Wealth Building Is Mostly Invisible

To a certain extent, investors like myself desire to see a steadily rising net worth.  Up and only up please!  Unfortunately, life and the stock market don’t always comply with what I want them to do.

There will be years where the market is down, and weeks when more cash flows out than flows in.  So how do I know I’m actually building wealth?

On a day to day basis, wealth grow is pretty much invisible — and I don’t mean invisible in the sense of “stealth wealth” where you don’t tell your friends and neighbors about your growing wealth pile.

I mean you can’t actually see it!  This is because most well-known financial measurements don’t actually measure wealth growth.  Instead, they (mostly) measure financial noise.

Think about it — If you track your monthly spending there’s going to be big swings to the positive when that monthly paycheck comes in, and likewise a big drop in the negative direction when you pay the mortgage and credit card bills.  Those swings day to day are going to be pretty large.

If you track net worth, your number will also swing to the positive or the negative if the stock market has a good day or a bad day.  Or a good month or a bad month.  A good year or a bad year.

All those fluctuations don’t necessarily mean you aren’t building wealth.  It just means you’re measuring HUGE amounts of noise.    Statistical noise is not the same as wealth building.

Think of these financial fluctuations as waves crashing onto the beach — perpetually moving in and out.

Wealth building itself is actually closer to the relentless rise of ocean levels.  It’s a well known fact that ocean levels have been rising around the globe for decades now, but if you take a trip to the nearest beach can you see it rising?

ocean seal levels
Ocean sea levels have been rising for decades. Many data sources confirm this.

No, you can’t see it!  The process is very slow and it’s drowned out by all the ‘noise’ from the waves and tide!  Waves are certainly connected to the sea level of the ocean, but watching the waves closely isn’t going let you see the ocean’s rise.  There’s just too much noise in the system!

Certainly online financial tools can help you track day-to-day cash flow levels in your bank accounts, or catch up on current market prices for your assets… but that’s really just wave-watching.

Wealth building is more like the rising ocean — powerful, slow, and almost invisible to our everyday eyes.  It can really only be measured and seen in the past tense.  Trying to see it in the “here and now” is practically impossible.

So how do we deal with this problem of ‘invisibility’ and keep building wealth in the face of market ‘noise’ and the tidal forces of economic cycles?


Relentlessly Building Wealth

In essence, there are two forces that contribute to a growing net worth — thrift (spending less than you make) and compounding (investing money to earn more money).  Combined, these two superpowers (if maintained) will eventually build wealth for anyone who can achieve them consistently over time.

Sounds simple, right?  Then, why isn’t everyone a multi-millionaire?

The key word here is consistency.  In reality, consistency is a lot tougher for humans than we like to let on.  We get bored.  We change jobs.  Tragic accidents happen.  Priorities change.  Life just gets in the way sometimes, and we fail to keep saving and compounding.  Being consistent is hard.

While the ideas behind wealth building might sound simple, the real trick is putting in-place systems to keep both forces happening over a lifetime.


Weak Thrift And Strong Thrift

Imagine for a moment that you have a friend who claims to understand the value of thrift.  During certain months this individual saves a reasonable percentage of their income (say 20%), and they think they’re doing pretty well.  The problem is, the following month this individual eats-out a little too often, buys some new consumer junk, pays for car repairs, and before they know it they’ve spent 20% more than they earned.

The savings disappears!

These swings could even be greater than simple month to month swings, they could happen over years — one year your friend might managed to save 20%, but the following year he/she spends it all on a nice new car.  This effectively wipes out any savings from previous thrifty periods.

This is what I call weak thrift.  That individual isn’t actually saving anything.  They’re just deferring spending for a few months, (or even a year or two) until a major spending event happens.

tesla min
New cars are notoriously good at soaking up saved cash.

Strong thrift requires a more serious commitment and dedication to saving.  Individuals that practice strong thrift frequently save 50% or more of their income and they relentlessly hold onto it.

The practicers of strong thrift don’t fall prey to the newest iPhone, or “fashion” trends popularized by social media.  They’re perfectly willing to look “unfashionable” and drive ugly rusted cars for the sake of building wealth.

Standing apart from the crowd like this takes serious strength — hence the term “strong thrift”.  You have to be strong.  It isn’t easy to maintain this level of thrift in the face of social pressure, but some people do manage it.

How?  Start by not caring what other people think about you.  Become a big weirdo.  After that, it’s all just practice.


Are You Compounding?

