The Tools to Wealth-Building (Do This to Be Rich)

The 3 Ingredients to Building Wealth (0:00)

Brian: Ever been curious on what tools, specifically three tools that will help you build wealth?

Bo: Brian, I am so excited to talk about this because we both know that wealth building is incredibly simple, but that doesn’t necessarily mean that it’s easy. But I think a lot of people are fascinated to recognize it’s not all that complicated of a formula.

Brian: Yeah. I mean, I don’t care which path you are. I don’t care if you’re just starting out or if you’ve had some accomplishment with your financial assets or even maybe if you’re a multiple seven figure person, you’re going to recognize that we are giving you the keys to the kingdom by talking about these three tools. These three key ingredients go into everybody’s journey on building wealth.

Bo: And I think a lot of people have a misconception around this, like, okay, well, in order to be wealthy, I’ve got to do this or this has to be true. And a lot of people think, okay, if I’m going to be wealthy, I must just have to be in a big income. I must I need to have a huge shovel and that’s the only way that I’m going to be wealthy. But that in fact is not the case. I mean, look at this stat. Nearly 80% of NFL players, these are professional athletes, face significant financial strain in their first three years once they get out of the league. So right there, it should tell you, okay, having a huge income, having a huge windfall, having a huge payday may not be the thing that necessarily leads to wealth.

Brian: Isn’t that funny how what a false mirage that somebody thinks having the huge income that’s rich, that’s not wealth. Wealth and rich are completely different because just because you have a big income, a big shovel, if it doesn’t actually turn into assets on the net worth statement, you have missed out. And that’s why we have talked about this for years. And we’re just going to go ahead and open up the playbook of all the things that are super successful. We want to give you the three ingredients to wealth building. Number one, this is discipline. The first thing you have to do is live on less than you make. You use that discipline of living on less than you make to create the margin that actually yields the money. And guess what? You actually put the money to work. And then that’s where the third and most powerful ingredient actually comes into play. If you give that money enough time, it will work harder than you can with your back, your brain, and even your hands because it is truly the eighth wonder of the world.

The Power of Discipline (2:25)

Bo: So, let’s dive into each one of these ingredients and what you need to know about them. The first one, Brian, is discipline. You already said this. This is the idea of living on less than you make. And in our opinion, how much discipline you have is probably the most pure indicator of future wealth or future success. Because at the end of the day, of all the ingredients, this is the one that you by far have the absolute most control over.

Brian: Yeah. And this is the one you got to make the good habits as easy as possible. Make the hard bad things in your life that much harder. And that’s why I think it is the clearest indicator. Will you be wealthy if you can conquer and have discipline?

Bo: And yet, even though it’s so important and so powerful, the majority of Americans out there fail at this. We know that right now 59% of Americans, according to bankrate.com, cannot come up with $1,000 for an emergency. That means that six out of 10 Americans are failing on putting aside a little bit of today for tomorrow. They are failing on having that little bit of discipline to keep their financial life out of the ditch.

Brian: I think back even before I started doing the podcast in 2006, I used to enjoy going to high schools and trying to talk about good personal finance habits. And if you asked me what I actually talked about, I actually created a whole presentation for high school kids on deferred gratification because I really this that’s really another way of saying discipline. But if you can teach somebody, it really is the leg day of personal finance. If you can teach somebody to give a little bit of today, meaning you actually instead of living in the moment, you resist the temptation of going for the present bias of rewarding myself right now and just do little things for your great big beautiful tomorrow. It will actually change your life.

Bo: And the beautiful thing about deferred gratification is it does not have to be huge decisions. It does not have to be monumental things that you’re doing. If you can just make small decisions given enough time, those small decisions can have a huge impact.

What Small Decision Can You Make? (4:19)

Bo: So, one of the questions we want you to ask is when you think about your financial life and how you’re going to change what you’re doing now or how you’re ultimately going to end up where you want to be is what small decision, what little thing can I change today? What’s the small impact I can have on the decision-making process I’m doing today that’s going to lead to that great big beautiful tomorrow? And it doesn’t have to be a big one. It can be a small one done consistently through time.

