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Six Rules for Wealth

Charles Wilson

IN SEPTEMBER 2014, The Wall Street Journal published a column entitled “The Simple Secret to Building Wealth.” An early paragraph began thus: “Wealth is born of great savings habits.”

As I read along, I found myself not only agreeing, but also wondering if the author had secretly consulted with my wife prior to penning the column. The similarities between his suggestions and our savings habits were striking.

I wrote an email to the author—who, as you might have already guessed, is now HumbleDollar’s editor—and he graciously wrote back. I described the steps we took going from a negative net worth, when we married at age 31, to a net worth that, excluding home equity, is now in seven figures. This was a 26-year process, although I doubt we had that goal in mind until it seemed imminent. Instead, we just pushed hard to build wealth and reduce debt.

Over the years, in thinking about the process of building wealth, I can offer readers the following six steps. Although the steps are simple, it takes uncommon dedication and discipline to see things through.

1. Save 15% of gross earnings. Dedicate yourself to living on the remaining 85%. You need a mechanism that moves the 15% directly to savings without the possibility of spending it. This may be the most difficult step. Where should the 15% go?

2. Skip the big cash reserve. Contrary to almost everything you read, I suggest skipping the step of building up an emergency fund—in cash, that is. This money is too easily spent. I’m willing to bet that only a small minority of people build up an emergency fund and then truly use it for emergencies only.

My suggestion: Start a Roth IRA in place of the emergency fund. In a few short years, you’ll gain sufficient satisfaction from watching your Roth grow that you’ll no longer be tempted to spend your savings.

There are limits on Roth IRA contributions, of course. Assuming the maximum allowable Roth contribution amount is less than 15% of your gross, the rest should go into your 401(k) or a taxable investment account. I’m a firm believer that the Roth IRA is superior to a 401(k) because you’re free to choose exactly where the money gets invested, plus the account’s tax bill is prepaid. You have far less control over where your 401(k) money is invested and who is actually in charge of investing it, although you do benefit from your employer match.

3. Buy used cars. What you drive is perhaps the most important aspect of building wealth. In Jonathan Clements’s column, mentioned above, he wrote that great savers “take pride in driving their car until the odometer breaks.” My wife and I purchase cars that last a long time. These are top-of-the-line cars, but typically have 80,000 to 100,000 miles on them when we buy them. My wife’s everyday car is a 2010 Lexus SUV with 252,000 miles, bought used with about 80,000 miles at the time.

In other words, let the new car buyer take the huge hit on the initial depreciation and the massive amount of sales tax. After all, these cars are built to go hundreds of thousands of miles. I drive a 2008 Chevy pickup truck with 231,000 miles on it. We have, as a backup vehicle, a 1999 Toyota Avalon with 358,000 miles on it. All three vehicles are in perfect running condition and we will drive them until death do us part.

Consider how much money is lost in the transaction for a new car. The sales tax alone is enough to dissuade me from ever buying a new car, let alone the interest costs on a car loan. Once you build some wealth, you can buy the types of vehicles I’m suggesting with cash. We bought our 1999 Toyota Avalon in 2005 for $11,000 and it had 98,000 miles on the odometer. We’ve been driving it now for 17 years.

4. Prepay your mortgage. We all know that, if your return in the financial markets exceeds your mortgage interest rate, paying off your home loan early is not fiscally prudent. Still, I would suggest some acceleration in the paydown. A 30-year mortgage can be reduced to 25 or 20 years with a certain amount of extra principal paid each month. The psychological advantage of living mortgage-free is huge. Once paid down, you can then seriously ramp up your monthly contributions to your portfolio.

5. Required reading. The most important book to read is The Millionaire Next Door. Indeed, Jonathan references this book in his column I mention above. The book profiles typical American millionaires, and their habits and lifestyles. It also profiles typical high spending-low net worth Americans, whose goals are opposite of the wealth builders. These people seek status at all costs.

6. Suggested reading. I’d also recommend The Little Book that Beats the Market by Joel Greenblatt. As your net worth grows, you’ll need to learn to handle your investments. This book will guide you. I have been implementing Greenblatt’s suggestions since 2011.

As they say, “A journey begins with a single step.” Start with No. 1 above—and, after a few years, you’ll see it for yourself.

A native of Hershey, Pennsylvania, Charles Wilson recently retired from his custom homebuilding business of nearly 30 years. He holds music degrees from Pennsylvania’s West Chester University and Boston University, and is a former member of the USMA Band, West Point, New York. Chuck and his wife have two children and reside in Westminster, Maryland.

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