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Another Way to Build Wealth

By JLP | January 21, 2007

I have been thinking about our personal finances lately (well, all the time). I noticed recently that our household net worth has doubled over the last couple of years, which is pretty impressive in my book. I started thinking about what caused this growth. I can think of a few things:

1. Good bonuses
2. Excellent 401(k) growth along with good contributions
3. Pay raises
4. Getting rid of our credit card debt

and most important:

5. NOT increasing our lifestyle

All of these combined were the ingredients in the growth of our net worth but I think the real key was number 5: NOT increasing our lifestyle. This wasn’t always possible. When we were younger, pretty much everything we did was an increase in our lifestyle. Now that we are in our mid (to late) 30s, we have the house, the cars, and the other stuff that we had to purchase when we were younger. Now we are basically coasting along and so every raise and every bonus can be used to increase our net worth instead of increasing our lifestyle. That’s not to say that we wouldn’t like a nicer house in the future or a nicer car to replace our 9-year old Honda Civic.

The point of all this? Well, if you are young and just graduating from college, think long and hard before you go out and buy that fancy car or rent that expensive apartment. Instead, concentrate on setting up your emergency fund, getting started in your 401(k), paying off credit cards, and buying a house. And finally, RESIST the temptation to spend those raises and bonuses. Then 10 – 15 years down the road, you’ll be most happy!

Here are some other posts related to this topic:

Building Wealth Using Other People’s Money

How an Emergency Fund Can Save You Thousands Each Year

Financial Planning for Generation X

AFTER You Get The Job

How to Boost Your Cash Flow in Two Easy Steps!

How-to…Personal Finance Edition

Topics: Basics, Budgeting, Credit, Credit Cards, Financial Planning | 14 Comments »


14 Responses to “Another Way to Build Wealth”

  1. Miguel Says:
    January 21st, 2007 at 2:52 pm

    JLP,

    Nice summary, which fits well with the wealth discussions I’ve been having over at SingleMa’s blog. I also have experienced a major run-up in NW over the past 5 years and my list would mirror your list almost precisely, except for #4 – We’ve been CC debt free for at least the past decade (but I am a few yrs older than you). And I also add a #6, strong real estate markets.

    It felt as though we went from 0 to 60 in a relatively short period of time. However, in reality, the early years provided a solid foundation for wealth creation.

    Once you reach a point where your lifestyle is satisfactory (usually in your mid-30’s), the key is to maintain the same lifestyle even as earnings continue to increase. If ever there was a quick way to becoming a millionaire, this is it.

  2. Single Ma Says:
    January 21st, 2007 at 3:49 pm

    Congrats! Do you share your NW on this blog?

    “Then 10 – 15 years down the road, you’ll be most happy!”

    This is where most people (self included) lose their motivation. What about being happy NOW? Do you not celebrate the bonuses and pay raises at all? I’m sure those rewards were a result of hard work and many sacrifices.

    How do you resist the temptation of buying what you want if you know you can afford it? Let’s say a new car or big screen TV for example. Is there a healthy median? Or is the only way there (i.e. building wealth) to save, save, save? Work hard today…but enjoy life later?

    These questions are rhetorical so you don’t have to answer. My point is, it’s hard to stay focused and think long term if there is no compromise or at least SOME SMALL reward(s) along the way.

    I’m “almost” to the point of reaching a fixed lifestyle that I will maintain for a long time. Excluding two large spikes that I expect (sending daughter off to college and furnishing my home), I’m pretty comfortable.

    Congrats again! Doubling your NW in just a few years IS impressive. :-)

  3. not confucius Says:
    January 21st, 2007 at 4:38 pm

    Great advice. SingleMa brings up a good point — its hard to think that far ahead when you’re young. Especially when you just come out of school and are earning “real” money for the first time. I wish I was able to stick to this advice a few years ago. Still, better late than never for me! =)

  4. JLP Says:
    January 21st, 2007 at 4:40 pm

    not confucius,

    It may be hard to think that far into the future, but you HAVE TO if you want to build wealth. The future is going to come whether you plan for it or not.

  5. Miguel Says:
    January 21st, 2007 at 5:03 pm

    @ SingleM Ma – JLP’s last NW update in Dec put him just over the $1mm bar on retirement assets. Woo hoo!!!

    To the questions you raised, I think the key is to find a lifestyle that fits like a comfortable old shoe. Which is not to say that there won’t be the occaissional splurge or bonus celebration, but to say that those things become exceptions to the rule. Some people I know seem to be constantly in the bonus celebration mode as the norm. Big bonus comes around, they buy new cars, jewelry, winter vacations, etc, as if they expect the gravy train to just keep coming year after year. If the bonus gets cut, they will have to cut back on lifestyle. In my household, we start with the prior year’s budget with the objective of holding it steady or at least returning it to normal after a major splurge – different mindset.

    Admittedly, now that I’m in my 40’s and thinking much more seriously about the astronomical amount of money it will take for me to feel comfortable that I have reached true financial independence, it is much easier to pass up the new cars, boats, etc. in exchange for a measure of financial security. I don’t know how JLP does it while still in his 30’s and with kids, and would love to hear more from him on the subject.

  6. Josh Says:
    January 21st, 2007 at 6:46 pm

    Miguel, I think you may be confused — I’m pretty sure that’s a hypothetical retirement portfolio JLP has posted about.

  7. Miguel Says:
    January 21st, 2007 at 6:51 pm

    Oh – Oops!

  8. Single Ma Says:
    January 21st, 2007 at 8:47 pm

    @ Miguel – I love this analogy:

    “I think the key is to find a lifestyle that fits like a comfortable old shoe.”

    You know I’m a fan of thought provoking quotes…and shoes. :-) So this really helped to put it in perspective. Thanks!

    ~SM

  9. eR0CK Says:
    January 22nd, 2007 at 8:20 am

    Good post. The most important thing to note is that you didn’t increase your lifestyle.

    More often then not, many people increase their lifestyle as they make more money and end-up being in the same debt situation as they were previously. I see this a lot especially with college grads after they get that big paycheck.

    I actually enjoyed the links more then the post, but thanks for those too!

  10. College Age Finance » links for 2007-01-22 Says:
    February 2nd, 2007 at 11:09 am

    [...] AllFinancialMatters » Blog Archive » Another Way to Build Wealth (tags: money finance tips)   [...]

  11. Debt Blitzkrieg » Blog Archive » Forex dreamin’; or how to defer my financial doom Says:
    April 1st, 2007 at 4:37 pm

    [...] YOU MAY ALSO LIKE: 7 Ways to Take Charge of Your Finances in 2007 (NOTE: trading isn’t one of them.) Another Way to Build Wealth (NOTE: Nope! Trading not here either…) [...]

  12. How To Lessen Your Financial Worries - Advice From Dale Carnegie—� AllFinancialMatters Says:
    November 26th, 2007 at 11:10 am

    [...] Just because you make more money doesn’t necessarily mean you need to increase your spending. In fact, one of the ways to build wealth is to not increase your lifestyle as your income increases. If your spending holds steady while your income increases, your net worth will grow dramatically. [...]

  13. Fabulous Financials » A Millionaire’s Recipe For Accumulating Wealth Says:
    March 30th, 2008 at 10:24 am

    [...] to so that we don’t feel deprived of the benefits of working hard. I recently described this (in a comment on JLP’s AllFinanceMatters blog), as “finding a lifestyle that fits like an old comfortable shoe.” This is important [...]

  14. mei Says:
    August 21st, 2009 at 9:42 pm

    Can’t state enough how important the sacrifices that go into wealth creation are.

    Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?

    http://www.richestmanintown.com

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