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How to Accumulate Wealth and Live Within Your Means

Value investor with a deep passion for understanding and a desire to improve results over time.


Money Problems

It's natural for you to want your own "money tree." The idea of simply walking outside and plucking off a few freshly grown paper money might seem intoxicating to you, or it might sound like a lifeline, depending on where you are with your personal finances. So, what do you do? You get to work on building a nest egg, a fortune, an arsenal of money, so that you can have the additional security of an additional income stream. For a few years, it's exciting to play this game, but over time, it can be exhausting. That's because there are often two opposing forces, working against each other and neutralizing your ambitions and energy: social pressure, and the desire to be financially secure and free. Understanding this dynamic can help you navigate toward the future you want.

What Usually Happens

Most human beings have a tendency to allow their living standards to rise along with their rising wages. This is only natural; after all, you've worked really hard to have a better life for you or your family, and the way to do that is often to spend money. That's why you're working so hard!

However, something else also happens to most people: the desire to acquire new toys and trinkets (or bigger houses or cars) in order to acquire status. In other words, we tend to want to keep up with the Joneses, a dangerous phenomenon that is seldom rooted in logic, and almost always destructive to your wealth. You'll need to make a tough decision in order to avoid this pitfall: either you need to stop worrying about status, or you'll have to give up your ambitions to grow wealth. While the trade-off might not be 100%, there is always this decision to be made. Most people understand this at some level, but find it difficult to break away from the social pressure (who wants their neighbors to think they're not successful at the game of life?).

Maybe Not So Spartan After All

Once you see past the social pressure/Joneses phenomenon, you'll still be interested in improving your quality of life (or your family's). The sorts of things you're spending money on should be based on two things:

  1. Anything that will meaningfully improve the quality of time you spend with your loved ones (family, pets, friends), or even yourself
  2. Anything that makes you money over time (produces income)

I'm tempted to include a third item—a reward for accomplishing a meaningful goal, like finishing a major project that took months or years to complete—but instead, I'd suggest working on reprogramming your mind so that you regard items 1 and 2 above as rewards.

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Even better: try to combine 1 and 2 into one, and spend on things that bring you and your family happiness or utility, and which also produce some kind of return over time. An example might be renovating your home, which would add a lot of quality to your daily existence, plus increase the overall value of your home. Another example could be a family vacation where you carve out some alone time, in order to plan your next year, or to learn a new skill.

Even Less Spartan

There's a common misconception in personal finance literature, which suggests that the only way to get rich is to live like a monk, eating Ramen noodles and beans and rice until you have a billion dollars in the bank or whatever. If you can keep up your mental stamina, it is mathematically true that the lower your expenses are, the higher your overall wealth, all else being equal. However, all else really isn't equal. First, the old axiom that it takes money to make money can help you remember that spending money on a new skill, or touching up on something you already know, can be an amazing investment. This may take some time to pay off, but I've never found a better investment than the right kind of knowledge.

Second, and maybe even more helpfully, you can still increase the rate at which you're getting wealthy (accumulating), while also allowing your standard of living (expenses) to rise. The key here is to allow them to rise at a slower rate than your income is rising, and the slower, the better. If you make another $10,000 one year, and spend $3000 more than you spent last year, you've still got a net gain of $7000 to your bottom line, but you've also got a little bit better lifestyle (leaving inflation out for the purposes of simplicity).

The Millionaire Next Door

The proverbial millionaire next door probably didn't get rich by lighting up cigars with burning $100 bills, although it's always possible. It's much more likely, however, that they followed a very simple maxim: spend less than you save. Odds are very good that they also followed my advice: focus your spending on things that meaningfully improve your quality of life, or which return cash to you at some point in the future. Even better, find things to spend money on which check both of these boxes.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Andrew Smith

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