4 Signs You Are Not Building Lasting Wealth as Smartly as Other Americans
Written by
J. Arky
Edited by
Levi Leidy
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In America, everyone wants to be rich. While some people might come from a long line of privilege that affords them wealth, jobs and investments from the moment they are born, others tend to build their wealth from the ground up making smart money moves. The majority of Americans, though, find themself somewhere in between, unable to create lasting and sustaining wealth.
If this is you, the question could be on your mind as to why you are unable to create a legacy with your money that is sustaining. “Americans build wealth by spending less than they earn and investing the rest. It’s a virtuous cycle. More investments lead to higher income, which increases saving and restarts the cycle,” said Kevin Estes, a financial planner and the founder of Scaled Finance.
Estes pointed out how some Americans are savvy with their money, but here are four signs that you are not building lasting wealth as smartly as your compatriots.
4. Investing Episodically vs. Systematically Contributing
It all comes down to consistency. If you are not adding to your portfolio, contributing to your investments and making sure to get as much return on investment in personal areas like your retirement, you are missing out.
“Consistency is the key to building wealth over the long run,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University, noting that too many investors listen to so-called “experts” who forecast that markets are overvalued or undervalued, then attempt to time the market and end up “buying high and selling low.”
If you want to be smart about your finances in order to build wealth, Johnson encouraged Americans to continue investing in the market whether it is going up, down or sideways.
3. Playing Safe With Investments vs. Prudent Money Risks
Investing can be tricky, potentially involving loss. However, playing it safe also comes with its own form of risk, which hurts Americans long term when they look to cash out. It’s important to take some risks when it comes to accruing wealth, just make sure they are prudent and well thought out.
“Individuals need to be taught to invest and not simply to save to build wealth. The surest way to build true long-term wealth is to invest in the stock market,” urged Johnson. “Mistakes begin early in life and the biggest financial mistake people make is taking too little risk, not too much risk.
“The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks,” said Johnson. “Someone with a long time horizon should not have exposure to money market instruments, yet many investors do because they fear the volatility of the stock market.”
2. Moment-to-Moment Money Decisions vs. Automated Savings
“It is exceedingly difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future,” Johnson shared. “Making retirement and savings contributions automatic is a wise approach. People should try and automate as many financial decisions as they can. One must make saving money a habit.”
And habits — good or bad — develop over time, Johnson said. As an example, Johnson offered that Americans should have an amount taken out of each paycheck and put directly into an investment fund — most appropriately a low-cost stock index fund.
“This strategy means you will be putting money into the market whether stocks are rising, falling or treading water. You will practice dollar-cost averaging and build significant wealth over the long run,” Johnson said. “The biggest advantage of automatic plans are [the] behavioral underpinnings of the plans. If we are enrolled in an automatic savings plan, inertia and the inherent laziness of people tend to work in our favor. That is, once enrolled in an automatic savings plan, people tend to stay enrolled.”
1. Budgeting For Investments vs. Not Budgeting at All
“The key to building wealth is to budget and budget realistically,” Johnson stated. “Specifically, one should not simply budget and track expenses, but one should budget for savings.”
“By carefully reviewing their budgets, individuals are able to more easily identify unnecessary expenses,” added Nick Campanale, CFP, a private wealth financial planning manager at Citizens Wealth Management. “By redirecting those funds into their savings, they can help build an emergency fund, which is the first step in becoming financially stable.”
However, Campanale noted that “…many Americans lack the financial discipline or awareness to do this. It can be challenging to start a new habit that one never witnessed or learned, but working with a trusted advisor can provide the necessary guidance and support.”
“One should not feel guilty about spending money in a manner that some might consider frivolous,” Johnson said. “The key is to budget in order to maximize one’s own unique preferences and not those of others. One certainly shouldn’t cut out those things that truly bring us happiness.”
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