Just Keep Buying: Proven ways to save money and build your wealth

by Nick Maggiulli

I had been doing some analysis on the U.S. stock market when I discovered something profound. To build wealth it didn’t matter when you bought U.S. stocks, just that you bought them and kept buying them. It didn’t matter if valuations were high or low. It didn’t matter if you were in a bull market or a bear market. All that mattered was that you kept buying.

Despite having only $1,000 in my retirement account at the time, I spent hundreds of hours analyzing my investment decisions over the next year. I had Excel spreadsheets filled with net worth projections and expected returns. I checked my account balances daily. I questioned my asset allocation to the point of neurosis. Should I have 15% of my money in bonds? Or 20%? Why not 10%? I was all over the place. They say that obsession is a young man’s game. I learned this truth all too well.

Think about how foolish this behavior was. With only $1,000 of investable assets to my name, even a 10% annual return would have only earned me $100 in a year. Yet, I was regularly blowing that same $100 every time I went out with friends! Dinner + drinks + transportation and my year’s investment returns (in a good year) were gone.

If you don’t have much money invested, then you should focus on increasing your savings (and investing it). However, if you already have a sizable portfolio, then you should spend more time thinking about the details of your investment plan.

How do you know where you are on what I call the Save-Invest continuum? Use this simple calculation as a guide. First, figure out how much you expect to comfortably save in the next year. I say “comfortably” because this should be something that you can achieve with ease. We will call this your expected savings. For example, if you expect to save $1,000 a month, your expected savings should be $12,000 a year. Next, determine how much you expect your investments to grow in the next year (in dollar terms). For example, if you have $10,000 in investable assets and you expect them to grow by 10%, that means you are expecting $1,000 in investment growth. We will call this your expected investment growth.

Finally, compare the two numbers. Which is higher, your expected savings or your expected investment growth? If your expected savings are higher, then you need to focus more on saving money and adding to your investments. However, if your expected investment growth is higher, then spend more time thinking about how to invest what you already have. If the numbers are close to each other, then you should spend time on both.

We shouldn’t use static, unchanging rules because our finances are rarely static and unchanging. I experienced this personally after seeing my savings rate drop from 40% while living in Boston to only 4% during my first year in NYC. My savings rate plummeted because I changed careers and stopped living with roommates when I moved to New York. If I had vowed to always save 20% of my income no matter what, then I would have been absolutely miserable during my first year in NYC. And that’s no way to live. This is why the best savings advice is: save what you can.

The researchers tested this hypothesis by randomly allocating wealth (e.g., in the form of livestock) to female villagers in Bangladesh and then waited to see how that wealth transfer would affect their future finances. As their paper states: “[We] find that, if the program pushes individuals above a threshold level of initial assets, then they escape poverty,

but, if it does not, they slide back into poverty… Our findings imply that large one-off transfers that enable people to take on more productive occupations can help alleviate persistent poverty.”

Their paper clearly illustrates that many poor people stay poor not because of their talent/motivation, but because they are in low-paying jobs that they must work to survive.

The most consistent way to get rich is to grow your income and invest in income-producing assets.

Teaching (especially online) is one of the best ways to have scalable income. Whether you choose to do it through YouTube or a learning platform like Teachable, teaching something useful can be a great way to grow your pay.

While James spent his money guilt-free, he did so frivolously. And while Dennis managed his money well, anytime he did spend it he was filled with anxiety.

The first tip is what I call The 2x Rule. The 2x Rule works like this: Anytime I want to

splurge on something, I have to take the same amount of money and invest it as well. So, if I wanted to buy a $400 pair of dress shoes, I would also have to buy $400 worth of stocks (or other income-producing assets). This makes me re-evaluate how much I really want something because if I am not willing to save 2x for it, then I don’t buy it.

In Drive, Daniel H. Pink proposes a framework for understanding human motivation that provides a great start. Pink discusses how autonomy (being self-directed), mastery (improving your skills), and purpose (connecting to something bigger than yourself) are the key components to human motivation and satisfaction.