The second force to consider when thinking about how to build wealth is Compounding.  Compounding consistently is something very hard to do because investors are typically very far divorced from the mathematical forces of compounding.

The nature of compounding is something that I’ve written about before, but maintaining it is tricky.  Why?  Most compounding is in the form of what I call “internal compounding”.  This is the internal reinvestment of cash earned from the investment back into itself.  In theory it sounds great, but the problem is investors have little control over how (and if) that compounding actually happens.

For all we know, the CEOs controlling these investments could be wasting our dollars on private jets, Caribbean “retreats”, and gold plated washrooms instead of reinvesting our earnings properly into the business.  This happens more often than you think!

What we need to ensure compounding over long periods of time is control — The most likely form of control we can get when trying to compound is something I call “external compounding” — That is, the reinvestment of dollars earned from our investments into even more assets.  This is done external to the investment, by our own hands, so *we know* compounding is really happening.

(Note: While external compounding is typically not quite as tax efficient as internal compounding, the lack of control and oversight around internal compounding makes these two sub-forces of wealth building roughly equal in my mind.)

External compounding is one of the reasons I’m a big believer in Dividend Growth Investing.  I constantly have fresh cash coming in from dividends that needs to be reinvested, thus ensuring the continuous compounding of my wealth.


Large Eroders of Wealth

Beside growing wealth, investors also need to be aware of wealth erosion.

Just like the ocean slowly eroding away at the beach, wealth has forces of erosion that will “eat away” at your wealth over time.  We need to be aware of these wealth eroders and minimize them (as much as humanly possible).

The most important wealth eroder to remember, has to be Inflation.  Inflation, is the gradual rise in prices over time.  Typically this happens because of a growing money supply.

Like it or not, inflation is probably here to stay long-term.  Some years the rate of inflation is going to be greater than others, but current monetary policy supports the idea that a certain amount of inflation is actually good thing.  I see no reason why this would change anytime in the near future.

That’s right, the Federal Reserve is actively working to increase the money supply and they want to keep eroding away at your wealth.  Primarily this keeps consumers spending (instead of hoarding and waiting for lower prices), and it keeps savers investing in assets with actual risk.

The only real way to beat inflation is to: Earn a salary that grows faster than inflation, OR invest in assets that earn a greater return than the rate of inflation (after taxes).


Lifestyle Creep

The second big wealth eroder everyone needs to be on the lookout for, is something called Lifestyle Creep.  Lifestyle Creep is the gradual increase in lifestyle expenses as someone becomes accustomed to greater and greater levels of comfort and luxury during their lifetime.

At first, we all start out as a poor college student with minimal expenses.  Over time, it gets harder and harder to “live like a poor college student” as we hedonically adapt to a comfortable lifestyle filled with nice things.  Basically, we slowly become spoiled babies.

This wealth erosion is really hard to beat, but the best advice I can give is to Sip Lightly From The Bottle Of Comfort and slow the trend of continuous higher spending as much as you possibly can.


Final Thoughts

Wealth building isn’t terribly easy to track.  It’s like an invisible financial force of nature. You can record the rise of your net worth, but if you do so too frequently you’ll just end-up measuring all the noisy movements of financial markets.

This is exactly why I don’t publish my net worth more frequently than once a year — too much financial noise drowns out what’s really important to building wealth:  Thrift and Compounding.

Whether you build wealth by working at a job or by just investing money, I firmly believe that everyone needs to understand what it takes to build wealth.  We owe it to ourselves — the world has seriously changed.  Financial Independence is no longer just a luxury to be achieved only by elite earners.  We all need be building wealth to ensure a comfortable life in retirement… even if it isn’t easy to see or track by conventional means.


[Image Credit:  Flickr, Flickr2]

28 thoughts on “Wealth Building Is Mostly Invisible

  • November 28, 2018 at 4:52 AM

    That’s one of the reasons I don’t get these no spending days. You aren’t spending money for a few days but aren’t you just spend that money later anyway?

    Wealth building will and its up’s and downs. The key point is that you are getting an upward trend.

    • November 28, 2018 at 7:43 AM

      I keep a chart of my spending and any days I don’t spend I get to colour in.
      The point of the ‘no spend days’ for me is that it makes my spending intentional and cuts out a lot of little indulgences that are easy to dribble money away on… “It’s only $1 for the chocolate, so why not?” etc. It also stops a lot of impulse spending.
      Works for me, anyway!

