Summary: This post details the few, essential steps anyone needs to take to build wealth.聽
My daughter is the only one in the family brave enough to play me in chess.
I still beat her handily each time, but she keeps trying, so I give her credit for that.
After the last game I told her that I’d teach her a few basic chess guidelines that would improve her game dramatically.
Here are the essential chess principles I’ll share with her before the next game:
- Develop your pieces quickly
- Control the center
- Castle for safety
- Pay attention to your pawn structure
- Have a reason for every move
- Build up small advantages throughout the game
- Get/keep the initiative
It seems impossible given how complicated chess is, but anyone who follows these seven steps will be a better player than the vast majority of people who know how to play the game.
Focus on the Essentials
For as long as I can remember, I’ve been a big believer in the pareto principle.
Also known as the 80/20 rule it says:
20% of the invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes. This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. For instance, the efforts of 20% of a corporation’s staff could drive 80% of the firm’s profits. In terms of personal time management, 80% of your work-related output could come from only 20% of your time at work. In Pareto’s case, he used the rule to explain how 80% of the wealth is controlled by 20% of the country’s population.
In other words, a very small amount of time/effort/people/whatever account for the vast majority of the results.
The same is true in personal finance.
You can spend years and years studying all forms of investing strategies, complex technical financial terms, detailed tax-planning options, and on and on. But these are in the 80% of things you can do that only have 20% impact on your finances. I’d much rather focus on the 20% of topics that deliver 80% of the impact.
In fact, I’d say personal finance is more like 90/10 or even 95/5 because a few, simple steps can help you grow your net worth to amazing levels.
The Essentials Series
With this in mind, I’m starting “The Essentials Series.” I’ll take various financial topics and list what I think are the essentials for success — the 20% of tasks that get you at least 80% of the impact.
I will then ask ESI Money readers to give their thoughts. Did I leave something out? Did I include something that isn’t essential? Did I not come at it with the right solution?
As I’ve said several times on this site, ESI Money readers make the site better because they have such great experience, insight, knowledge, and wisdom. So I know that whatever I put out there, you’ll make it better!
The Essentials of Building Wealth
So to start the process, let’s begin with the big picture — what are the essentials of building wealth?
I’ve spent a lot of time thinking about this issue, writing about it, and living it out in my personal life.
I think it will come to no surprise to anyone that I think the essentials of building wealth are:
- Earning — You need an income of some kind and the higher it goes, the better. For most people the key to driving income growth will be to develop their careers, but others will pick a business (or at least side business) to super-charge their earnings.
- Saving — You must spend less than you earn. It’s vital. Even if you make $1 million a year and spend it all, you are going nowhere. So you need to control spending and grow the gap between income and spending to be as large as it can be (within reason, of course, you don’t have to be frugal to the point of hating life).
- Investing — You then take that gap money and invest it in ways you like/prefer to grow it. I opt for index funds, real estate, and P2P lending, though there are many other ways to invest for success as well.
So to me, those are the essentials of building wealth. There are certainly other financial topics and they add to the picture, but these are the vital ones to me.
What do you think? Did I get it right or miss something?
photo credit: Il principio di Pareto via photopin (license)
Mike H says
Good chess advice. I’d also add to keep lines of attack toward the enemy king to inhibit piece movement of your opponent (discovered check).
You hit the nail on the head for the 80/20 rule of personal finance. The first rule is that savings rate dominates everything else- and it can be cranked up by earning more and spending as little as possible. Get to a savings rate North of 50% after tax when starting your career and you will be set up for smooth sailing after only a decade and often much faster.
During that time take your time to figure out what investing methods work for you- the trick is not to go after home runs but steady singles and doubles and just remain consistent. You don’t have much money at risk so the time spent learning about how to invest will pay off in the future.
-Mike
Coopersmith says
Good to get back to basics and all of this is very good.
My only addition to this is time. When I started my 401k I was putting in 10% wile single and when I got married my only regret was not putting more in back then before we had kids and we had plenty of cash on hand. Even a small amount over time would have meant thousands more due to compounding earnings.
An example I remember reading a while back and it went something like this, is take an amount of money you are saving per year and put it in one account for seven years and after that put that same amount in another account earning the same rate of return for 21 years. After 28 years which account has the higher amount? It was the 7 years account.
Taught me the lesson of time is very important.
SBDad @ Small Budget Blog says
Firstly, I think it’s cool that play chess with your daughter. And that you beat her each time. And that she keeps wanting to play. It shows grit. Like her dad!
I think you nailed it.
A few that came to mind that might simply be refinements of yours would be:
* Avoid debt. Especially on non-income producing items.
* Small actions over time equal large results. Whether it’s job, reputation, savings, etc.
* Relationships in finance matter. A spouse that is on-board helps a lot.
Financial Panther says
This is one thing about building wealth. It’s so simple! It really all boils down to spending less than you earn and saving the rest. Looking forward to reading the rest of the series.
The Green Swan says
I think those are good key principles, ESI. They are definitely the foundation and provide building blocks to develop a personal finance plan/strategy. I think along side those principles can be found good support beams including building and maintaining positive habits, working hard and working smart, and being a conscious decision maker. Personal finance can be daunting, but boiling it down to the basics and sticking to the plan pays off in time. I look forward to the series, ESI!
BH says
My 5-year-old absolutely old loves chess, and in fact is the only thing that can hold his attention (he’s extremely hyperactive). I cannot think of a better way for him to learn big crossover life skills at this age. Very cool that you still play with your daughter.
PatientWealth says
I think one of the essentials is the concept of compounding. Here’s why: someone could go along for years investing in sub-par investments and forgo a major opportunity to build wealth. If they don’t understand the concept of compounding interest they may not choose the right investments to try to take full advantage of it.
Also, when one understands the incredible power of compounding interest, it provides added motivation to Earn, Save, and Invest. In terms of essentials I would think it is actually:
Earn
Invest
Give
But I understand your blog is ESI 馃檪 I guess I see saving and investing as the same thing.
Regarding chess – totally agree and would love to play you one day. My wife and kids keep challenging me and I’ve realized getting the queen, bishops and knights moving immediately (and castling) is a simple way to tilt the odds vastly in one’s favor.
Cheers!
Ed says
Great points – I am exposed to high level finance on a daily basis professionally, but at the end of the day it is the soild, SIMPLE, financial pricipals, applied day in and day out that make a difference.
As the more knowledge one acquires increases throughout your life about the way financial markets works, high level business decisions are made, etc., the smaller that percentage becomes.
I honestly feel what has made my family successful financially is attributed to the low single digits in terms what what I know.
Application of key principles tends to trumps everything else. Sure you get beat on occasion on the chess board by those that imply high level stratagies, but at the end of the day it is the key principals that enables the player that sticks to those key principles you to continue to play in the long run – and end up winners in the end.