Ultimately, your money should be used as a tool to create the life that you want. That’s the point. Therefore, the difficulty lies not in spending your money, but figuring out what you truly want out of life. What kind of things do you care about? What scenarios would you prefer to avoid? What values do you want to promote in the world? Once you figure that out, spending your

money becomes easier and much more

enjoyable. The key is to focus on the framing of the purchase rather tha...

Researchers at the University of Cambridge found that individuals who made purchases that better fit their psychological profile reported higher levels of life satisfaction than those who didn’t. Additionally, this effect was stronger than the effect of an individual’s total income on their reported happiness.

Within 20 years no Vanderbilt would be among the richest people in America. In

fact, “when 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.”30

For example, imagine that you just received a raise at work and now you want to go out and celebrate. After all, you’ve worked hard and you deserve something nice, right? Maybe you want a new car, a better place to live, or you just want to dine out more often. No matter what you decide to do with your newfound cash, you’ve just fallen victim to lifestyle creep.

the most important factor in determining how much of your raise you need to save (to keep the same retirement date) is your current savings rate. Differences in annual rate of return, income level, and income growth rate matter far less for this discussion. After testing all of these things, I found that savings rate was the most important.

Initial Savings Rate How Much of Your Raise You Need to Save 5% 27% 10% 36% 15% 43% 20% 48% 25% 53% 30% 59% 35% 63% 40% 66% 45% 70% 50% 76%

As a quick refresher, The 2x Rule states that before you buy something expensive, you should set aside a similar amount of money to buy income-producing assets. So, spending $400 on a pair of nice dress shoes means that you would also need to invest $400 into an index fund (or other income-producing assets).

This behavior, known as bet hedging, is a risk-reduction strategy that seeks to maximize an organism’s long-term reproductive success. It’s not about maximizing offspring in any one year, but over time.

Debt can also be used to decrease uncertainty when locking in a payment stream into the future. For example, if you want to live in a particular area, taking out a mortgage can fix your cost of living for the next few decades. Because of that debt, you no longer have to worry about changing rents or housing security since your future payments are known and unchanging.

In addition to reducing risk, debt can also be utilized to generate a return greater than the cost of borrowing. For example, when it comes to paying for an education (student loan), starting a small business (business loan), or buying a home (mortgage), the cost of borrowing can be lower than the return it eventually generates.

For example, we know that the average public university student in the U.S. borrows around $30,000 to get a bachelor’s degree.36 We also know that the average annual out-of-pocket cost to attend a public four-year school is $11,800.37 This means that, over a four-year period, the total cost (out-of-pocket cost plus debt) of attending a public university is $77,200 ($11,800 × 4 + $30,000).

research published in the Journal of Economic Psychology found that British households with higher levels of outstanding credit card debt were “significantly less likely to report complete psychological well-being.”38 However, no such association was found when examining households with mortgage debt. Researchers at Ohio State echoed these findings when they reported that payday loans, credit cards, and loans from family and friends caused the most stress, while mortgage debt caused the least.39

because if you are someone who is considering debt then you are more fortunate than you may realize.

In full, the one-time costs of buying a home can range anywhere from 5.5%–31% of the value of the home depending on the down payment, closing costs, and real estate agents employed. If we ignore the down payment, the transaction cost associated with buying a home ranges from 2%–11% of the home’s value. This is why buying a home usually only makes sense for people who will stay in it for the long term. The transaction costs alone can eat away any expected price appreciation if you buy and sell too often.

In addition to the explicit financial costs associated with maintaining your home, there are also significant time costs as well. I’ve heard far too many anecdotes from friends and family about how being a homeowner is like having a part-time job. Whether you are scheduling repairs or doing it yourself, home maintenance can take up more time than you might initially imagine.

renters are able to lock in the price they pay for housing for the next 12 to 24 months, they have no idea what they will be paying for housing a decade from now. As a result, they are always buying at the market price, which can fluctuate widely. Compare this to a homeowner who knows exactly what they will be paying for their housing into the future.

