Tuesday, December 11, 2007

Building Wealth - Secret #1

SecretEvery once in a while, I'll talk about something I learned along the way that has helped me build a pretty sizable nest egg at a relatively young age. So to start things off, I will give you my best tip. The secret to building wealth is to start building wealth.

I know what you are saying. What? Well the secret to building wealth is recursive. For all you non computer geeks, this basically means that the definition of something is contained within its own definition. As soon as your head stops spinning let me explain through my own personal story.

I wasn't always on the path I am today. I started out of college with a good job that paid well. However, living in New York City, I had a lot of expenses. The two bedroom apartment I was renting was $3400 a month. My share of it was basically eating up half my paycheck. Somehow though, I managed to save some money and even put a little away in my 401K, almost $5000. After a year, I left my job and had to pay for my own move back to California, and that ate a big chunk of my savings. However, I still managed to keep enough for an emergency fund.

Over the course of the next few years, I was careful with my money, always remembering that sometimes, unexpected things like leaving your job and moving across the country can pop up and you need to be prepared. I still managed to max out my 401K every year and slowly but surely it was growing to quite a bit of money. As I became more successful in my career, I continued to see promotions and pay raises, but each time I kept my lifestyle pretty much the same. In fact, I began living more frugally. I'll explain why.

The effect of getting more income and spending less money was VERY POSITIVE on my bank account. The higher I saw it go up, the more I wanted to see it go higher. The more money I got, the more interest I could earn from my savings account. As I started investing my money, I realized that the more money I had, the faster the whole pile would grow. This became almost addictive. I would find ways to save more and more money so I could funnel it toward these accounts. The power of compound interest is really displayed when you have a big bank account, and it just starts to snowball on itself. It almost becomes a game as you try to find more ways to save money or earn income to see the wealth grow.

So this is the best tip I can give. Just start trying to build wealth by any means you can. As you do it, you will find you really like it, and you will find other ways to increase your wealth. You will start getting into a feedback loop and you will soon realize that building wealth just becomes a habit. I now earn well over 2.5 times what I used to when I lived in NYC but I probably spend less money. All because I have become addicted to building wealth.

10 comments:

  1. good call, ' just do it' , and keep on til the job gets done. i couldn't agree with you more.

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  2. Off comment, but the image you included looks mangled (the girl with the whisper hand motion). Maybe it should be resized before placed in the blog ;) Go ahead and delete this comment.

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  3. I completely agree. For the first 2-3 years out of college I was making great money, but my checking account was at equilibrium. I was contributing a lot to my 401k, but I've always considered that money to be "boring" because I can't tap it until I'm 60. I was always upgrading my computer or buying lots of DVD's, etc. and never tried to have any money other than checking and 401k.

    It wasn't until this calendar year that I started having enough money to make significant inroads into savings and -- like you said -- it's addictive! Paying extra principal on my mortgage and watching the required payment drop like a brick is awesome, as is buying shares of GOOG and watching them jump +10%. I'm very fortunate to have a significant source of secondary income, and hopefully I can reach the crossover point "soon".

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  4. That should fix it. I even used Paint.NET to do it!

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  5. If you have an employer 401K match, you should definitely take advantage of this free money. Just designate the percentage you want to contribute to your 401K and have it taken from your pay check automatically. This way you'd have saved money without thinking about it.

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  6. I too eventually came to realize the compounding power of not spending. That old saying is so true: a penny saved is a penny earned. It seems the longer I work, the more I realize how something I want now is going to cost me in the near future, not just in potential interest but also in work hours. For instance, I was eying a luxury car a couple months back. After some basic math, I discovered that I'd have to work an extra 4 hours every week to get the car! Now multiply the 4 hours by 52 weeks... yeah too many extra hours!

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  7. For a concept so simple, so few actually do it. Significant wealth won't happen overnight and few are willing to wait for it. I really enjoy investing and the progress that can be made. Like you say, you just need to start.

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  8. It was hard to start for me because I'd belittle the amount I could save a month. I had the classic mindset of "what's $20 going to do?!" Just remember that no one ever regrets saving. If anything, look around your apartment, I bet you'd find a couple things you wish had not purchased.

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  9. [...]  Joel Greenblatt’s The Little Book That Beats the Market -  The best book is the book that you read and you finish.  That’s why I put this book on the list.  It’s very short and a very quick read.  The advice is actually half way decent, but more importantly it is simple to follow.  He even has a website that does all the work for you.  The thing I like about it most is that it should make it really simple for you to invest, and the most important thing when it comes to investing is to just start. [...]

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