Average Income – Extraordinary Wealth

When you hear the word millionaire, what crosses your mind? These days, to be wealthy is to be evil, but most millionaires have worked hard, saved, and lived below their means. Their wealth has been accumulated over the course of many years of sacrifice and the practice of making healthy financial decisions. Many believe incorrectly that today's millionaires have built their wealth by cheating on their taxes, inheriting their riches, or having high paying jobs. None of that is true. According to Thomas J. Stanley's book, "The Millionaire Next Door: The Surprising Secrets of America's Wealthy," only 20% of millionaires inherited their riches. This leaves the other 80% of first generation millionaires to generate their wealth through hard work.

So one might ask “What is the best way to build wealth on an average income?”

I hear this question a lot when I talk to groups about financial stability. There is nothing extraordinarily sophisticated about building wealth. It is a simple formula. Spend well below your means and save as much as possible. In addition to strategically allocating your income, never invest money you cannot afford to lose or that you will need tomorrow. Make sure you maintain an emergency fund of at least six months of expenses. In my book, Simple Wealth Building Strategies, I recommend a tier three emergency fund equal to one year’s gross salary. I discuss why this is important in my book.

In addition to managing your income, get out of and stay out of debt. Debt is the number one killer of wealth and the theory that one can use debt to build wealth is misleading at best. The over use of credit and the debt that results has destroyed more families, marriages, and lives than you can imagine. If you are drowning in debt, you are more likely to experience higher levels of stress. That stress can turn even the smallest inconvenience a major issue.

Once you have these foundational elements of your financial plan in place, that’s when the real fun begins. Even if you start with a small amount, always save something. As you free up your financial resources from the grip of mismanagement and debt, you can begin to increase your savings and investment commitments. I am a strong advocate of starting your wealth building goals by taking advantage of tax-favored accounts. Tax-favored means any account that receives special tax treatment such as company sponsored retirement accounts (401k/403b), Individual Retirement Arrangements (Roth and Traditional IRAs), and Health Savings Accounts.

Once you have established these accounts, I suggest looking into taxable accounts with tax-favored investments. One such type of account I used early on was a taxable brokerage account with a national investment firm where I invested in a state tax-free bond fund. If you own a tax-free bond fund and live in the state associated with that fund, you receive income that is sheltered from state and federal taxes. A tax-free money market is a great place to hold your emergency fund because the interest earned is state and federal tax-free. Although it might not be significant, if you have a tier three level emergency fund, you will earn some level of interest and why pay taxes on it?

These ideas are not sophisticated, but they are, over time, effective ways of building wealth. I stay away from the more complicated things such as real estate, commodities, and other forms of investment vehicles. A wealth building plan does not have to be complicated nor does it need to involve high degrees of risk. Yes, with risk there is the potential for reward, but where possibility is high, probability is usually low. Doing the right things, consistently over a long period of time, usually results in wealth. Think about that.

Doing the right things means prioritizing your income, staying out of debt, having an emergency fund and, most important, maintaining a steady source of income. I have experienced two layoffs in my thirty plus years of being in the labor force and I was never out of work for more than a month and a half. Having an emergency fund in place protected the wealth my wife and I had built until I could find employment.

Doing these things over a long period of time is critical to building wealth. Time can be a friend or a foe depending on how your use it. That is why being consistent with doing the right things over a long span of time results in success. The longer you apply and operate under these basic financial principles, the greater your ability to build wealth becomes. The best way to build wealth on an average income is to keep it simple, take advantage of tax-free and tax-deferred investments, and don’t get side tracked by what everyone else is doing. In other words, develop a plan and stick with it for the long haul. Opportunities will arise and you will be positioned to take advantage of them.