Brian: Well, I want my young people to lean into this a little bit more and the fact that a lot of you guys are feeling like the system’s rigged against you. And I get you. I get it. I mean, there’s been post pandemic, post this inflation we’ve had. There are a lot of things out there that you’re probably like, man, this system is just rigged against me. But I want you to know the good news of the fact that you guys have something that older people just don’t have. It’s that legacy of time that allows you to every dollar of opportunity that you can invest is worth so much more than what all your peers have. And that’s why we talk about for a 20-year-old $1 has the potential if you put that money to work to be 88 times over in retirement. Nobody in their 30s can do that. Nobody in their 40s can do that. That is for you in your 20s. Maximize that incredible opportunity.

The Easier the Path Is (5:35)

Bo: And the earlier you can figure this out, the easier the path is going to be. You get to choose how difficult you want it to be. Do you want it to be slightly difficult today or do you want it to be really really difficult tomorrow? Because a lot of people say all the time, “Oh gosh, it doesn’t make sense to save because it’s going to be so hard to get there and I don’t need to you guys talk about a million, but why would I even care about a million dollars because I need five million, 10 million?” Well, you can’t get to two million, three million, four million unless you get to that very first million. And when you think about getting to that very first million, do you realize that for a 20-year-old, if you want to get a million dollars in your investment accounts, by the time that you get to age 65, you’ve only got to save about $95 a month. Less than $100 a month for a 20-year-old can make you a millionaire by the time that you retire. But if you do not defer gratification today, if you do not exercise discipline today, and you wait until you are 30, instead of being able to save $95 a month, you have to work four times harder, saving almost $350 a month to get to that same million dollars by the time you reach age 65.

Brian: Well, this is the thing I want to go a little deeper in what you’re talking about because I think there’s so many voices out there telling people, look, live your best life now because don’t worry about your 20s. You’ll be able to save money in your 30s or 40s when you have big pay raises, big promotions. But Bo, you just said something really powerful. You think about because I got excited when I was in high school when I had that economics teacher with a one-off statement. He said, “$100 a month will turn you into a millionaire.” And it really did turn something that was so elusive and what in my mind at that time seemed impossible to where it was right here in front of me for $100 a month. But look at what you just shared. Four times harder for a 30-year-old. Imagine if you’re somebody who does live your best life in your 20s and 30s when you find out to become a millionaire by the time you’re 40s. You instead of saving $95 a month like the 20-year-old, you have to save $1,000 a month. That is 10 times harder. So, it’s back to the point. If you can be disciplined, you get to choose your hard. It’s much easier to take just a moment, just a little tiny portion of today to build that great big beautiful tomorrow. But if you procrastinate and wait, you can still do it. It’s just going to require a lot more of you and a lot more of your hard sacrifice and discipline.

What Financial Discipline is Not (8:04)

Bo: So, what is financial discipline? Well, it’s simply a lived behavior that then turns into a habit. Again, discipline is a lived behavior done over enough time that then it becomes a habit. This is what financial discipline is not. We’ve already alluded to this. It’s not an income. We know that 60% of people making over $100,000 a year claim that they live paycheck to paycheck. 60% of people are having to make sure the next paycheck comes in so that they can make ends meet. So financial discipline is not an income.

Brian: Well, it’s also think about those professional athletes we just said within 5 years 80% of them are out of money. Second thing it’s not, it’s not the huge trust fund. When I was younger I thought that everybody who was wealthy came with a silver spoon that they got this because of what was given to them. Imagine my surprise when I read Millionaire Next Door and then I think about Everyday Millionaires came after that and then I started thinking about all of our millionaire surveys we’ve been doing with our clients and the data is consistent approximately 80% of millionaires are actually first generation meaning that somehow they have figured out they don’t come from money but they use the power of discipline to take that little bit of today to build something pretty spectacular.

Bo: And look discipline is also not luck it’s not just winning the lottery we know that 33%, one out of three jackpot lottery winners end up going bankrupt. So it’s not an income. It’s not a huge trust fund or a background. It’s not luck. So then what is financial discipline? How do you define it? What are the things you know?

Forced Scarcity (9:43)

Bo: Well, we’ve already said it’s living on less than you make. Well, how do you do that? How do you actually live on less than you make? Brian, this is a concept you’ve talked about forever. If you can figure out how to implement forced scarcity into your life, it will naturally create that behavior that can turn into a habit.

