Common-sense Principles for Building Wealth

When I reflect on building wealth, I often find myself fixated on principles that are common sense.  It is true that everything you need to build wealth is actually pretty simple! Here are some common-sense principles for building wealth long term!

I really wanted to title this post Everything You Need to Know for Building Wealth You Learned in Grade School!

The majority of the principles that follow were passed down from my parents or distilled down from various financial books that have influenced me over the years. 

Sage advice has a way of becoming timeless. 

I wanted to put together a post talking about how much of what you need to be successful remains common-sense.  As I have reiterated often, financial success is simple, but it’s not easy! What follows is a series of principles I have lived by since I was a child that are just as applicable today as they were decades ago.  I hope you enjoy!

Live below your means

I can still hear my parents reiterating this while I write.  ‘Live below your means’ was instilled in me from a young age.  In today’s world this recommendation takes many forms, from ‘save 20%,’ to ‘live like a resident,’ and everything in-between. 

Despite the different iterations, the principle remains the same…live on less than you make. 

It may seem common-sense, but unfortunately, I see well-educated colleagues fail at this consistently.  Countless examples exist regarding athletes, actors, entrepreneurs, and influencers who make exorbitant incomes and still retire poor or bankrupt.  What do all of these individuals have in common?  They spend more than they make…and it catches up with them as it catches up with anyone.

Physicians are guilty of this too often.  We all hear of surgeons, specialists, dentists, etc. who make high incomes yet still live paycheck to paycheck.  This is largely due to an inability to understand this fundamental principle. 

The golden handcuffs

The ‘doctor home’ and the sports car…don’t forget about the pool, and the country club membership!  Oh, and how could I forget about the multiple international vacations each year?  Did I not mention the season tickets…with box seating?  What about the boat…and that second home we just had to have in the mountains!  

You see where I am going with this…

These expenses add up.  Individuals may be able to give the appearance of wealth externally, but a large portion of these same individuals are reliant on their high-income salary to stay afloat.  These are the ‘golden handcuffs’ chaining them to their careers, driving burnout and unhappiness.

I published an article previously called How to Write a Financial Plan.  To anyone who feels they need to make a change in their finances, I suggest starting here.  Make a budget, make a plan, save, and invest. Break the cycle.

Work smarter, not harder

This too is timeless advice.  However, for the sake of personal finance, I want to specifically address two things here; automating your finances and utilizing compounding interest.

As mentioned above, to build wealth you need to live on less than you make, and save the rest.  This excess income saved should be prioritized for retirement savings, debt elimination, etc.  The easiest way to save money is to make it automatic and effortless.  If you won’t take my word for it…check out ‘Nudge’ by world renowned economist and Nobel laureate Richard Thaler!

Pay yourself first

Many employers offer the option of automatic retirement deposits.  This allows a portion of your take-home pay to be redirected to your retirement savings.  This automatic deposit takes the brain power out of the equation and allows guaranteed savings with each pay period. 

This can further be applied to other aspects of your financial life.  Personally, my wife and I automate a number of our savings.  This is often called ‘paying yourself first.’  This means that at the first of the month, when our paycheck hits our bank account, we have automated deposits directing our money to multiple locations.  We have a portion automatically paid to our student loans so we can meet our annual goal.  We have another portion automatically placed into our Holiday Savings Fund so that the holiday season doesn’t disrupt our finances.  Lastly, we have a portion directly placed into our short-term investing accounts to help us save for future large purchases.  If we plan to increase our emergency fund, we automate this too!

Make your money work for you

Another import aspect of working smarter is utilizing compounding interest!  Compounding interest is the 8^th wonder of the world!  Put your money to work for you. 

If you are saving money, you should be housing that money in a vehicle that makes money for you…passively.  Automatically have a portion of your earnings placed into a diversified portfolio and put that money to work.  I understand that we all have differing opinions on what is considered ‘liquid’ when it comes to emergency fund savings.  However, with any other amount sitting around, you are leaving money on the table by not having it housed in an account that benefits from compounding interest!

Create a financial environment that minimizes the effort necessary to maximize financial gains.  With account automation I don’t have to ‘think about saving 20%’ because my finances are set up to do it automatically!  This guarantees that I am meeting my financial goals (and alleviates fiscal anxiety to an extent). 

Debt…is debt

I find the topic of ‘good debt’ fascinating.  I understand the concept that certain debts can be labeled as assets.  These often include a mortgage as real estate tends to appreciate in value making the mortgage a ‘good debt.’  I also understand the concept of education being a ‘good debt’ as it is an investment in yourself and your future… hopefully in achieving a job with a higher-income.  However, even those to me are debatable…but I will yield housing and education. 

