Recently an old colleague reached out to me with a question:
“You're a very smart guy. One of the smartest dudes I know when it comes to money that I know of. Suppose you are starting fresh after 30, with $10K in the bank. What would you do to accumulate wealth?”
The funny thing is, I don’t think that it takes all that much to be smart when it comes to money. Sure, it helps to know a thing or two about finance, business, and economics. But I’m not an amazing mathematician, I prefer to use financial calculators when calculating a derivative (which I hardly ever do), and I’m not somebody who is ever going to create a revelatory economic theory. At heart, while I believe that it helps to be knowledgeable about investing, I do not think that it is a requirement to “accumulate wealth”.
The fact of the matter is, accumulating wealth can be attributed to a couple simple things that everybody can do:
1) Learn a skill that can earn you a living.
2) Spend significantly less than you earn.
3) Do not get into credit card debt.
4) Put what you save into an interest bearing account, preferably a low fee index fund if you are new to investing and do not understand the markets and business principles.
That’s it. If you do these four simple things, I promise you that you will accumulate wealth. But don’t take my word for it. Check out the calculations that support what I’m telling you. Using the “I’m a 30 year old with no debt and $10K in the bank scenario”, it’s easy to see that by the time you’re 40, you will have close to $500,000 in your investment account, and by the time you are 46 you are a millionaire.
Sure, this is a simple back of the envelope calculation and we could go crazy on the assumptions and start working in a whole bunch of other assumptions, but the fact remains that the most powerful ally you have in accumulating wealth is a force of nature known as compounding interest. But once again, don’t take my word for how to accumulate wealth, read the works of Dr. Thomas Stanley and Dr. William Danko. The only other caveat that they would add to my 4 simple things list is that there is a strong correlation between being a millionaire and owning your own business.