If you surveyed the population and asked, “How does someone get wealthy?” What answers do you think you would get? What would the most popular answer be? What would you say?
One of the responses that might be top of mind for a lot of people is, “Well…make lots of money.”
How to Be Rich?
They’re not wrong. Having a substantial income certainly does contribute to making wealth building easier, and can play a huge role in accelerating how fast someone is able to accumulate wealth. But does that rule out middle income earners from realistically being able to make themselves independently wealthy? Is wealth a privilege of the “1%”?
One study that surveyed over 10,000 millionaires across the United States in 2017-2018 showed that one of the most important factors―if not the most important―in determining whether someone would become a self-made millionaire at some point in their lives was whether or not they made regular, consistent savings contributions, and for how long they were able to do that for. While some top earning professions such as engineering, accountancy, and law were at the top of the list, other middle-income careers were a significant presence as well. In fact, teaching was number three! And though medicine ranked high overall, doctors didn’t even make the top five careers in the survey.
How is that possible?
How can a regular person, with a regular salary and regular responsibilities, kids, a mortgage, two cars, bills, college tuition, more bills...and all the rest, possibly get themselves into a position where they could consider themselves wealthy? How can our kids? Can they really pursue a career that they’re interested in, or should we be pushing them towards the top-earning professions at all costs?
The Secret Sauce
First of all, as most of us would intuitively guess, very few people get to be wealthy without earning a steady living. There has to be enough to go around to meet basic bill obligations and needs, and there has to be a little extra to save, too. There should be a reserve for emergencies, because those will inevitably come up. This requires having a budget, so that you’re able to track regular expenses in order to save for a crisis and for the future, too.
And while life gets much more complicated than that―income sources get more muddled, and expenses get harder to track―in principle, the first step in wealth building is as simple as that: aim to spend below your income so that you can save, and have a way to make sure you’re doing it.
In a few words that we’ve all probably heard at some point or another from a cranky grey-haired voice: “Live below your means.” “Spend less than you make.” And while the demands of our modern, busy lives seem to make this an impossible, idealistic dream, the data seems to suggest that none of us can become wealthy until―and unless―we do.
Okay, but still? How much below our means can we really expect to live? I mean, we’ve all got serious obligations!
While the first ingredient in the secret wealth-building sauce is knowing to live below your means, the second ingredient is knowing just how little it takes to actually make a marked difference in the wealth and security of your future. Once it’s established that saving must be a priority and that it doesn’t take as much as you might think, the third critical secret is knowing that the absolute fundamental ingredient is saving regularly, and consistently, for a long period of time.
The Fourth Ingredient―And the Magic
The fourth ingredient―and this is where the magic happens―is to have these savings in a safe, conservative investment so that they can grow over time.
Miss out on any one of these ingredients, and you might as well have forgotten to put the pod in the coffee maker. Yum.
Let’s work this out with some numbers.
Between you and your partner, let’s say you’re able to scrape together a nest egg of about $15,000 to throw into your safe, conservative investment. And let’s assume further that you’re able to contribute $400 per month.
You and your partner are both 30, and you plan to work for another 35 years before retiring together.
Pull up any old financial calculator online, and let’s see how wealthy you are at 65:
Lump sum: $15,000
Monthly contributions: $400
Annual rate of return: 8%
Number of years invested: 35
Total future value: $1,170,908.54
That’s right. Throwing just $400 a month at your $15,000 investment will make you millionaires when you retire.
And what if you’re able to do better than that? What if as you get raises over the next 35 years, you increase your contributions accordingly? What if your initial investment is $20,000? $50,000? What if you find a safe 10% return instead?
Needless to say, it can only go up from there.
And if you can only do less? That’s okay. Let’s try a new scenario. Let’s say you’re 22, and you can only imagine putting $100 a month in if you try really hard.
Lump sum: $0
Monthly contributions: $100
Annual rate of return: 8%
Number of years invested: 43
Total future value: $451,655.35
Still, not too shabby, considering your real cash contributions over that horizon have really only amounted to $51,600.
Wealth May Be PossibleSo what’s the moral of this story? Well, the moral, truly, is that almost anyone with a moderate income can improve their financial situation and financial prospects, making small decisions that make meaningful differences in the future.
It does take a little bit of learning, a little bit of sitting down to figure it out, not to mention a commitment to at least a little bit of budgeting and restraint. But this secret sauce really doesn’t need to be a secret―it should be something we get really, really excited about.
And that’s not to mention, at Mentorhood Math, we believe that math is something relatable, that we interact with daily, and that has a real effect on us as we move through our own little worlds. Wealth building is one of the most tantalizing forms of impactful math―and we don’t mind sharing just how giddy it makes us, so that maybe you can get a little giddy, too.
(And so that you can giddy up, partner, towards your own wealth building journey.)
1. This is not investment advice, but an illustration for the purpose of arguing a certain point. Speak with your professional of choice about what’s right for you.
