Practical Math Reveals Why Getting Rich Is Hard But Gets Way Easier Over Time

My colleague Ben Le Fort wrote a really nice piece, How Do You Get Rich? Slowly, and Then Suddenly. That got me thinking. Is it really that simple? As I commented there, I think it’s actually a bit more nuanced than two speeds – slow, then fast.

Practical Math Reveals Why Getting Rich Is Hard But Gets Way Easier Over Time

1. How Much You Invest Each Year As clearly, the more you invest, the faster you’ll grow wealthy. This is why you need to increase your savings (and investing) rate, by controlling your spending and increasing your income.

4 Factors Affect Your Wealth Building

2. Your Average Annual Investment Returns

If you simply take the money you’re not spending and stuff it under the proverbial (or real) mattress, your “investment” returns will actually be negative because inflation will eat away at the value of that cash.

If you invest a large enough amount of money when you’re very young, you can get away without investing any more money over your lifetime, and just let your investment returns build up your wealth for you.

3. Your Consistency over Time

4. Your Retirement Budget

This final piece is every bit as crucial as the others. The higher your desired (or required) spending in retirement, the larger a portfolio you need to fund it.

While 7%/year has been the average real return for US stocks over the past century or so, future returns may well average lower.

Caveats

Returns will definitely not be constant each year, but will rather be higher (sometimes much higher) some years, lower in other years, and will likely be negative about one year in four.

The math of wealth building isn’t terribly complicated in principle. However, that doesn’t make building wealth easy for those of us who start at zero, let alone owing more than we own.

The Bottom Line