Anytime you look at U.S. housing as an investment, you have to compare it to what an investment in another asset would have done over the same time period. This is known as the opportunity cost of the investment.

researchers at the U.S. Census Bureau found that in 2020, the homeownership rate was nearly 80% for those households with an income greater than the median income.47 And my own calculations suggest that the homeownership rate is over 90% for those households with a net worth greater than $1 million in the Survey of Consumer Finances.

buying a home will probably be the biggest financial decision you ever make. And this decision is socially acceptable and critically important for so many other things in life. Housing determines what neighborhoods people live in, where their children go to school, and much more. If you decide to be a lifelong renter, that is fine—but you could be excluded from certain communities as a result.

The right time to buy a home is when you can meet the following conditions: You plan on being in that location for at least ten years. You have a stable personal and professional life. You can afford it. If you can’t meet all of these conditions, then you should probably be renting.

What makes buying a home even easier is if you can afford it. This means being able to provide 20% as a down payment and keeping your debt-to-income ratio below 43%. I chose 43% because that is the maximum debt-to-income ratio you can have for your mortgage to be considered qualified (i.e., lower risk).49 As a reminder, the debt-to-income ratio is defined as: Debt-to-Income Ratio = Monthly Debt / Monthly Income

If you are deciding whether you should save up and get a bigger home or get a starter home and then transition later, I recommend waiting for the bigger home. Given the transaction costs, it’s probably better to wait to buy something a little outside of your budget than to buy a starter home and then sell it within a few years.

To follow the 4% rule, you would need to save 25 times your expected spending in your first year of retirement. When you’ve reached this total amount of savings, you can retire. This is why I used this guideline in chapter 5 when discussing how getting a raise can affect your retirement savings. It was the 4% rule in disguise all along.

Zelinski’s book suggests that it is not a financial crisis you need to worry about in retirement, but an existential one. I have heard similar messages from others who reached financial independence early and hated it. For example, consider what Kevin O’Leary, a.k.a. Mr. Wonderful from Shark Tank, said about retirement after selling his first company at age 36: “I retired for three years. I was bored out of my mind. Working is not just about money. People don’t understand this very often until they stop working. Work defines who you are. It provides a place where you are social with people. It gives you interaction with people all day long in an interesting way. It even helps you live longer and is very, very good for brain health… So when am I retiring? Never. Never. I don’t know where I’m going after I’m dead, but I’ll be working when I get there too.”

All jokes aside, O’Leary brings up an important point about the value of work and how much it contributes to someone’s identity. Take that work away and some people may find it difficult to find meaning elsewhere in their lives.

“In observing friends who’ve sold startups and made millions: After one year, they’re back to toying with their old side projects. They used their money to buy a nice home and eat well. That’s it. They’re otherwise back to who they were.”

Deciding to retire is far more than just a financial decision, it is a lifestyle decision too. So, in order to know when you can retire, you need to figure out what you will retire to. How will you spend your time? What social groups will you interact with? What will be your ultimate purpose?

Once you have good answers to these questions then you can retire. Otherwise, you may be setting yourself up for a future of disappointment and failure. Because as much as I want you to succeed financially, that won’t matter if you don’t succeed mentally, emotionally, and physically as well.

“Embracing a nomadic FIRE lifestyle means accepting that you are no longer relevant or important and in some ways now operate in the ether between existence and non-existence.”

The concept of retirement didn’t exist until the late 19th century. Before then, most people worked until the day they died. No golden years. No new hobbies. No long walks on the beach.

For example, one experiment had a group of people look at “age-progressed renderings”—digitally aged photos—of themselves to see whether it had any impact on how they allocated money to retirement. It did! Individuals who saw the older versions of themselves allocated about 2% more of their pay (on average) to retirement than people who didn’t see such photos.62 This suggests that seeing a realistic older version of yourself may be helpful in encouraging long-term investing behavior.