2. Such as https://www.calculator.net/annuity-calculator.html, for example
3. There are plenty of resources out there, if you’d like to learn more about financial calculators and calculating how much your investments might be worth over time! Hop on to YouTube or speak with a professional of your choice.
4.You’re dying to try this with your own financial situation. I know you are. Please do―and have fun!!
“Honey, let's crunch the numbers,” is a less-than-popular conversation starter in many households. Balancing the chequebook "at the kitchen table" used to be a common trope describing how families manage their household budgets, but today, it’s less than common. Studies show that one half to two thirds of people in the United States and Canada self-declare having a budget, and yet other studies show that the primary factor determining wealth in retirement is as simple as saving consistently over a long period of time. So, if regular maintenance of a budget continues to be a vital part of wealth management and prediction, why is financial literacy so under-discussed?
Budgeting, at its core, isn’t chock-full of groundbreaking arithmetic concepts. It’s addition and subtraction: income minus expenses equals either a surplus or a deficit. That's it! That’s the heart of it. So, is the math really over our heads?
Why Don’t We Budge on Budgeting?
Our modern lives are much more complicated than the aforementioned equation might imply. People often have multiple income sources, or double income households, and many people don't have a good metric for tracking expenses. Where did I put that cash? How come my bank account is lower than I budgeted for? Which card was that on? I have so many transactions. How can I possibly categorize them? This is where things get a little more complicated, but these questions are not unsolvable without a little bit of confidence and organization, and the math itself, if isolated, would typically be easy-breezy to an average person.
Perhaps we don’t see universal acceptance of budgeting because our busy modern lives have left us with little time for financial reflection. Couple that with the availability of credit that lets us tap into tomorrow’s savings today, and we might have created the perfect environment where we grow up without seeing the impact of personal financial management on daily life, and we may have little desire to discover it for ourselves when we grow up. Our children, likely, will follow suit. It’s possible, then, that lack of budgeting is partially because budgeting seems unfamiliar, foreign, even enigmatic. Having never been taught how to budget, we feel intimidated, which creates a lack of confidence, which short-changes our motivation to begin.
The Intimidation Factor
We see children confronted with unfamiliar, intimidating math every day at Mentorhood. And our philosophy is to take that intimidation factor directly out of the mathematics. Math is not mystical, and it’s not reserved for the most acute minds who can perform mental gymnastics on a dime. Rather, math is an observable reality that we can relate to in our everyday lives, and as such, can be taught from a relatable perspective. And that’s why we believe that math can be mastered at an intuitive level―that when broken down, even the most difficult concepts can be swallowed by the most math adverse individuals.
Budgeting is about rolling up your sleeves and believing that if you sit down, open up the computer, check the credit card statements, and plug some numbers into your spreadsheet or app, you’ll be able to get to the bottom of your financial situation and do something to influence it. If we can empower our children neutralize the intimidation that often surrounds things like math, we could see more willingness to approach mathematical activities, such as budgeting, in daily life. This effect can proliferate itself into a whole host of economic decisions they make as they grow up: how they choose their careers, how they save and plan for the future, how they pay for education and expenses along the way, how they manage credit, and how they build into their lives the freedom to pursue the things that satisfy them.
The Simple Secret
Math can be intimidating. But turn that on its head, and a confidence to apply mathematics in daily life can be incredibly empowering. Budgeting is not a tool for being miserably miserly. Budgeting celebrates the resources you have, and puts you in the driver’s seat to decide how you are going to allocate those resources. Budgeting creates a policy of full disclosure between you and yourself, allowing you to fully see how well your financial bloodstream is supplying resources to all the vital parts of your life. Budgeting is about peeling back the curtain―which can be incredibly scary! And that’s why we believe that the first step towards good financial management for the kids that we teach is to take some of that “scary” out of the math.
By providing classroom environments where children are encouraged to explore mathematics from a concrete and visual perspective, where they can build their intuitive understanding and be celebrated as they make strides, we’re paving the way for tomorrow’s adults to approach their lives―and their pocketbooks―with courage, confidence, and good cents.
Backman, M. (2016, October 24). Nearly 3 in 5 Americans are making this huge financial mistake. CNN Money. Retrieved October 27, 2021, from https://money.cnn.com/2016/10/24/pf/financial-mistake-budget/index.html.
Debt.com. (2019, April 4). Fewer Americans are budgeting in 2019 -- although they think everyone else should. Cision PR Newswire. Retrieved October 27, 2021, from https://www.prnewswire.com/news-releases/fewer-americans-are-budgeting-in-2019----although-they-think-everyone-else-should-300824384.html.
Financial Consumer Agency of Canada. (2020, May 29). Canadians and their Money: Key Findings from the 2019 Canadian Financial Capability Survey. Canada.ca. Retrieved October 27, 2021, from https://www.canada.ca/en/financial-consumer-agency/programs/research/canadian-financial-capability-survey-2019.html.
Ramsey Solutions. (2021, September 27). The National Study of Millionaires. Ramsey Solutions. Retrieved October 27, 2021, from https://www.ramseysolutions.com/retirement/the-national-study-of-millionaires-research.