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Consistency is the key to building wealth

By April 18, 2022April 20th, 2022Financial Planning

When it comes to building wealth, the truth is that relatively unremarkable actions completed consistently over many years (and decades) produce remarkable results. But because these actions appear unremarkable, people tend to overlook their importance. Also, sometimes, people are tempted to undertake intense and often risky “investments” as a shortcut to make up for past inaction. Unfortunately, this approach rarely pays off. Consistency beats intensity.

This blog sets out the top 4 unremarkable actions that generate the most wealth if completed consistently over many years.

Eliminate unconscious expenditure

Holidays are expensive. And post-Covid, holidays are even more expensive. However, holidays tend to deliver a lot of happiness and satisfaction. We tend to think deeply about whether to book a holiday, where to go and how much to spend. This conscious approach to spending typically means we get good value for money i.e., in economic terms, maximise the utility per dollar spent.  

If you are reading this blog, it’s very likely that you make wise, rational decisions about how you spend money. Therefore, your only potential weakness then is unconscious expenditure, which you must eliminate. Unconscious expenditure is when you spend money on items without thinking about it. These items tend to be small dollar value transactions. Most importantly, they tend to add little to your standard of living (i.e., utility), and as such, are a waste. A perfect example is the Stan subscription that I cancelled last month. My family hasn’t watched anything on Stan for a few months, so it was a waste to continue to pay for it. Unconscious expenditure can add up to multiples of tens of thousands of dollars each year.

How do you eliminate unconscious expenditure? There are two ways. You can track every dollar and cent you spend using an app like Pocketbook. However, for most people, this approach feels tedious, time consuming, and draconian. Instead, you need an approach that is simple and unintrusive so that you can stick to it for the long term. All my clients have had great success with the approach set out in this blog.

If you can adopt a strategy that ensures you minimise or hopefully eliminate unconscious expenditure and stick to it for the rest of your life, it will probably literally save you millions of dollars.

Invest regularly either in the share market or by making additional super contributions

If you invest $500 per month for 20 years and earn a return of 7% p.a. (on average), you will accumulate $260,000. If you invest $1,000 per month, you will accumulate $520,000 (consisting of $240,000 of capital plus $280,000 of investment returns).

You can accumulate substantial wealth by consistently investing relatively small amounts of money over long periods of time. The sooner you begin, the less you need to invest to produce substantial outcomes. For example, if a 25-year-old invested $500 per month, they would accumulate over $1.3 million by the time they were 65 years old!

There are two main ways to invest money regularly. Firstly, you could make additional contributions into super (be careful to not breach your annual cap of $27,500).

Or secondly, you could invest money in the share market. This blog sets out a very simple and cost-effective way to do that yourself.

You must measure your progress

You have probably heard these sayings; “what gets measured gets done” and “you can’t manage what you do not measure”.  These sayings couldn’t be any more perfect for wealth management. The fact is that if you do not track your progress, how on earth do you know if you are heading in the right direction. Also, the mere fact that you start measuring something means that it almost always improves, which is called ‘the Hawthorne effect’.

The key number to track is your net worth, as it reflects your surplus cash flow (i.e., how much you have saved, repaid debt, or invested) and any change in asset values.  

I recommend that you review two net worth calculations. Firstly, compare your current net worth to what it was 1 or 2 years prior. Consider what worked well (and you should repeat) and what didn’t work so well.  Secondly, as discussed in this blog in January, forecast your net worth in 12 months’ time. This will give you an opportunity to consider whether you need to adjust your approach over the course of the next year.

Measuring your net worth every month won’t necessarily provide you with meaningful information and in fact, might tempt you to make short-sighted changes. However, tracking your net worth every 6 to 12 months is best practice. If you do that, there’s a very high probability that it will improve because it encourages you to take action.

Take responsibility for your money

Taking responsibility for your money means that you take ultimate responsibility for ensuring that your financial position continues to improve. It is your money, and you cannot delegate this responsibility. That is not to say that you cannot delegate the responsibility for day-to-day management to a financial advisor, for example. Of course, you can. But just like any CEO, whilst it’s not their “job” to do the work, it’s their job to ensure the work gets done correctly.  

Looking after your money is a lot like looking after your health. If you don’t look after it, you are the one that ultimately suffers. You can ignore health issues but that’s not a long-term solution as they aren’t going to disappear. In fact, they almost always get worse. The same is true with money. However, unlike with health (e.g., exercise), when it comes to building wealth, you can delegate all the hard work. The only thing you need to do, just like a CEO, is to take responsibility for ensuring you make progress. That means stepping in to correct any issues when they arise.

Taking responsibility for your money does not require a large time commitment – maybe 1 to 2 hours per year to review results and meet with your advisors to make financial decisions. But if you fail to invest this time and take an interest, you will be the one that ultimately pays the price.

The results from ‘unremarkable actions’ compound

Consistency beats intensity every day of the week!

As Simon Senik explains, intensity is like going to the dentist whereas consistency is like brushing our teeth twice a day. If you go to the dentist but never brush your teeth, your teeth will fall out. Brushing your teeth one time only won’t produce any long-term results. But brushing them twice a day produces remarkable results. The same is true for building wealth.

Completing these four relatively unremarkable actions consistently over many years will produce remarkable financial results.