The 8 Most Important Ingredients for Financial Success
There are many paths to financial independence, but they usually share the same basic principles. In our opinion, the most important ingredient to financial success is money saved, followed by time, then discipline.
This entire site basically exists because the path to financial independence is pretty complicated.
There are so many obstacles to navigate in life and circumstances are constantly changing.
We built the Next Dollar Roadmap to try and provide an optimal guide for this journey to FI, but we admit there are other ways to get there.
Even so, there are several fundamental ingredients that seem to appear in nearly every path to financial success (except for maybe lottery winners and heirs of large fortunes).
So, in case you’re like most of us and will need a way to wealth that won’t include a large windfall here is a list of those common principles, from our perspective, in their order of importance
Ingredient #1: Money Saved
I honestly struggled with putting this in the top slot. The reason is that it seems like a given and it is pretty easy to obtain.
Yes, money is pretty easy to obtain. I am speaking to an American audience.
Currently, unemployment in the U.S. is around 3.9%. If you don’t have a job, it isn’t because there aren’t any available.
You may be holding out for a specific line of work or certain conditions for employment, but if you want a job you can pretty easily get one right now.
For that reason, I don’t want to spend a lot of time here, because money won’t matter much without also observing the next two items on our list at a minimum.
However, I admit that all the time and discipline in the world won’t make you wealthy if you don’t have at least a little money to get you started.
After all, a 100% return on zero is still zero.
So, yes, because money is a mathematical concept, it is also the first ingredient to success in a sound financial plan.
But don’t kid yourself. You can’t stop here.
Ingredient #2: Time
TIME IN THE MARKET!
It’s a financial mantra of sorts because it is such a critical component of wealth building.
If you need a refresher about why, please check out our post about the power of compound interest.
Your army of dollars can’t go recruit friends without time in the marketplace to harvest gains. They need time and the more they have the better.
This principle is the primary reason we stopped following Dave Ramsey’s baby steps years ago. The math simply didn’t support delaying investing for the sake of prioritizing our debt.
There is no substitute for time. Once it is gone, it’s gone for good. It can’t be replaced or repurchased.
So, what does this mean?
Save early and save often.
Start early, and if you didn’t do that, start now.
Ultimately, your wealth will be a product of the money you save and the time it has to grow.
Unless you have a way to shovel loads of cash into savings later on (not very efficient by the way), you’ll need to use the asset of time to get you to financial independence.
Ingredient #3: Discipline
When I started working on this list, I put discipline first.
I really struggled with moving it back to number 3, but as I’ve said before, the math is the math.
Even with the greatest level of self-discipline in the world, you won’t reach financial independence without money and time.
Sure, you could argue that time and discipline go hand in hand, but since we’re prioritizing these, time came first.
I’m reminded of stories I’ve heard in the past of people who forgot about an old IRA or 401(k) that grew into millions of dollars simply because it was left alone to grow.
Their ignorance, not discipline, along with time led to wealth. So, splitting hairs here, but time is more important.
With all of this said, it’s pretty rare to see financial success without a high degree of self-discipline.
I realize it’s not a fun word, but self-discipline is critically important.
I’ve mentioned before that I listen to the Millionaires Unveiled podcast. I’ve probably taken in almost 200 episodes over the last several years, each one with a new, unique millionaire sharing their story about building wealth.
Some of them are boring, some exciting. Some smart, some dumb. Some are humble while others are annoyingly prideful.
The interview subjects also obtain their wealth in a variety of ways. They’ve interviewed business owners, doctors, landlords, authors, and even janitors.
As we’ve said before, there are many paths to wealth.
But do you know what all these millionaires have in common? Self-discipline.
The money came in hundreds of different ways, but they all had a plan for what they did with it and they stuck to their plan. The result is significant wealth.
Ingredient #4: Stability & Flexibility
“The best laid plans of mice and men often go awry.” – Robert Burns
If you stopped after ingredient three, I’d give you much better than-average odds for success.
However, things happen.
Sometimes you lose your job or get sick. Cars get wrecked and storms pound houses.
And that’s why stability and flexibility are ingredient number four in our list.
Naturally, the less the unexpected happens, the better. So, if you can do things in a manner that avoids risks to your plan, you should.
Just know that no matter how hard you try there will always be a chance that unforeseen circumstances may knock you off track.
There is no greater ballast for financial turbulence than cash.
This is precisely why many recommend having 3 to 6 months of expenses available in liquid savings, as do we in Milestone 4 of the Next Dollar Roadmap.
You can’t see into the future and that’s exactly why everyone needs an emergency fund.
More and more often I hear about people who plan to use lines of credit in place of a cash emergency fund.
I can understand why one might want to put their money to work in investments instead of leaving sitting in a boring savings account.
The problem with using a line of credit is you’re not guaranteed the line of credit will always be there.
In many cases, lines of credit are pulled exactly when people need them most (like after a layoff or economic turmoil).
Ingredient #5: Returns
Cash is always nice to have, but if some is good, more is certainly better.
And, there’s no way to make cash grow unless you invest it somewhere.
In fact, if you just stuff it under your mattress cash will decrease in value as inflation marches along at its own steady pace.
So, how much of a difference do investment returns make? Let’s look at a brief example to illustrate the importance of the return on your invested capital.