Brian: Yeah. When we talk about forced scarcity, really what we’re saying is, I want you to have a plan for every dollar in your army of dollar bills that actually automates the process. Meaning, you’re automatically putting the money into work for you because once again, it makes the good habits that much easier because the behavior is just happening. It also when you’re doing forced scarcity, since the money already has a plan, it already has an obligation of where it’s going, it makes the bad habits of just letting money drift off that much harder.

Don’t Let Your Lifestyle Creep (10:24)

Bo: And then as you’re doing that, as you’re implementing this forced scarcity, the thing you have to be aware of is not to let your lifestyle begin to creep. Just because you have that behavior in your 20s does not mean that it needs to adjust and improve as you move into your mid-20s, into your 30s, so on and so forth. So, you want to make sure that you’re not running up high-interest debt, that you’re not living off credit cards, that when you spend money, you’re actually spending with intention. There’s nothing wrong with your lifestyle improving so long as the discipline that you’re exercising in your financial life improves along with your lifestyle. You do not want them to begin to diverge from one another, or else you’re never going to be able to live the future life that you want to live.

Brian: Now, let me tell you, I want to caution all my financial mutants. You’re going to get excited about watching your money start to build and you do have to make sure you avoid you do have to cover your risk because a lot of you guys once you see how powerful your dollars can become, you’ll want to throw the whole kitchen sink. But don’t skip out on building that emergency fund, making sure you understand like term life insurance and other things because we don’t want you making desperate decisions just because you went so far out on the risk spectrum trying to make your army of dollar bills work that much harder.

Ingredient #2: Money (11:35)

Bo: All right. So, the first ingredient to wealth creation is discipline. And what that discipline does is it then begins to create the second ingredient necessary, which is money. Now, I know a lot of you are probably thinking, well, duh. If I want to be wealthy, of course, I need money. But that’s not exactly what we mean when we talk about money as this ingredient.

Brian: This is one I’ve thought a lot about is because I’m just going to be honest, and there’s a reason we said discipline was the leg day of personal finance. It’s hard. You actually have to put in the work to be disciplined to spend less. But if you do the work of discipline, I don’t want you to squander this second ingredient, which is money. Because I grew up in a household where my parents were great with discipline. But they never put their money to work. And that’s really what the second ingredient if you want to encapsulate what does this mean is don’t squander the opportunity of actually taking that margin and actually putting it to work so you can see the benefits of what margin creates.

The Benefits of Margin (12:35)

Bo: Because what you want to happen is you actually want your money to get to the place where it works even harder than you do. And as you begin to build this margin, a few things happen in your financial life. Number one, you have flexibility. As you begin to have margin, you now have freedom to choose how you adjust course and choose how you improve your lifestyle and choose how you make the financial decisions that you make. You no longer have to make decisions out of necessity. You get to make decisions out of choice.

Brian: You also get security. You don’t have to make the desperate decisions the more money you have. And look, here’s the cool thing about being disciplined, but then also putting your money to work. That second ingredient is that even if your goals change, you still get access. That’s why that flexibility, you know, I came out of school thinking at 22 years of age, I don’t like working that much or I just can’t imagine my 50-year-old self loving to work. So, I’m going to save as much as I can. So, I can do what I want, when I want, and how I want. Imagine my surprise when I realize I absolutely love what I do for my day job. But now, I get to make flexibility. I get to make security decisions off of what I want to do because I actually made those hard decisions when I was earlier. This makes the hard decisions get easier for you versus you getting squeezed if you defer and procrastinate. You’ll have to make the harder decisions and there’ll be less and less options for you to make those decisions. And then as you are continuing to create that margin, what it allows you to do is it allows you to begin to accelerate your financial journey. It may seem like that margin you’re creating early on isn’t doing a whole lot. But as you continue to do that over and over and over again, it allows you to move more quickly and more quickly and more quickly towards your ultimate financial goal.

Two Options (14:16)

Bo: So when you think about, all right, I understand what margin can do. It can create flexibility. It can create security and it can accelerate my financial journey. How do I do it? How do I create margin? How do I impact that? Well, when it comes to financial decision-making, we really only have two options for affecting and impacting our margin.

