If you have been following my posts recently, I have been discussing why it is important to save money. I talked about saving for emergencies and then outlined saving for purchases and bills. These serve as a solid foundation for our financial health and to build wealth for the long-term.
They are foundational because we have to work through a lot of emotional baggage. We have to re-wire years of incorrect thinking about our saving habits. That’s not easy because we have to admit our mistakes. But once we have succeeded in changing our mindset about saving, we’ve conquered a giant obstacle. As I’ve said before most people aren’t thinking this way.
These saving concepts are foundational because they allow us to move on to the next phase of money management – to build wealth.
What Does It Mean to Build Wealth?
To build wealth means to enter the phase of money management where assets begin to grow over time. It involves more focused and disciplined saving, which is why I said we have to change our mindset and habits first. Successful long-term wealth building truly is a pyramid-like process. Start with the basics as your foundation (emergency funds, budgeting, proper spending habits), then move upward into wealth building.
The wealth building stage can present a big hurdle because it requires a little education. At this point in the financial journey, we know about basic savings instruments like CDs or money market funds. However, these kind of financial instruments won’t help build wealth, as the rate of return on them is minimal. To build wealth – big time wealth – we have to come face to face with learning about the big “I” word – Investing.
Now don’t be confused here. We are still saving money but the name “saving” is replaced by the term “investing” to indicate the stage of the process we are in. We are still saving by putting money aside on a regular basis but the financial instruments we have chosen to put that money into have changed.
Most people’s investment vehicle of choice is the stock market. Historically, the stock market has achieved an average return of about 10% per year. That’s a much bigger rate of return than the 2% or less from a savings account or CD. And there are at least two big reasons why we need that higher rate of return to build wealth.
The first reason is that we will need money for our own retirement. The current retirement age in the U.S. is 65 but the average life expectancy is 78 years. What if we are fortunate enough to live another 30 years after retirement? How will we support ourselves over those years with a reduced income and the increase in medical bills that will inevitably come? We cannot rely on government funded plans to support us. We will have to do it ourselves.
The second reason we should invest to build wealth is that one day, if you have children, they may want to go to college. Check out these statistics published in this overview by the College Board:
“Average published tuition and fees for in‐state students at public four‐year colleges and universities increased from $8,256 in 2011‐12 to $8,655 in 2012‐13. The 4.8% ($399) increase in tuition and fees was accompanied by a $325 (3.7%) increase in room and board charges for students living on campus. At $9,205, room and board charges account for more than half of the total charges for these students.”
I won’t even go into the numbers in the report for out-of-state or private school yearly tuition because they are too depressing. And don’t think those numbers won’t continue to climb. The kids may need some financial help from mom and dad along the way.
We cannot afford to stop saving just because we have a fully funded emergency fund. We need to continue to set money aside by investing so we can grow build wealth. We have a good idea of the financial challenges that await us down the road so we have to do our best to be prepared for them.
Questions: What else can you invest in to build wealth for the long-term? What are some options for reducing expenses in retirement? How in the world can students (and parents) deal with the rising costs of a college education?
Next Post: “Give It Away Now” – Saving to Give
Prior Post: How Far Would You Go to Get What You Want