Suppose you receive a $10,000 bonus at work and decide to invest it all and leave it for 30 years until you retire.
We’ll assume you’re evaluating two investment options. The first is our typically referenced lifetime S&P500 index return of 10.67% and the other is Vanguard’s Total Bond Market Index Fund (VBTLX).
VBTLX has returned an average of 4.78% annually since its inception.
If you placed $10,000 in an index fund tracking the S&P500 and received an average annual return of 10.67%, your investment would be worth $209,420 in 30 years.
If instead, you invested in VBTLX and received an average of 4.78% annually, your $10,000 investment would be worth $40,589.
That’s a difference of $168,831 just for picking an investment with higher returns.
The gap is so vast because of the value of compounding interest. It causes the monetary value to increase exponentially.
So, yes, investment returns have a dramatic impact on one’s ability to increase the value of their investments but don’t read this and go off chasing gains.
Study after study has shown that even most professional mutual fund managers fail to outperform a portfolio that simply holds the entire stock market in a basket of mutual funds or exchange-traded funds.
You’re not going to do any better trying to “pick the winners” than the pros, so don’t bother.
We placed returns in front of knowledge because just about anyone can open an investment account and select a target date mutual fund that will contain sufficient investment diversification to achieve pleasant results.
You could certainly do a lot worse.
If you’re unsure about how to invest your money appropriately, you might consider visiting a financial planner or advisor to tailor an investing strategy for your personal goals.
Return should always be evaluated along with risk. Depending on your own goals, it may or may not be wise to take on more risk in hopes of earning higher gains.
Ingredient #6: Knowledge
Sir Francis Bacon is credited with coining the phrase “knowledge is power” and it is difficult to dispute.
Knowledge certainly doesn’t tend to make you weaker anyway.
With that said, we’re not talking about knowledge related to picking hot stocks. We never will.
What we are referring to is a steady growth in your understanding of how money works, various tax laws and strategies, effective retirement planning, estate planning, insurance, etc.
In other words, the stuff we created the website around.
There’s always more to learn and there is an endless amount of information available in books, online, in podcasts, and on YouTube.
If you want to learn about virtually anything, all you have to do is look. It’s there for the taking.
And the more you know, the more you can take advantage of and/or the more pitfalls you can avoid.
I remember learning about Qualified Charitable Distributions while listening to a podcast a few years ago.
It wasn’t pertinent to me, but I had several family members who were approaching RMD age and were also regularly giving to charity.
Just by sharing what I had heard about QCDs, they’ve been able to save quite a bit by not having to pull income from those retirement accounts triggering more taxes.
Let me challenge you to lean into what you don’t know and look up topics that you’d like to understand better. This is the information age. We might as well all make the most of it.
Ingredient #7: Marriage
Marriage doesn’t necessarily make you wealthier, though it does provide some efficiencies that are more difficult to obtain if single.
What we’re primarily referring to is the impact an unharmonious marriage or even a divorce can have on one’s financial status.
First off, just having a difficult time getting on the same page will either lead to frustration resulting in the desire to avoid conversations about financial planning, an inability to stick to a plan because both parties aren’t very committed to it, or some combination of both.
Budgeting carefully is not fun and it’s challenging enough without a spouse that blows through the dining out budget like an MMA fighter through a can of whey protein.
The resulting frustration may lead to both spouses completely giving up on a financial plan altogether, meaning goals are never reached.
On the flip side, marriage can also provide a healthy environment for accountability and even learning through the perspective of the person you love most.
It’s no wonder that in the famous book The Millionaire Next Door, the millionaires interviewed regularly acknowledge the role a supportive spouse has played in their financial success.
I too agree wholeheartedly that my own wife, Lisa, has been a key to nearly any accomplishment of mine over the last nearly 20 years, finances included.
Ingredient #8: Professional Partners
Professional partners like accountants, advisors, or attorneys can all play exceptionally important roles in your road to financial success.
In most cases, these professionals are worth the fees they charge because they are so much more knowledgeable about their specialties than the average Joe.
Not only can they help point you toward superior results, but they can also spare you a great deal of headache and save you loads of time.
In our recent post about whether one should hire a financial advisor, we didn’t have a chance to get into the tools and experience these professionals have at their disposal.
Using carefully created interview questions and software tools, they can provide a robust financial plan for nearly every relevant piece of your life in a fraction of the time you’d spend trying to do this on your own.
They also have the advantage of seeing a wide variety of cases (which most of us don’t) giving them perspective you can’t really find any other way.
I consider myself a consummate do-it-yourselfer, but even I can see the value in using a professional if it makes sense for you or if you have the least bit of discomfort in making your own plans or doing your own taxes.
Finally, if you ever accumulate any wealth of significance, you should at least consult with an attorney about an estate plan.
Yes, they can be expensive, but so is probate. And probate takes a lot longer.
Conclusion
This is by no means meant to be an exhaustive list, but once again we hope it makes you think about how you prioritize your own financial plans and goals.
The first few of these I would consider absolute necessities.
We started out this post with a cooking metaphor, comparing each of these principles or ideas to ingredients.
Well, personal finance without savings, time, and discipline would be akin to baking a cake without sugar, butter, or eggs.
Good luck without it.
If you feel we’ve missed something, feel free to shoot us a note on the contact us page.