Brian: Yeah, I always think this is like a captain obvious thing, but it really is important for you to kind of zoom out and think about money in general terms because sometimes we over complicate things with money. In reality though, when you are trying to figure out how can I create more money to put to work, you really only have two options. You can either make more money meaning we increase the income you make the shovel you have at your disposal or you can get extra discipline and actually pull the lever down of spending less money. That is if you can look at your life and go can I make more? Can I spend less? This is how simple it is if you really want to zoom out and figure out what components you control when you’re creating that margin of money.

Bo: And so as you’re thinking about building margin and how you’re approaching this financial decision, you need to recognize that early on in your journey, no matter where you’re starting, your ability to impact margin is greater than outside forces. We say this all the time that early on in your journey when it comes to impacting your wealth, your savings rate is exponentially more important than your rate of return. How much you’re choosing to defer, how much margin you’re creating actually matters more than what your money is doing. You are actually able to work harder than your money early on. And if you do that well, you give your money the ability to work harder than you later on in your journey.

Brian: I think people they see that we have our goals out there. We have, you know, how much you should be saving. If you go to moneyguy.com/resource/how-much-to-save, we call it what 25% will do for you, but really it will talk about how much you should be saving by age. And I’m always amazed when people see in their 20s that we’re saying we’d love for you to aspire to save and invest 20 to 25%. We get it. I know that’s hard. But the reason we put such a stretch goal for you is because when you understand what every dollar in your army of dollars could become, you will be on fire to figure out how you make this happen. And we created a great case study because a lot of you guys, I think when you’re younger, you spin your wheels and focus your effort on the wrong thing. You’re thinking, if I can just go find the greatest and latest investment that’s popping off right now, that’s what I need to do. And we want you to know, no, don’t waste the calories. Don’t waste the effort. What would be better is you to think about those two levers we just covered. How do I make more money? How do I spend less money? Because it doesn’t have to be hard. I just need to save more because those good decisions will be rewarded. So Bo, show them the case study on why we can say with such conviction that savings rate is greater than your rate of return.

Sal vs Manny (17:06)

Bo: So let’s think about two savers. Let’s think about Sal the Savant and Manny the Mutant. Let’s assume that both of them begin their saving and investing journey earning $50,000 a year as their salary. And let’s assume that every year their wages increase by 3% so they keep up with inflation. Let’s assume that Sal the Savant has a 10% savings rate but is a savant and can actually earn a 25% annual rate of return every single year. As a reminder, if we think about what the S&P 500, the 500 largest companies in the United States has done on average over the last 60, 70, 80 years, it’s somewhere between 9 to 11%. But let’s say that Sal can nearly triple that at 25% rate of return. On the flip side, you have Manny. Manny’s going to save 25% and Manny’s going to make the average rate of return of 10%. So Sal’s going to save 10%, make 25%, Manny’s going to save 25%, make 10%. Do you realize that on the course of their financial trajectory, Sal does not pass Manny for over 10 years? Let me say that again. At that differential between savings rates, Sal would have to make 25% every single year for a decade to make up for what Manny was able to do just by increasing his savings rate. What Manny was doing saving was way more powerful than what Sal was doing in trying to accommodate his rate of return.

Brian: Well, and let’s talk about the elephant in the room. Nobody is going to get 25% every year for 10 years. If they were out there, we’d all be loaded up on it. But more than likely, whenever you do see these one-off stories, they turn out to be the Bernie Madoffs. They turn out to be the crooks that were basically promising it was too good to be true, and people fell into the trap. And that’s why we want to focus on the fact of what can you control. It’s of course that discipline. It’s creating the margin. It’s the money. And if you can get your savings rate of 20 to 25% as we just told you, which is aspirational, but it’s so good. If you do this long enough, the compounding on this is just so incredible and it gets us so excited that I just want you to know, focus on what you can control so you can see how powerful this is in your future.

Bo: And remember the goal is to save 25%. You may not be able to do that today, but what you can do is okay, what can I save? How can I improve? Can I improve 1% and then can I improve one more percent and then can I slowly build towards that 25%? Because remember, the earlier you start, the more time you have on your side, the more powerful it can be.

Ingredient #3: Time (19:50)

Bo: And that’s exactly what the third ingredient of wealth creation is. It’s time.