      • November 30, 2018 at 11:50 AM

        Right cutting the little indulgences make sense but what I was saying is like “not buying any groceries, or not buying any gas.” You’re just pushing these expenses out to a later date. To me that’s just creative accounting. 🙂

    • November 29, 2018 at 9:00 AM

      I suppose ‘no spend days’ are kind of like fasting. It can help certain kinds of people, but isn’t necessary for everyone.

  • November 28, 2018 at 7:02 AM

    FI is indeed a “long game”, and most things that take long have extended periods of silence. They seem boring, unexciting. So they’re hard to stick to. Time rewards persistence.

    • November 29, 2018 at 9:00 AM

      Indeed it does. Most people prefer some feedback however. 😉

  • November 28, 2018 at 7:10 AM

    Very good article Mr. Tako! I think that most people just don’t look far enough out to see this. They are just interested in the here and now and really should be focused long term, almost imagining like you were going to live for 200-300 years. I enjoy not spending money much more than I enjoy spending money. Definitely the exception to the rule for most.

    • November 29, 2018 at 9:04 AM

      Thanks Bob! I think you’re right — many people don’t really think about their mortality. Or, how much getting up at 6am for work when they’re 75 years old is going to suck. 🙂

  • November 28, 2018 at 7:46 AM

    I think that’s a good reason why Jack Bogle said that if you don’t open your investing account statements until retirement, you’ll be amazed at how much money you have accumulated throughout your working years.

    I like how you talk about the idea of weak thrift. I know a number of friends like this who can’t seem to figure out why they can’t get ahead, but when they cut back, they only do it for a few weeks and then they start booking vacations and buying new cars. It drives me nuts, but it’s not my place obviously to say anything.

    — Jim

    • November 29, 2018 at 9:05 AM

      Yup, most of my neighbors are like that. One just bought a brand new car. I didn’t say a word. 😉

  • November 28, 2018 at 7:50 AM

    Here in Australia, we have compulsory superannuation – our employers have to put 9.5% of our wage into a retirement account. You can also elect to salary sacrifice, where you can take pre-tax dollars and have them put straight into your superannuation at a lower tax rate.
    Personally, I salary sacrifice as much as I’m allowed to, so that steady compounding you were talking about is accelerated. Your ocean analogy is correct, by the way. It often doesn’t FEEL like I’m getting anywhere, but over time I can see the progress.
    I liked the ‘Sip Lightly’ post, too!

  • November 28, 2018 at 9:08 AM

    Funny, my wife and I just got back from Walmart where we were buying a grocery cart of items to donate to a foster home for kids down the block from where we live. I realized when I was getting dressed this morning to go I had left my best pair of jeans, out of the two decent pair I own, in the closet at the Bed and Breakfast my wife and I had stayed at last weekend clear across the state. So I picked up another pair at Walmart today. $9.99 and they fit great! The pair I left at the B and B, they were the same price! I guess being worth a few million and no longer having to have a JOB but still buying ten dollar jeans is weird but it is a big part of how we got here! We also drove to Walmart in my wife’s thirteen year old car, instead of my 11 year old one. As we were loading the car with our purchases a very young mom with her baby was loading her stuff into her shiny new car in the next parking slot. It was a 2018 or 2019 suv, and the hatchback closed itself electronically. I had to heave ours closed, what an inconvenience! I also had to wonder if she’d ever be financially independent buying $40,000 cars on payments in her twenties. Probably not.

    • November 28, 2018 at 10:17 AM

      I’ve noticed the wealthier I’ve become, the more my wardrobe is sourced from Walmart 🙂

      • November 29, 2018 at 9:06 AM

        In my case, it’s the thrift store. We don’t have a walmart. 🙂

  • November 28, 2018 at 10:14 AM

    I agree it’s all about the systems – get them right and let the wealth building juggernaut begin 🙂

    I think you’re spot on re: weak thrift and strong thrift. People who celebrate thrifty actions typically aren’t thrifty; people who have thrifty values / behavior / personalities often don’t think of it as thrifty – it’s just their “normal”. My biggest reminder that I’m thrifty comes when other people notice and comment (oft with an eye roll…).

    • November 29, 2018 at 9:09 AM

      It’s true! Being thrifty is my normal. An ingrained habit now.