Pretty much anything else (as I see it) is just debt.  Plain. Old. Debt.  And what is debt?  Debt means you are indebted to something or someone.  You owe them.  The most common scenarios include being indebted to a private bank or the federal government, especially when it comes to educational loans for physicians.  Debt also accumulates interest, and if not addressed can continue to hinder your ability to reach financial independence. 

Differentiating debt is a slippery slope

I think the approach of differentiating debt as either ‘good’ or ‘bad’ is a slippery slope.  This mentality leads individuals to believe that some debts are not worth paying off.  I find this a false justification.  From an elementary perspective, all debt hinders your ability to achieve financial freedom.  Yes, occasionally debt is necessary (see examples above), but all debt should be seen as a liability and paid off in a timely manner.  See how we are tackling our $670,000 medical student debt fast!

I won’t belabor this argument. One because I could go on forever.  Two, because this point has been stated before, and was much more well written and convincing.  Check out The Wrong Way to Think About Debt from The White Coat Investor.  Dr. Dahle does a great job thinking through the justifications many have for ‘good’ debt and why that mentality needs to be reevaluated.

If you can’t pay for it in cash…you can’t afford it

Do I need to say anything more?

The current consumer economy is built around credit.  We swipe our cards mindlessly to purchase goods.  Often times it is a chore to think “do I have the money for this?” before we offer up our cards.  In a world where purchasing on credit is the path of least resistance, it can be challenging to stop and determine what you actually can afford!

Even though I understand there are arguments to lease or finance…some of the items you will be purchasing are ‘wants’…not ‘needs.’  When it comes to ‘wants’… if you don’t physically have the money to afford them, you shouldn’t be purchasing them.

I think it is easy to get lost in the weeds of day-to-day life…

I can finance this new iPhone!  Its 0% down for this new car.  The problem here is you eventually talk yourself into any purchase if you can put it on credit. 

Credit cards carry high interest.  You are increasing the overall cost of a purchase if you are unable to pay off the credit card in full each month.  If you do not have the money to purchase the item, then there should be very serious consideration (before your buy) if you should be making that purchase to begin with.

If it sounds too good to be true, it is

Here is a classic.  If it sounds too good to be true…it likely is.  I think the lottery is a great example.  Millions of Americans purchase tickets trying to ‘win big.’  Our collective ‘spontaneously rich’ fantasies are appeased at the idea that we have a winning lottery ticket.  However, as with the lotto, the statistics are weighted insurmountably against us.  This too can be seen on any advertisement before your Youtube binge.  ‘Get shredded abs in 30 days’ and ‘do this one thing and make money daily.’ 

All of these advertisements are preying on the human tendency to want an easy solution to their problems.  A one-pill cure all, get-rich quick scheme. A single workout to put me on the cover of Men’s Health.  However, this is not reality.  Do not fall for these false promises. 

There is a simple solution. 

It is to work hard and stay the course!  If you want to get rich, save money and invest over the long haul.  If you want a chiseled body, eat healthy and workout…consistently…for years.  If you want a dream family, prioritize that family every single day.  All of these are incredibly simple solutions, but none of them are easy.

Avoid the pitfalls of searching for quick solutions to problems humankind has struggled with for centuries; they do not exist.  The real solutions all require hard work, dedication, and patience. 

Treat others the way you want to be treated

The golden rule.  I thought this was appropriate to end on.  This is less financial advice, and more philosophical.  My hope is that any and all readers of The Motivated M.D. will achieve their dreams of financial independence, wealth, and happiness.  I recognize that is a big dream, but I mean it sincerely.  With the assumption that my wishes come true, that will put many a reader in a very safe financial space. 

When you ultimately gain this financial footing on this mountainous journey, make sure to turn around and help the next one behind you.  Whether that is by offering sound financial advice or providing charitable donations, not all are as fortunate as you.

In an era plagued by pandemics and war, now more than ever are opportunities to really make a difference both locally and abroad.  Share your financial superpower.  Stay for a healthy conversation.  Keep an open mind when partaking in debate.  Help the less fortunate.  Treat others they way you would wish to be treated if roles were reversed. 

Take home points

I get the privilege to sit and put my thoughts on (electronic) paper each week.  As I have always stated, this is quite therapeutic for me.  I really do believe that building success is a healthy combination of a life lived through guiding principles (including those mentioned above) and a little luck.  There are so many aspects of life that we cannot control.  However, if you follow some basic principles, you can lead a fulfilling life that includes wealth, success, and happiness.  As always…

Stay motivated!

The Motivated M.D.

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