Seven Wealth Boosters
1) The Employer Match
In terms of sheer wealth-building capability, there isn’t a retirement savings plan feature more powerful than the employer matching contribution.
The math is pretty simple.
For contributions you make to an employer-sponsored retirement plan that receive a dollar-for-dollar match, you get double the benefit for each dollar you save.
Furthermore, any subsequent earnings will grow at double the rate because double the dollars are earning interest.
But what if you only receive a partial match?
Well, you get less of a benefit, but it’s still free money that helps you along in your financial journey. Any contribution from your employer helps to the extent of the contribution’s value.
Contributing $100 with a 50% match? Your contribution is worth $150.
Contributing $100 with a 15% match? Your contribution is worth $115.
Someone out there will look at a 15% match and turn their nose up at it as if it’s beneath them to accept such a paltry sum when other employers contribute a true dollar-for-dollar match.
It’s true. Fifteen percent is much less than one hundred percent, but it’s still free money and it costs you nothing. Unless, of course, you don’t take it.
Think of it this way, if I offered you $115 for every $100 you’d give to me, you’d probably take that deal, right?
This really isn’t any different.
To me, taking advantage of an employer match is one of the top priorities for any of us financially.
That’s why it comes in at Milestone #2 on The Next Dollar Roadmap.
Don’t walk away from free money. If you’re not taking advantage of an available matching contribution from your employer and you actually would like to be wealthier, then go do that now.
2) Paying Cash
No one has ever spent or borrowed their way into prosperity. The math just doesn’t support it.
Ultimately, wealth is the product of a straightforward math problem:
Net Worth = Assets – Liabilities
Viewing this from a day-to-day, cash-flow perspective, we can think of assets as the result of inflows or income and liabilities as the result of outflows or spending.
As long as the inflows are coming in faster than the outflows, we are generating more wealth.
However, any time the outflows outpace the inflows, our net worth is shrinking.
So, our focus should be on maximizing income and reducing spending if we want to build wealth.
This is all painfully obvious, isn’t it?
Well, what seems less obvious to people is the way borrowing serves to amplify the impact of our spending.
For example, let’s assume you incur $1,000 of expenses on a credit card in one month. Let’s further assume the credit card charges an annual interest rate of 20% on any balances that aren’t paid by the end of the month.
If you allow this expense to roll over unpaid, your $1,000 balance will incur an additional $16.67 interest charge meaning you now owe $1,016.67 before the end of next month.
And if you let it roll again, you’ll owe $1,033.61 which includes $0.28 more interest than last month because your interest from last month has started to earn interest for the credit card company.
This is not the direction you want compounding interest to carry you.
“Big deal”, you might say. “Who cares about 28 cents?”
Wealthy people do.
It’s not that 28 cents represents a relevant sum of money to most people, but it is a microcosm of the thousands of transactional financial decisions we make every day, month, and year.
And those decisions add up to significant amounts of money.
Twenty-eight cents per month for 40 years is worth $134.40. What if you decided $0.28 wasn’t a big deal a thousand times?
That’s $134,400 of “who cares?” decisions.
The truth is, even the small decisions matter because we make so many of them.
Let’s take this to a larger scale by using one of my favorite debt targets: the automobile.
The average monthly car payment in the United States as of October 2023 was $729. On average, Americans hang on to their cars for a little over 5 years before trading in for something newer.
Over that period, we pay $6,946.63 in interest.
If you repeated this process for 50 years, that’s $69,466.30 just paid for holding the debt.
“Hold on Curt, you haven’t accounted for the trade in value!”
Well, you’d get the trade in value whether you pay with cash or take out a loan, so no, I didn’t forget about that.
The bottom line is lenders understand the power of compounding interest which is why they are eager to loan you this money.
If you invested $6,946.63 every five years for 50 years and earned just 8% interest on it, you’d have $998,261.60 more than if you borrowed the money instead.
Speaking of compounding interest…
3) Adequate Saving (15%-25%)
Wealthy people save money.
There are two primary points of you one could take toward this statement.
- Wealthy people make enough money that they have sufficient cash available to save.
Or…
- Wealthy people are wealthy because they prioritized saving in the past.
While #1 is certainly true, I am arguing point of view #2.
I don’t think it would be particularly helpful to focus on the first point of view because A) if we could easily produce more income, we probably would and, B) this perspective could contribute to a sense of victimhood, excusing us from exercising control over our savings decisions.
So, maybe I should restart by saying, “Prioritizing saving money makes you wealthy”.
Oh, and the stats back this statement up.
Ramsey Solutions, Dave Ramsey’s media company, conducts regular research on America’s millionaires. Here are a few of the things they’ve found:
- 8 out of 10 millionaires invested in their company’s 401(k) and another 75% also invested in plans outside their company.
- 3 out of 4 millionaires credited their financial success to “regular, consistent investing over a long period of time”.
- 79% of millionaires say they did not receive an inheritance and only 3% inherited $1 million or more.
- Only 31% of millionaires had an average salary above $100,000 over the course of their careers.
Clearly, saving and investing play key roles in the financial success of most millionaires.
But how much to save?
As a rule of thumb, I recommend adjusting your savings rate according to your age when you start saving and investing. The earlier you start, the less you have to save as a portion of your income.
If you start in your 20s, 15% of your income should be adequate. If you start in your 30s, try 20% and in your 40s start with 25%.
Another option is to read my detailed post about setting a savings rate as a percentage of your income or watch the YouTube version.
