How Can You Build a Substantial Nest Egg?
People often ask this question: “What’s the best way to build wealth?”
Well, the simplest (and best) answer we can give to that question is this: “Save early and save often.” But that’s not very satisfying to hear, is it? It’s not glamorous, it offers no insight, and it doesn’t reveal any special secrets.
Of course, what they really mean when they ask how to build wealth is probably this: “What’s the best rate of return I can get in the shortest amount of time?”
The fact is that building wealth has very little to do with how much money you make or what great rates of return you can achieve; the key here is how much you can save over a long period of time. People make quick fortunes all the time, but they also lose those fortunes just as fast.
On the other hand, people with even modest incomes can build up a great deal of money by saving bit by bit over time. And since it’s possible to accumulate a nest egg without a high income, but it’s impossible to do it without a high rate of savings, you can see which one is more important.
And frankly, people have a lot more control over their ability to save than they think. A common belief is, “I’ll save more when my income goes up – I just can’t afford to save right now.” But what often winds up happening is that their spending goes up when their income goes up, because hey – we all want more and better things in life, right? But this way of thinking can make the idea of accumulating wealth seem beyond reach.
So the key here is to recognize when your spending changes from having the comfortable, entertaining, and meaningful basics to simply wanting more and more stuff. Once you reach that point, saving money becomes almost impossible.
It’s been said that the best reason to save is to gain control over your time. Having a larger nest egg gives you options, and options give you flexibility. If a job loss comes your way, or a forced retirement, or any number of life’s curveballs, if time isn’t on your side, you’re forced to take whatever’s right in front of you. But having a nest egg, having savings, gives you the time and the flexibility to wait and choose the best opportunities for you. It’s kind of a hidden return on your money, isn’t it?
So save early. This means starting as soon as possible, because the magic of compounding only happens over decently long periods of time – at least 15 years. Warren Buffett is one of the wealthiest investors of all time, but it’s not all because of his investing skills. The real secret to his success is that he’s been an investor for 75 years. As a result, thanks to his money simply compounding, almost all of his wealth was amassed after he turned age 60.
And save often. Regular contributions to your savings and retirement accounts, what we call Dollar Cost Averaging, allows you to invest your money in equal portions at regular intervals, regardless of the ups and downs in the market, just like you do in your 401k. When the market’s down, you’re able to buy more shares because they’re cheaper. When the market moves higher, your regular contribution will buy fewer shares, but you’ll already have shares from prior purchases which are now worth more. This potentially gives you the power to turn small 401(k) contributions today into substantial 401(k) balances at retirement.
So yes, the answer to building potential wealth isn’t glamorous, and it isn’t a secret. And it’s important to know that building a nest egg is one thing – keeping it alive and thriving is another. How do you keep your wealth once you achieve it? That requires a whole different set of skills, which we will address in next week’s video.
The advisors at Lucia Capital Group focus on getting your financial strategy aligned, then building a personalized portfolio for you that’s designed to help address your strategic goals. How can we help you the most? Just give us a call.
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
A dollar cost averaging strategy does not guarantee a profit or protection from loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low-price levels.
Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.