Brian: Yeah. Everybody, if you’re young, here’s what I love. We just did a show recently and I found out that 87% of our audience is under 50 years of age. The majority of you in your 20s. Hot dog. I mean because you are a billionaire of time. For all the jealousy you might have for your bosses or co-workers who are a little bit older and have a little bit more money, maybe make a little bit more money. They are just as jealous of you with that opportunity time. And in a lot of cases, that time is going to be more valuable than even what they’ve got in their Roth IRA because you have the potential for it to grow exponentially upon itself. Remember the very beginning we said that for a 20-year-old, $1 has the ability to turn into $88. It’s why we have all the koozies, all the swag that talks about that because we understand that when you can apply discipline and margin through time, it can multiply your wealth.

Wealth Multiplier (20:49)

Bo: We even have a tool called the wealth multiplier. You can go to moneyguy.com/resources and you can play with this. You can see, okay, if I’m 25 years old, what does every dollar I save turn into by the time I get to 65? If I’m 35 years old, how much can every dollar I save turn into? And what you’re going to recognize is that the earlier you figure this out, the earlier you recognize the power of your dollars, the larger your wealth multiplier can be. And it’s because you are now taking advantage of that powerful ingredient that is time.

Brian: Well, but I want to be and I think it’s appropriate for me since I’m in my 50s to throw the cold water. Look, when you’re 20, every dollar has potential to become 88. When you’re 30, it’s 23. That’s still an amazing thing, but did you see the drop off? I mean, it basically you cut it in a quarter. And then fast forward to the 40-year-old because you put it off. And this goes back to my point when we were starting the show. Now it has a wealth multiplier of around seven. Still incredible, but such a tenfold difference from the 20-year-old. And then you get to my age when you’re 50 years of age and you have to round it up to even get to three. I mean guys, don’t squander the opportunity you have the potential for every dollar in your army to be so powerful for you that you’ll think about spending differently. You’ll think about how you’re saving. You’ll think about the investing. Time is that powerful.

Compound Interest (22:16)

Bo: And so, how does this happen? What’s going on in the background to cause this? Well, it is in fact the eighth wonder of the world, compounding interest. And this is the way that it works. If you think about $100 and you make 10% on $100, you now have $110. But then if that $110, that $100 you started with plus the $10 in gains grows at 10%, now you have $121. So at the first year, you had $10 in gains. And then not only did the money that you invested make money, but the money that it made also made money. So now you have $11 in gains. And this compounds over and over and over and over. The more time you have for this to happen, the more powerful it can be and the faster it begins to work.

Brian: Well, and that leads us to the next point is that and look, I know I mispronounce everything in the world. That’s what that’s the beauty of being southern is I think people kind of expect it, but I talk about the boiling point of where your money actually starts building. And my biggest regret or fear for my young people who are watching this content is you’re going to get excited from watching this show, but then you’re going to have a downturn in the market or something is going to happen in the first 10 years that you go, I hear what those guys are saying, but you got distracted by something. It happens to everybody. So, Bo, I feel like we need to when I talk about the boiling point, and I’m trying to get people excited. We always say that first $100,000 is super valuable because you got to get those small decisions start growing upon themselves. But we want to create an illustration to show you when we talk about compounding, how this magical thing of it building upon itself, you got to stay consistent. You got to stick with it no matter what the market does. No matter what happens in your life, promise me you’re not going to give up. And I think this next illustration, maybe you print it out, take a freeze frame, take a screenshot, and then print out this next illustration so you don’t lose focus on what happens after year 10.

Roth IRA Example (24:20)

Bo: So, think about this. Let’s assume that you’re someone who’s going to just max out a Roth IRA every year. You’re going to save $583 a month every month for every year. And let’s say that on average you can earn 8%. No matter what age you’re starting at, let’s assume that that’s what you’re going to do. If you began doing that, it’s going to take you about nine and a half years to get to $100,000. Again, $583 a month. Every single month, it’s going to take you nine and a half years to get to that first $100,000. There’s a potential for a lot of quitting there. That’s right. Scares me to death. I don’t want you to quit. There’s not it’s not a straight line. There’s a lot of ups and downs. But do you realize that if you continue saving at that same clip, $583 a month, it would only take you about 5.4 years to make the next $100,000 to go from $100,000 to $200,000. After that point, it would only take about 3.7 years to go from $200,000 to $300,000. It would only take about 2.8 years to go from $300,000 to $400,000. And it would only take about 2.3 years to go from $400,000 to $500,000. So, what has happened is the race to $100,000 has gotten shorter and shorter and shorter and shorter where you now have gotten from zero to $500,000 in 23.8 years, but that’s only half the story.

