By DIony Cespedes
This week I was asked why, as a financial coach, I write so much about goal attainment. Why don't I write more about finding discounts, paying off debt, and saving? All are all important topics; however, saving more and spending less are pathways, not final destinations, for wealth builders.
Wealth building requires envisioning your ideal life, making a plan to attain it, and working with others to execute the plan. The plan centers around making consistent investments to increase your well-being and net worth.
Some of us learned the E.S.S.I. (pronounced, "easy") formula for increasing net worth, Earn more, Spend less, Save more, and Invest. Although it is a helpful tool, we often make the mistake of concentrating too much on the first three parts of the formula, while ignoring investments.
Being excessively frugal in the short term can be possible when you have compelling reasons for saving (e.g., crippling debt, weddings). What often happens in the long term, however, is people who cut expenses to "starvation budget" levels with no incentives, get frustrated by the constant sacrifice, and go on spending binges.
Unfortunately, I first learned this lesson through my own experience, client evidence came later. In my twenties, I built a six-figure net worth through aggressive, yet unfocused, frugality (i.e., penny-strangling), then spent five years rebuilding my position after a tired-of-scrimping-for-no-reason spending binge that left me five figures in debt.
Career planning to maximize salaries is helpful, but doing so exclusively is dangerous, especially for those in high-income brackets. The past six years have taught us how easy it is to lose a job. Learning about and making investments early is a more reliable accelerant of wealth for most of us. Even better, you don't need a high salary to begin investing.
If you place $100 earned from a low-wage job in an investment earning 8% per year, at the end of 30 years it will have grown to $1,006. If you postponed investing for ten years until you were in a higher salary position, your $100 investment would have only grown to $466 because it had just 20 years to grow. The ten-year delay cost you $540.
So, which investments should you make? It depends on a variety of factors from your skills and risk tolerance to your savings and credit history. This is where personal finance gets personal. After you have built an adequate emergency fund and paid off most of your consumer debt, building net worth is less about easy formulas and more about goal setting and developing expertise in the areas you choose as wealth building vehicles (e.g., real estate, stocks, technology). The best teachers: advice from people who have already accomplished the investment goals to which you aspire and first-hand experience. Check prior posts for research and execution tips.
The wealth-building journey starts with a vision. What's yours? What investments will you make to support it? I wish you a pleasant, productive, and profitable week.
Diony Cespedes, MBA is a financial fitness coach and business strategist. She founded Sole Strivers,LLC , a wealth-building consultancy, to provide coaching, programs, and publications to help clients attain financial goals. Sole Strivers specializes in helping clients reach their first $100,000 in liquid net worth through behavior changes, career strategy, and entrepreneurship. Email her at email@example.com; read her blog at solestrivers.wordpress.com; and follow her on Twitter @solestrivers.