As a teaser, here is a chart summarizing the percentage of income you should save based on the number of years until your expected retirement.
To be clear, this chart applies to savers who are just starting out. You shouldn’t expect to try and save 327% of your income when you’re five years from retirement.
Unless you’re just starting of course. In that case, good luck.
4) Wise Investing
While saving is an important component of building wealth, it is far more valuable when combined with thoughtful investing.
The good news is that nowadays investing can be as simple or complex as you want to make it.
If you have no idea what to invest in and just want to drop your savings into an investment and let it roll, then you are probably a good candidate for target-date index funds.
Target date funds allow investors to choose a single investment that aligns with their “target date” for retirement.
The underlying holdings in the fund are then adjusted from a more aggressive to a more conservative portfolio as you approach your retirement date.
All the rebalancing and market diversification is taken care of for you in one investment.
(If you go the target date route, don’t hold it in a taxable brokerage account, and be sure the underlying holdings are indexed mutual funds to keep expense ratios low. You should be able to easily find target date funds with expense ratios below 0.10%.)
If you want to take a more “hands on” approach to investing, you can buy a selection of mutual funds that focus on a variety of industry sectors, investment types, company size, geographic focus, etc., or even buy individual equities directly (not recommended).
If you decide to be more active in your investment selection, be sure to do your research first and follow these guidelines:
- Diversify your portfolio through mutual funds or ETFs.
- Buy low-cost index funds. Their performance consistently beats active management, and especially so after management costs are factored in.
- Don’t ever hold more than 10% of your invested assets in a single company and even less stock in the company you work for.
- Avoid the urge to constantly watch the performance of your assets, or even worse, make frequent trades.
- Set up an automated savings process through payroll deduction or direct draft from your bank account so you don’t have to actively remember to save.
There’s a lot more to investing than we have time to cover in this post, but here are some links to other material we have available:
5) Education
“No Brain, no gain. Stay in school.” – Michael Jordan
While it may be somewhat ironic that this quote comes from a man who has made over a billion dollars from his athletic ability, he’s not wrong.
There is a lot to gain from staying in school.
I recently posted the reciprocal point of view to this article, which was named Five Wealth Killers.
While researching for that editorialized bit of magnificence, I dropped by the Bureau of Labor Statistics to take in a view of their 2023 Education Pays survey.
Here is a visual summary of the results:
For perspective, a $1,000 weekly salary is $52,000 per year. A $1,500 monthly salary would be $78,000 per year.
You probably aren’t surprised to see that income tends to follow one’s level of educational attainment.
It is particularly noteworthy that there is a steep uptick in income for those who receive a bachelor’s degree or go even further into academia.
Based on this data, if you obtained a bachelor’s degree you’d make $2.33 million more than those with a high school diploma over the course of a 40-year career ($5.85 million vs $3.52 million) assuming you receive an annual wage increase of 3%.
The truth is those with higher educational attainment are likely to receive more frequent increases in income.
Additionally, job security seems much stronger as one becomes more educated meaning you not only make more money, but you also make it for longer periods of time.
6) Own Instead of Rent
This one may be a bit touchy given how crazy the housing market in the United States has been over the last 4 or 5 years.
But the fact is homeowners are typically much better off than renters from a net worth perspective.
According to the Federal Reserve, in 2022 homeowners had a median net worth of $396,200 versus $10,400 for renters.
That’s a whopping 38 times the overall net worth.
That’s not to suggest that homeownership is always a superior decision to renting. If you think you might move in the next few years, then renting might make perfect sense.
However, if you have roots somewhere, you’ll be much better off in the long run if you buy a house.
For most American families, the largest portion of their net worth is their home.
And even though a mortgage is a debt arrangement, it is much more palatable to your finances because each payment transfers more ownership in an appreciating asset over to you.
According to FHFA, homes have appreciated at an annual rate of 4.3% annually.
At that rate, the value of the average home will more than double over the period of a 30-year mortgage.
Rent on the other hand? Well, it does give you a warm and dry place to stay, but it doesn’t contribute to your net worth at all.
7) Measure Progress
I had a boss once that was fond of telling my colleagues and I that “what gets measured, gets done!”
If he said it once, he said it a thousand times.
He was using it as a justification to micro-manage us, but there is actually some truth to it.
Think about it for a minute. How can you verify that the decisions you’re making are carrying you closer to your goals if you never stop to evaluate the impacts of those decisions?
Or how do you measure progress if you don’t know where you started, where you’ve been, or where you are now relative to those other data points?
Anytime we work toward a goal that will take time to achieve, we will need to make thoughtful course adjustments to keep us on track.
Financial plans, goals, and budgets (to name a few) all help us do that.
According to the Certified Financial Planner (CFP) Board, American consumers who have a budget feel more in control (62 percent), more confident (55 percent), and more secure (52 percent).
Studies also show that we’re more likely to make positive choices about saving and investing when we celebrate net worth milestones along the way.
Of course, a sudden drop in the value of one’s investments often leads to poor choices. That’s why I recommend that you just avoid looking when you know economic conditions are choppy.
I’m serious. When the stock market runs into the ditch I walk away until I’m confident things are back on track.
Conclusion
So, there you have it. Seven concepts to boost your net worth.
It occurred to me as I looked back over the list that I have at least some positive personal experience with each one of the seven wealth boosters I’ve listed above.
So I guess that’s another endorsement for their value.
Thanks for reading. Be sure to check out our YouTube channel for more content.