  • November 28, 2018 at 4:42 PM

    This was a really good post! We are definitely weak thrifters in my household. If you’d asked me that a month ago, I would have said that we were doing really well with our spending but I had a recent reality check that has convinced me otherwise. We tend to do really well at being thrifty when the weather is nice. It’s easier to be motivated to get stuff done and cook at home when the sun is shining. Now that it’s rainy and dark before 5 here in the PNW, it’s a wee bit harder to not order something in or buy myself a little happy. I’m not sure how to translate this newfound self-awareness into actual progress. Still working on that!

    • November 29, 2018 at 9:14 AM

      Thanks Bec. Being self aware is a good first step. Unfortunately I don’t have any good fixes for the weather either. The PNW isn’t great during the rainy season.

      I guess the trick (for me) is to not make cooking at home seem like suffering. Make it a joy. I find something I really want to eat, and I just make it. I let my taste buds do the motivating.

      That said, some nights are leftover nights too. 😉

  • November 28, 2018 at 10:48 PM

    Hey, nice post. I think this is your best work so far. Good job.
    I especially like the strong/weak thrift concept. It’s like dieting vs adopting a different way to eat.

    As for the stock market, it’s hard to ignore the noise. Although, I must be one of the few people who like seeing the stock market drops. That’s a great wealth building opportunity when you’re young.

  • November 29, 2018 at 7:23 AM

    Good morning Mr. Tako. I am about 150k plus cash cushion away from my goal, so watching the gyrations (or trying not to) is nerve wracking. Also, a good friend just got a package from his company today, and generally feeling a great deal of change and shift around me politically and with the economy. Thank you for your blog, it helps keep me focused!
    Happy sipping!

    • November 29, 2018 at 9:16 AM

      Thank you Tigermom! I’m glad you find some value in it! 😀

  • November 29, 2018 at 12:01 PM

    I have never saved 50% of my paycheck. Not even one month. For over a decade, my 401k contribution has floated between 12% and 16% of my gross salary. I have auto-deposits to mutual funds worth another 4% to 6%. So I have been consistently saving approximately 15% to 20% of my gross salary.

    401k elections is the easiest way to practice strong thrift.

    Frankly, I have always been of the opinion of forced deprivation is foolish. Certainly just because you can afford to eat like a glutton, you shouldn’t eat like one for health purposes. However, stuff like not turning on the heater even though you can afford to is silly to me. Freezing your ass off one night doesn’t prepare you to freeze your ass of every night if needed or meaningful impact your quest for FIRE. If the cost of running the heater on cold nights is difference between FIRE and non-FIRE, I recommend you learn to live without FIRE (I made pun).

  • December 2, 2018 at 2:59 PM

    Beautiful analogy between the ocean and wealth. It is true we get too caught up in the waves and miss the bigger picture.

    That was also a great explanation of why inflation is needed in society as it gets people to promote the economy by consuming and buying now rather than later when it will be presumably more expensive

    • December 8, 2018 at 1:07 PM

      It’s also handy to have wages and asset prices go up over time and not down. I’ll take inflation over deflation any day of the week and twice on Sundays.

  • December 8, 2018 at 12:57 PM

    It’s funny how some of this stuff works. The new car thing, for example. I suspect the real wealth killer is not the buying of new cars, rather it’s letting emotions drive the decision. If that happens you will probably make mistakes like failing to account for depreciation in your budget and mis-timing your purchases, and THAT will kill your wealth. I’ve never been a new car guy, but as I get older that might change.

    If you’re the sort of person who absolutely must buy new, go for it but don’t do it stupidly. If you’re financing new SUVs and trading them every 3 or 4 years, that’s not a long term plan for success. On the other hand, buying a new luxury car and driving it for 12 years before trading it in can work just fine if you take care of it. Or buy a 3 year old luxury car for cash and trade it in after 5-7 years for a similar annual depreciation hit. Look at the depreciation curves and factor that into your decision. Buying older cars can also work (my last purchase was a 7 year old Prius) but comes with it’s own downsides and yes you are still paying for vehicle depreciation, plus you may find yourself buying out of necessity because the last junker you bought died for good. Buying out of necessity means you are not transacting entirely on your terms.

    Smaller luxuries can be surprisingly economical, as long as you don’t try to gold-plate every aspect of your life. For us a good example is cava (Spanish bubbly). We get a brand we really love by the case (bulk gets it under $9 / bottle). I laugh when I see articles and posts about lifestyle inflation that feature a photo of a glass of champaign. We spend ~ the same on booze as we always have, but we literally drink bubbly every day and I sort of feel like a million bucks every time I pop open a bottle.


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