For most people, the process of building wealth is a slow, gradual process. Wealth builds over the course of years and decades. There are bumps up and down along the way, but only rarely do people experience “liquidity events” such as the sale of a business, a substantial inheritance, or a lottery win that propels them to significant wealth in one or two short steps.
The most reliable way to get rich is to do it slowly. It's a slow build.
You don’t build wealth in a linear fashion
There is a saying that the first $10,000 is the hardest. The next $10,000 is easier, and the next $10,000 is easier still. After that, the first $100,000 is the hardest, and each successive $100,000 becomes easier. And of course, the first million is the hardest. I won’t say that the millions start rolling in for most people, but it definitely gets easier over time.
It's valuable to appreciate that building wealth isn’t something that happens in a linear fashion. I don’t just mean that compounding interest builds exponentially. I mean that the circumstances of people’s lives means that they don’t save a regular amount from year to year.
The amount you earn and spend changes substantially over a lifetime. For example, someone who has a traditional professional career might have a trajectory like this:
They will spend more than they earn for a number of years while they study, meaning they graduate with a student loan. Their graduate earnings won’t be substantial, and while they might save some, they will also spend a fair amount on travel and discretionary items. As their income starts to increase they may also couple up, and as DINKs ("double income no kids") their financial situation might improve substantially. They might save a deposit and buy a house and start paying off a mortgage. Then they have children, and live on one income while experiencing increased expenses, which is likely to slow the rate at which they build wealth. As their kids grow up, their income might increase, and the stability that comes with having a family enables them to pay off their mortgage (substantially or in full) and possibly start saving while their kids are at home. Once the kids are financially independent, the savings seriously start to accrue.
What’s the message here? Different phases of life have different characteristics in terms of how much you can and should save. If you’re at a stage of life where you can’t save as much as you’d like, that’s fine. It's important not to get discouraged. The key is to build a solid base, so that when the wind is at your back, you can go further and faster.
Think of building wealth as a yacht race. When the wind is at your back, your progress is clear. But when you're in the doldrums, you won't make much progress in terms of how far you go. But when this happens, two yachts can be very close, but a long way away in terms of the length of time it will take to reach their destination. Once the wind hits, however, the difference between them becomes clear.
An aside: because of this, we should expect wealth inequality
An extension of this is that “wealth inequality” on its own shouldn’t be something to be worried about. There are many reasons for people to have unequal levels of wealth. A significant reason is age – it stands to reason that someone who has worked for a number of decades and is approaching retirement should have a higher net worth than someone starting out.
I recall reading something to the effect that 80% of funds under advice by Australian financial advisers relates to clients aged 55 and over. If you think about it, this isn’t so surprising.