Building Wealth

About a year ago, I wrote a post about retirement planning and discussed the how and why of calculating your wealth score. TB received her latest Social Security Statement so we quickly ran the numbers to see how our wealth score had changed. And change it did, much to our surprise. Despite the bumpy ride the U.S. economy has been on since mid-2007, our wealth score as of today grew to 33.4% (+5.4%) in just under 12 months. That’s more than a 19% year-over-year increase.

Stack of Coins To put this in perspective, the denominator in the wealth score calculation is the sum of every dime of one’s reported lifetime earnings. TB’s starts in 1990, when she earned $976; mine starts in 1991, when I earned $1,949. The numerator in the wealth score is one’s net worth (i.e., what would be left after all your debts/liabilities are paid). Some financial planners include automobiles, jewelry, furniture and similar possessions when tabulating their clients’ net worth. The assumption being one can liquidate such possessions to pay off debts/liabilities if necessary. TB and I are more conservative, choosing to only to track our savings, equity investments and real estate as assets. As a result, our net wealth score basically means, together, we have managed to hold onto 1/3rd of our total lifetime earnings in the form of durable assets that, over the long term, should continue to appreciate.

How? Discipline. Hard work. Sacrifice. A bit of luck. Many factors contribute each and every day. I would simplify these to 3 rules anyone at any income level can adopt immediately, assuming s/he can work:

  1. Have a plan. When would you like to retire? How much will you need in retirement? How do you get there? Consulting with a professional can help. Also, there are numerous retirement planning tools online to help you get started.
  2. Save more, spend less. This could also be called living below your means. This is where the discipline and sacrifice factor in. Sure, any of us could die tomorrow, but what if we don’t?
  3. Be productive. For most, the period spanning our late 20s through early 40s is the most productive for building wealth (just ask professional athletes). Exceptions may be models and actors. This is because savings during this period have many years to appreciate in value compared to even the higher savings made during the later years in life. One way to save more and spend more is by earning more. This is often the most difficult step especially if our physical, mental or emotional health suffers from the longer hours, higher stress or weaker personal bonds.

If you start young, time is on your side, and you can run the road to retirement at a leisurely pace. If you wait until you’re older, you have a shorter distance to run, and it could require an all-out sprint. In either case: Run.