Originally published in BlogCritics
The secret to building wealth is no secret at all: work hard, spend wisely, save, and invest.
Of course, there are other ways. Some people are born rich. Some start successful businesses. Others possess talents or skills that command high pay. Still others have the good fortune to be at the right place at the right time, such as Matt Cohler, the tenth Facebook employee, who now has a net worth of $700 million. Some, like Chris Shaw, the sole winner of the $258,500,000 Powerball jackpot in 2010, are just plain lucky.
But the vast majority of people with money are good money managers. They earn it the old-fashioned way, spend less than they make, save, and invest the rest.
With so much focus on celebrity culture and its trappings, it can be hard to remember that reality TV stars and their posh lives are no more real than their injected lips and fake eyelashes. While there may be a chance that you’ll invent the next Instagram or cash in your stock options when your employer takes his start-up public, there’s a better chance you’ll work for a living and earn your money one day at a time.
While this may not be a glamorous proposition, it’s a hopeful one, because every young person, who earns more than he or she spends, can win the race to financial independence. The key is to pay yourself first. Before you pay your bills, buy tickets to hear Adele in concert, or try the new local sushi bar, deposit a fixed amount from every paycheck into your savings account.
If you work for an employer who offers a 401(k) retirement plan, your best bet is to deposit your savings (through automatic payroll contributions) into your plan. (Read my article on 401(k) plans to find out why.) Ten percent of your gross salary is a worthy objective, but if that’s too much, start with less. The important thing is to establish a consistent savings habit.
Due to the power of compound interest, which is interest paid on interest, even small amounts add up over time. You’ve probably heard that if you invest the cost of one cup of gourmet coffee – about $4.50 – it could be worth over $100 (if you let it sit for forty years at 8% interest). If you invest one year of coffee money, about $1,500, it could be worth $36,400. If you invest your coffee money everyday for the next forty years, it could be worth a whopping $436,400 (before account management fees and taxes).
Imagine that. Without any additional planning, a daily investment of $4.50 could very comfortably pad your retirement nest.
While interest rates vary, the math doesn’t lie. As every journey begins with a single step, slow and steady wins the race to financial independence. The determining factor isn’t the length of stride or the size of your deposit; it’s time. As we’ve just seen, small deposits, like small steps, add up mightily when given the time to grow.
The good news is you don’t have to wait forever to see results. Something wonderful and exciting happens about twelve to fifteen years out. If you invest regularly (through your 401(k) or private investment account), your portfolio hits “critical mass” when it starts to grow appreciably on its own, independent of your contributions.
If there is a secret to building wealth, it is to invest your time wisely. With time, you can make your money grow. If you loose money, you can make it back (in time), but no amount of money can buy back wasted time.