Hope for your financial life and beyond

2 HUGE Reasons We Need to Save to Build Wealth

build wealthIf 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 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?

Image by Ricardo Liberato at Wikimedia Commons (CC)

Next Post:Give It Away Now” – Saving to Give

Prior Post: How Far Would You Go to Get What You Want

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  1. The best thing we ever did is acquire a rental unit for passive income. This is way better than stocks, bonds, or any savings. People always need a place to live. If you screen good, maintain property good, and enforce lease rules you will have few headaches and a steady income.

  2. Kevin Watts says

    Very good post. I like you spelled out the basics of emergency funds, budgeting, proper spending habits. I am at this stage right now. I am about to finish paying off my student loans and then I will start an emergency fund and then start investing. As for college I frankly think if you have take out huge student loans to fund your education then you shouldn’t go.

    • Sounds like you are taking the right steps Kevin. I agree with your sentiment about student loan debt. There are many other avenues to pay for college but our society has lured us into the “borrow now and pay for it later” mentality. It’s a real trap.

  3. Laurie @thefrugalfarmer says

    Brian, great post. We have 4 kids too so I know how you feel. One of the ways we’re “helping” our kids cover their education costs is by teaching them now to figure out what their gifts and talents are and how to make money at them. Our oldest, at 13, is a gifted author and is just publishing books 2 and 3 of a fiction series for kids. We’re hoping that by teaching the kids to make their own money early, this will help them learn how to cover much of their own college costs. And one of the other reasons we’re working on building wealth is so that we are no longer dependent on Rick’s employer. In this day and age, you never know when a job, or an entire company, is going to go away.

    • That’s cool! What’s the name of the fiction series? Maybe I’ll have my kids check it out.

      • Laurie @thefrugalfarmer says

        Brian, it’s called Running Free, by Maddie Blank. On Amazon, or go to my site and there’s a link in the sidebar for the ebook. Paperback is also available, and 2 and 3 should be out within the next 4 weeks or so. Good, clean fiction for your kids. That’s so hard to find today, isn’t it? Probably ages 8-12 would like it best, up to 14 if they are still pretty innocent. But then again, we’ve had lots of adults who liked the stories too. :-). Thanks for your support. If you get it, let me know what they think.

  4. I am really worried about the future costs of college education. My kids are only 3 and 1….so who knows what the price of a degree will be by the time they get old enough. We save for them monthly and have since they were babies. Hopefully it will be enough =/

    • It is hard to imagine the costs associated with college. We have four kids so my head kind of spins when I start thinking about it. We’ve save for our kids as well, but I am inclined to think we will not be able to completely fund their education. However, as I said in another comment, that might be a good thing. They need to pay for some of their own way and figure out how to make it happen. That will be a good lesson in responsibility and money management.

  5. Besides the obvious i really don’t know. Stocks, bonds, investing, etc…these are areas which I haven’t “invested” a lot of time to research how I can make my money work better for me. I have a financial planner who takes care of that, but I admit that it’s lazy of me not to be in control more.

    • I wouldn’t beat yourself up too much for having a financial advisor. We have someone who advises us on some of our financial decisions. I think the important thing is just to be on the same page as your advisor and that you understand what they are doing and why.

  6. I honestly will start saving for my children’s college tuition as soon as their born. If I’m lucky I will be able to fund 50% of their tuition bills. Key word, if I’m lucky. At this rate you need to have some serious cash flow if you want to help out your kids in any material way with their tuition.

    • I agree, it’s going to be tough. I’m of the mind though that my retirement is the higher priority on the list of things to save and invest for. My kids could make it to and through college without assistance from me…there are ways to make that happen.

    • I’m wondering if the tuition bubble will bust by then — it almost has to. Tuition is rising at a rate much higher than inflation, and people are starting to catch on that it may just be better to go without a degree for a while than take out >$100K in student debt.

  7. Nice post. This was a good one. I think that too many people are scared of investing because of the unknown. Also, people are too attached to their money, so when they see the stock market dropping, they could start pulling out money and messing up their retirement.

    • I know…good point. I am amazed at how often I here people around me talk about how they are pulling out of the market. Usually that is happening when the market is tanking. That’s actually when you should be looking to invest more – like a few years ago when the Dow was below 7,000. What a great time to put money in that was.

  8. One other option is to invest in real estate by becoming a landlord. You have your tenants pay your mortgage and eventually, you have a paid off house along with an income stream.

    As for college, one can look into a community college for a few years to get the basic courses out of the way for a much lower cost, then transfer to a 4-year school.

    • I love the community college idea and think more students should take this route, especially if they don’t know what they want to major in right away. Get the core classes out of the way at a cheaper cost, then move onto the school and major you really desire.

  9. Great post, Brian. People still have a lot of fear of investing, but as you point out, to build enough wealth for retirement, you need bigger rates of return than a CD. Even though retirement for many of us will last 20-30 years, we still take a short-term approach when it comes to investing. Instead of investing for the long-term and weathering market cycles (always going to happen) we invest short-term – how much money did I make today? Not only does this create a ton of stress, it’s short-sided. A stock can do great one day and horrible the next – and neither scenario means you should keep or sell.

    • I began to lose my fear of investing when I finally got that it was a marathon, not a sprint. Having a 30-40 year time horizon lessens the fear I think. Every ten year period in the markets history has averaged a positive return. That’s a real comforting statistic if you are invested long-term.

  10. John S @ Frugal Rules says

    Great explanation of wealth building Brian! I think a lot of it requires a long term view of things, which is why it’s so foreign to many individuals. Regardless of what you’re investing in to build wealth proper diversification is needed, both in types of investments but also proper tax diversification.

    • Thanks John. And your right it does take a long-term perspective. Try teaching that to high school students, many of whom have been conditioned by our culture that they can have anything they want right now, including becoming a millionaire over night.


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