The 4 Keys To Building Wealth - The Retirement Manifesto (2024)

I don’t know where I first heard the quote shown above, but I’ve cited it many times over the past 30 years. The keys to building wealth are simple, and the quote above is true. However, I realized that the quote is not entirely correct. It’s not “Easy” to build wealth, but it is “Simple” (or, straightforward). We’ll build on that theme today, with statistical evidence that demonstrates the truth behind the statement.

I came across several articles this week that build on the original quote included at the topic of this article. Having done some research, I think the quote is enhanced by the addition of “invest the difference wisely”. Here, then, is how I’d summarize the statement today:

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I came across a PNC Wealth Management Surveyin which 493 millionaires were surveyed regarding the key decisions which lead to their wealth. The summary of their responses are below:

Todd Tressidor at FinancialMentor built on the theme with this article, which summarizes the keys to building wealth into two sentences:

1. Make more than you spend and invest the difference wisely.
2. Develop simple daily habits that result in wealth accumulation.

Using these two sources as background, I’ve summarized the 4 Keys To Building Wealth As Follows.

1. Spend Less Than You Earn

38% of millionnaires cite “controlling spending” as one of the keys to their wealth. This is a fundamental “First Step” in building your wealth. Regardless of your how much you make, develop the habits of spending less than you earn. If you make $50k, pretend you only make $40k and invest the $10k difference (a 20% savings rate. Tough, but you can achieve it in time). Automate your savings, so that it comes out of your paycheck before you see it. Increase your savings rate every time you get a raise. Don’t make the mistake of looking at things from the perspective of “Yeah, I can afford that monthly payment”. Rather, save cash until you have enough set aside to buy that car, and then only buy the car you can afford with the cash you’ve saved.

Be very, very careful with your spending, it’s one of the keys to financial wealth. The first priority should be to develop a “positive cash flow” in your personal situation, then work with that positive cash flow to build wealth.

It’s also important that you do this from the earliest possible age. I suspect many of you reading this are well into your careers. Pass it along to your children or grandchildren, while they still have time to Start Early. There’s a reason Albert Einstein called compounding The Most Powerful Force In The Universe. Let compounding work for you. Do It For A Long Time.

2. Save The Difference

Once you’ve developed the habit of spending less than you’ve earned, it’s important to get in the habit of saving the difference. In my life, I’ve found the easiest way to do this is to automate your savings. My daughter just started her first “real job” a few months ago, which I wrote about in “The First 6 Steps To Financial Wealth”. As mentioned in that article, we worked with her to set up automated savings into both a Vanguard Roth retirement account and a CapitalOne savings accountbefore she even saw her first paycheck. It’s important to get these details right early, and we’re working hard to instill the right habits in the life of our daughter as she starts her career.

Daily habits are more important than they may initially seem, and I give Todd Tressidor credit for pointing that out as one of his two sentences of the formula to create wealth: “Develop simple daily habits that result in wealth accumulation”. We all live life one day at a time, and those simple daily habits of controlling our spending and saving the difference are what result in wealth creation over time.

3. Maximize Your Earnings

The principle behind these 4 Keys To Building Wealth is simple math. You need to spend less than you earn. The bigger you can make the gap between earning and spending, the more quickly you’ll build financial wealth. If you don’t earn very much, you’re forced to focus on frugality as the only way to widen the gap.

A more powerful way to widen the gap is to focus on increasing your earnings.

If you’re not satisfied with your current earnings, do some honest self-evaluation. Are there things you could do which would increase your value in the marketplace? A landscaper who can only provide physical labor will not have the same earnings potential as a landscape designer who can work with a homeowner to build a personal landscape design. A factory worker who doesn’t understand business principles limits her opportunity to be promoted to “the front office”. Think about ways that you can increase your value to your employer. Take responsibility rather than looking for ways to assign blame.

Another option is to consider developing a “side hustle” for supplemental income. The options are almost limitless in today’s technology driven age. I have a friend who has built an Ebay store with his wife. They hit the big sales at retail stores, work the yard sales and auctions, and then resell the items on Ebay for a higher price than they paid. I just Googled “Side hustle jobs” and came up with the following:

1.7 MILLION “Side Hustle” Results! Not happy with your income? No one to blame but yourself. Get hustling!

As your earnings increase, avoid lifestyle inflation. Avoid the temptation to spend the extra income. If you work diligently at keeping your spending at the same level, your “gap” will naturally widen as your income increases, and your wealth accumulation will accelerate.

Sure, it’s hard to maximize your earnings. It takes time and effort to set up a side hustle. It takes work to find a way to enhance your education/qualifications while you’re working full time. However, hard work is the #1 influence cited by millionaires in the PNC Survey…..

If you’re serious about wanting to build financial wealth, be prepared to invest some hard work into the process.

4. Invest Wisely

As you develop positive cash flow, focus initially on using “the gap” to build an Emergency Reserve. Once you’ve built up savings equal to 30 days of your typical spending, you can work toward building your investment portfolio.

I’m a big fan of low cost mutual funds, and have no reason to suggest anything different for you. I wrote about various asset classes here, and would encourage you to read that article for my thoughts on how to “Invest Wisely”. If you’re interested in the simplest approach to investment management I’ve ever seen, have a look at The Simple Path To Wealth, and follow the model portfolio presented in the book.

Apply These 4 Keys To Build Your Financial Wealth. It's Simple. Click To Tweet

Thinking back to my opening quote, I’ve realized that “Simple” is a better description than “Easy”. Buildling wealth is simple, but it isn’t necessarily easy. It takes good habits day after day, week after week, year after year. Regardless, the reality is that the path to financial wealth is straightforward;

Spend Less Than You Make, Invest The Difference Wisely, And Do It For A Long Time.

The four keys presented above are “timeless wisdom”, and have been taught for thousands of years. They work, and they’re simple (if not easy). The hard part is self-discipline. It’s your responsibility to manage these four keys in your life. For a secure retirement, it’s critical to understand the keys to building wealth. More important than simply understanding, it’s critical that you apply them in your personal life.

How many of the four keys to building wealth have you discovered and put to use? Focus on the one key which you feel you’re most lacking, and work on improving that area of your financial life over the coming weeks. I’d love to hear how you’re applying these keys to building wealth in your own life. Are there other keys which you’ve discovered? Please share your ideas and your learnings. Together, we can achieve this blog’s goal of:

Helping People Achieve A Great Retirement.