As a financial planner, one of the most common questions I get is, “How do I accumulate wealth?”
Many people think wealth comes primarily from owning your own business, holding a high-paying job, investing in real estate or the stock market, or receiving an inheritance (and that doesn’t even count the possibility of winning the lottery). Yet these are not reliable wealth-builders.
While a high salary is nice, it’s no predictor of wealth accumulation. I’ve known many people with six- and seven-figure salaries who couldn’t save enough to fund an IRA.
Owning a business is no automatic route to wealth, either. Most people who go into business fail, and many who make it don’t earn any more than they would make as an employee. In addition, the current expansion of taxes and regulations will make building wealth through owning a business even more of a challenge.
True, fortunes have been made in real estate and investing. They’ve been lost, too. Certainly winning the lottery is a great way to get rich quickly, but your odds are much better of being struck by lightening. A rich parent leaving you a bundle is a more probable occurrence, yet only one out of 10 millionaires inherits their money.
All of these are only a few of the many ways to generate money. Accumulating wealth, however, requires the ability to keep the money you generate. The most reliable way to get rich is a method so old-fashioned and ordinary as to be almost embarrassing: live frugally and save money.
My average clients did not accumulate their wealth by having high salaries, owning businesses, inheriting or investing. They did it by living on far less than they made. I’ve known plenty of people who accumulated wealth on household incomes of well under $100,000. I once had a client who earned $50,000 annually and saved $20,000 a year. Many of these people never went to college. They were janitors, nurses, government workers, electricians and carpenters. They became millionaires because they learned the skill of frugality.
My frugal clients shop at discount stores and drive used cars. They often clip coupons. They hate to pay retail and are willing to wait until they can buy what they want at a deep discount. They routinely research their purchases to find the best quality for the lowest price. They comparison shop. They use cars, clothes and furniture until they wear out. They rarely buy designer anything.
Think about this: It’s normal for people to invest $40,000 to $100,000 to learn a career skill set. Yet few of us invest anything in learning good money management skills. Most people have never taken a course in anything even related to money management.
Good money management skills do not come naturally. Like other skills, they are learned. If you want to build wealth, it isn’t enough to acquire the skills you need for your career. It’s even more important to learn – and practice – the skills of money management and frugality.
Rick Kahler is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a flat fee. He is an author of four books on financial psychology and recognized by BusinessWeek magazine as one of the 15 most experienced financial planners in the nation. Contact Rick for help with virtually any financial need.