One of the best illustrations I’ve heard for building wealth on solid principles comes from a book called Financial Fitness. In it, the authors recommend you follow an investment hierarchy shaped like a pyramid, where the bottom represents what you do first and the top represents what you do last after all other steps are completed. While people might argue with the order of some of their levels, the concept is sound. The first layer is all about investing in yourself and always saving a portion of what you make—ALWAYS!
Sir John Templeton, whose savings and investment strategies earned him over 1 Billion dollars in net worth and made him one of the world’s top 150 wealthiest people said, “The great majority of people do not build up any wealth because they do not practice the self-discipline of saving some of their income every month.” I believe he’s wrong on one thing, relying on self-discipline to save every month will ensure you don’t save every month. Instead, you must make it an automatic habit so that there is no temptation to skip a month or rob from that savings. The problem is people try to will themselves to save every month, but they end up skipping when other “priorities” come up because their willpower happens to be low. But let’s return to Mr. Templeton for a minute. Because he followed this principle, he actually had some cash on hand when the Great Depression hit in the 1930s. With that cash, he went and bought 100 shares of EACH stock trading on the NY Stock Exchange (they were all trading for under 1 dollar/share at the time). Later when the economy came roaring back he made a killing. Really though he just prepared, saved money and let time build value for him.
Let me return to the pyramid analogy for a minute. Think of the sheer volume of stone in the first level of this pyramid to the right compared to the volume of stone in the top level that is missing. If you have a great foundation of knowledge (investing in yourself) and cash reserves (rainy day funds, emergency funds and safe cash investments), then when the hard times hit you are not only insulated but you are prepared to take advantage of the financial fire sales that will be available to you at the time.
The problem is that most people spend all their disposable income on liabilities (things that depreciate and charge interest, etc.), entertainment and pleasure, and hope to get rich with other people’s money. While someone might get lucky from time to time with this scheme, they will live a life of boom and bust because they haven’t developed the habit of building a solid foundation. That approach looks like this image to the left. Even if the get rich quick scheme works temporarily, the pyramid falls with the first financial tremor or windstorm hits. Sir Templeton may not have got rich in a minute but a decade was relatively quick and he got to maintain it and grow it for the rest of his life because the foundation was right. So make the move today and start building that base level thick and deep by saving every month so when you decide to venture into the potentially higher return areas you will sleep well at night resting on that solid foundation.