 to retired) or better. Let’s say you bring home 3000 per month, and are able to save 1500. Living on 1500/month is reasonable and would amount to the 50% savings rate. In this scenario, you would save $18,000 per year which should go straight to your investments. After 10 years, at this same savings rate and a return of 8% from your investments, you would have just over $320,000. If, during that time you were paying off equity on a house, your net worth could be in the ballpark of $400-500,0000. Easily enough to retire on for a single person.
As far as investing goes, there is really only one strategy that will work every time. Vanguard index funds. Vanguard was constructed in a manner that has yet to be replicated by any other investment company, in that the investors own the business. Because of this, the company interests align directly with their investors. Other companies rack up the fees which can be catastrophic to your wealth creation over time. Be wary of any company trying to charge you 1% or more in fees. Although this may sound crazy, let’s consider an average year of investment returns, where your ROI (return on investment) is about 7%. Let’s say inflation that year was 3%. This means your real rate of return (over and above inflation) was 4%. That 1% fee starts to look a little differently now, huh? Vanguard has the lowest fees across the board, essentially operating at cost. Be wary of other companies with low initial fees. Other fees may be lurking after they sign you up or get your money, and some companies even offer low cost accounts as loss leaders then try to get you to move money to another account. In other words, they lose some money to get you in the door then get you to switch to an account where they can charge you out the ass.
Don’t fall for the trap that you can pick your stocks. If it makes you feel any better, the majority of people who try and do that for a living can’t either. I’ve already been through that game myself and learned it’s not worth it. There’s a reason people like Warren Buffet are so famous, and it’s because they’re an outlier. It’s more likely that he has done so well in the stock market purely based on luck than by outsmarting everyone else. Having said that, I will give him credit that what he has done is impressive, but if enough people play a game someone is bound to hit the jackpot once right? By buying and holding nearly every company on the exchange (which is what an index fund will do for you) you are going to outperform an actively managed portfolio (someone who tries to pick the right stocks and will buy/sell frequently) in the long run. It’s also A LOT less work. By trying to dance in and out of the market and follow the hottest stock tips, you will lose all your assets to the next “Google” that flops, broker fees, and more likely than not, buying at the top and selling at the bottom. Watching the market does crazy things to investors and getting caught up in the commotion is bound to lose you much more money than it will make. If you buy and hold, you won’t encounter that issue.
Lastly, never forget the power of exponential growth. It will take time to build up your portfolio but if you do it correctly, you will shortly have a money making machine that could outperform your annual salary. Instead of working for your money, make your money work for you.