Brian: Well, think about that. I mean, fast forward. Look, you get to be my age. This seems common sense. If you go hang out in my neighborhood and you talk to people my age, anybody and everybody who started saving young, they look at each other and we’re talking about just, hey, what’s coming up? What’s the next endeavor? What’s the thing right around the corner? And I remember some of my buddies, we’ve been like, can you believe what’s happened? It’s like your money is this critical mass because yes, it was a 20-year journey to get to whatever that critical mass point is. But once you get the stone rolling down the hill and it catches momentum, here’s the magical thing is that the next to go from $500,000 to a million. Now remember, it took us close to 24 years to get to that first $500,000. We somehow make it to millionaire status two years less. Meaning, we do it in 7.8 years than it took us to raise our first $100,000. For all my trolls who say a million dollars is nothing anymore. That 1996 Millionaire Next Door, what are you doing? Giving us that stat. You know what’s even faster than 7.8 years to go $500,000 to a million? It’s going to take you less than seven years to go from a million to 2 million. You’re going to go even faster 2 million to 3 million. This thing is catching so much momentum that it’s just this is the part that gets me excited. But like I said, a lot of people quit. A lot of people who look at the journey to building wealth will look at this stat and say, “Wait a minute. You mean it’s going to take me 10 years to get to my first $100,000?” No, it doesn’t have to. Because guess what? Every one of these assumptions we did was very conservative. You’re going to once you get addicted to building wealth and you understand the power of every dollar, you’re not just going to max out your Roth IRA. You’re going to start increasing your contributions every year you get a pay raise. Here’s the other thing. We used 8%. You know what we could have done to blow this projection up even more. We could have put 10%. Bo just told you the S&P 500 historically is somewhere between 9 to 11%. We could have put 10 to 11% in here and it would have blown this number and made it that much faster. But we wanted to on purpose put a governor on this so you could see the powerful nature of your behavioral decisions that every incremental decision you make is what actually is going to flip the script on what creates your success.

Bo: And here’s the beautiful part. Do you recognize that if you can do this over this 30 plus year period by the end of your journey of that million dollars that you have created 82% of it is growth. $820,000 of the million is your portfolio growing. So that first $100,000 you had to work really hard. A lot of that $100,000 was your $583 a month going in. But if you let your money begin working for you, it can actually work exponentially harder than you can. So that by the end of the journey, 80 to 90% of it is money you did not have to save. Discipline that you did not have to exercise because you gave it enough time to begin working for you.

The Abundance Cycle (28:49)

Brian: This is why I love what we get to do. I don’t think when I started doing this show in 2006, I knew what a juggernaut of opportunity we were going to create for the public. And that’s why guys, you are missing out. If you don’t go to moneyguy.com/resources, just go get the free stuff. And because it really is this abundant cycle of what started as just this passion project to educate the masses. I felt guilty that I had a minimum as a fee only fiduciary advisor. So I was like, you know what, I could open up a classroom. I could start loading up. I didn’t realize that this was going to be the greatest marketing idea in the world. Because I thought I was just like, just get the education. Just make the wisdom as free as possible. And guys, that’s what the abundance cycle is. Get in there. Get it because this is going to be easier than you think. You just have to make small decisions today and it will start stacking and you’ll start seeing success. And then one day you’re going to wake up and you’re going be well on your way to crossing into seven figure status and you’re going to start having complexity. You’re going to start having decisions. There has to be a better way. And I’ve only done this once. Is there anybody out there sharing how you actually do money in the best possible way. You remember who planted the seeds? Who planted the portion of what compounding growth is? What a dollar has the potential to become. And that’s when you remember, you know what? It was those guys. It was Brian and Bo. They are the ones that caught fire and helped me figure this out. I bet they’re going to know how to handle deferred comp. They’re going to know how to do RSUs. They’re going to know how to do Roth conversions. They’re going to know how to avoid required minimum distributions. They’re going to know how to do Medicare planning for IRMAA and all the other discussions that come in. We’ve got this figured out for you. We’ll leave the porch light on for you. Just consider giving us that opportunity. I’m your host, Brian Preston. Mr. Bo Hanson, Money Guy team out.