The three-step plan for becoming financially wealthy and how to be wealthy without the money.
In this episode you’ll learn:
- The results of two recent surveys on wealth, investing and retirement planning.
- How much money do people believe they need to consider themselves wealthy.
- How is wealth distributed across the U.S. population and how wealthy are Americans?
- Why you need a simple financial plan.
- What are the three steps to becoming financially wealthy.
- How to live like you are already wealthy.
What does one have to do to become wealthy? In this episode, David dives into what defines wealth and explores three steps that you can take towards a more lucrative future. Charles Schwab and Stash both sent out surveys that surprised David with their statistics. The questions in the surveys surrounded how people planned on funding their retirement. 22.8% of participants said that they did not have a plan for retirement, and while over two-thirds considered themselves savers, 59% said that they live paycheck to paycheck. While most would love to become wealthy, how do most expect to get there?
The expectation of what it takes to become wealthy vs. reality
According to the 2016 Federal Reserve survey of consumer finances, 15% of respondents report spending more than they earn. 44% have difficulty paying credit card balances and keeping up with regular bills and expenses. Despite these statistics, 60% of the Schwab survey respondents said that they expect to be wealthy one day. This is surprising, considering that those who took the survey considered $2.27 million to define the minimal boundary of monetary wealth.
Most households don’t come close to reaching that kind of net worth, but most aren’t considering the value of Social Security. The Federal Reserve estimates that the median value of Social Security benefits for households in today’s dollars is about $172,000. That, combined with any amount that you choose to save and invest now, adds up to future wealth.
David explains that one of the reasons for a lower average net worth is that the wealthiest 1% of the US population has a larger slice of the overall wealth of the nation. Their wealth constitutes 38.6% of the nation’s wealth. The wealth belonging to the top 1% has grown at an annualized rate of 5.4% per year since 1990. While the overall wealth of the nation has obviously grown since 1990, the wealthiest still own a larger piece of the pie. How does one become included in the wealthiest 10% or so?
The foundational key is to have a plan. According to the Schwab survey, 28% of the respondents have a written plan, 46% have thought about goals they want to achieve but haven’t written them down, and 26% have no plan at all. Planners tend to have the upper hand when it comes to saving and building wealth over time. Goals and plans don’t have to be complicated, but knowing where you would like to be in ten or fifteen years, and the steps you need to take now to get there, is vital to success.
The first step towards wealth: Increasing your income
David explores three steps to take towards becoming wealthy. To begin with, you need to increase your income. You need to be making more than the median income of $60,000 per year. David says that it will probably take making $100,000 or more per year to reach the desired $2.27 million net worth. There are plenty of ways to increase your income including, getting better at what you currently do, asking for a raise, creating a deal with your business where you make a percentage of the revenue, and starting a side business. Be creative and have a plan.
The second step towards wealth: Increasing your savings percentage
How much are you saving? According to the Stash survey, 41% save less than 5% of their income. Only 11% save more than 15% of their income. David explains that you really need to be saving more than 15% if you want to become wealthy. Another way to save money is to keep your current standard of living—even as your income increases. Resist spending money on the bigger and fancier, and instead fill your life with rich experiences. Keep a budget and live comfortably well within your means. Don’t increase the budget for things that you don’t need as your income grows.
The third step towards wealth: Increasing your investment returns
The wealthy have higher investment returns. One of the ways you can become wealthy is to continually educate yourself on how to get the most out of your investments. The Stash survey revealed that 74% of the respondents don’t invest in stocks outside of a retirement account. That is poor planning if you are wanting to increase your wealth. Diversify your investments to increase the opportunity that you have for a better return on investment.
Some are scared of the perceived risk of investing, but it is important to realize that you don’t have to put everything you have into investments. Begin small, learn the processes and the options available, and keep your portfolio diverse. David distinguishes between volatility and risk as well. The market will change—as it always has—but risk is derived from financial harm caused by losses, not volatility.
How do the incredibly rich create higher returns on their investments than the rest of the population? The answer is through higher return drivers. The very rich invest less in cash and bonds, with most of their investments put towards stocks and alternatives. The alternatives category includes startup companies, buyouts, hedge funds, and real estate. Their lower-returning investments are kept to 25% of their portfolio. On average, US households have 44% in lower-returning investments. David encourages listeners to begin creating more diversity and higher return drivers through stocks.
It is key to remember that wealth can be measured in different ways. You don’t have to be monetarily wealthy in order to live a rich life. Relationships, experiences, being curious, and investing in opportunities to give to the world and make the earth a better place are all ways to live like you are already wealthy.
- [0:16] Schwab and Stash survey results.
- [2:49] Saving vs. living paycheck to paycheck.
- [4:29] How much does one need to be considered wealthy?
- [7:44] The value of social security.
- [9:23] The historical distribution of the country’s overall wealth.
- [11:33] The importance of having a plan.
- [13:38] Step One: increase your income.
- [15:10] Step Two: increase your savings percentage.
- [16:44] Step Three: increase your investment returns.
- [23:57] It’s not about optimization. It’s about diversifying and learning.
- [25:20] How to live like you are wealthy today.
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