​The Essence of Getting Wealthier

By Brad Thomason, CPA
 
 
If you want to be wealthier in one year than you are today, mechanically, two basic requirements need to be met.  First, earn a return.  Second, don’t withdraw anything.
 
That’s it.  If both of those conditions are met then in a year you will be wealthier than you are today (at least with respect to your investment portfolio, proper.  I’m ignoring changes to debt levels, home value, business holdings, etc, for purposes of keeping this discussion simple). 
 
Perhaps it seems like it should be more complicated than that.  For some reason we tend to want things which are important to be the result of grand means and requirements.  But in this case, it’s just those two things.
 
There’s nothing much to add.  But it probably is worth an extra minute to dig a little bit deeper into what is there, such as it is.  That’s often a good route to better understanding.
 
First, just take note of the fact that wealthier necessarily means more wealthy.  So to set that up there had to be some wealth to begin with.  Without some basic amount of wealth at the beginning, there’s no means for earning that return.
 
On the matter of withdrawals, to say don’t do any at all is admittedly sort of blunt-instrument-esque.  If you earn ten and withdraw two you are still eight ahead, for instance.  So we don’t actually, mathematically, have to have an absolute moratorium on withdrawals.
 
But if the goal is to get as much wealth growth as we can (for the level of risk incurred), then we don’t want to spend any of the return.  I like to use the term ‘give your money a life of its own.’  This is what I mean by that. 
 
If your investments earn returns, let them fuel future investments and future returns, and higher levels of growth.  Don’t spend them on a fancy vacation or a new car you don’t need.  That sort of thing. 
 
Eventually, when you get to retirement, you will need to use that accumulated wealth to pay the bills.  But inventing voluntary bills along the way works at cross purposes to that larger mission.  Ultimately, I’m not saying don’t go on the vacation or buy the car, by the way, as much as I’m saying if you do spend those dollars, let them come from this year’s paychecks.  Don’t raid your brokerage account to get them.  Not if creating the best possible chance of a successful retirement is your goal.
 
So that’s it.  Two things.  Use your old money to make new money, and then send the new money out to earn some more new money of its own instead of spending it.  Repeat year after year.  Get ever-wealthier.  Retire secure.