10 simple steps to build wealth and retire early

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Nov 14, 2023

Event: On November 20 (Monday) I am hosting a free online Workshop on — How to get scope in a flat or downsizing environment — where I will share my advice, answer questions, and talk about my upcoming course How to Break Through to Executive.

The workshop is almost full with over 500 spots taken.

A reader asked me to post about financial management.

Here’s my basic financial management in 10 steps.

If you are not able to live on less than what you make, no amount of investment planning will help you. The majority of my articles are on ways to increase what you make by growing your career. You’ll need to do one or more of those things before the rest of this post applies.
The alternative to raising your income is cutting expenses. Older car, local vacations, simpler clothing, cook rather than go out, buy used rather than new, etc. Each of my last two cars were 13+ years old when I let go of them, and I would have happily kept them if I could have.
With “extra” money after steps 1 and/or 2, first pay off any high-rate debt (bad debt). This usually means credit cards. Eliminate anything above 10% (roughly stock market returns).
Once bad debt is paid, build a cash cushion. This usually means 6 months of living expenses. Bad things happen. Be prepared.
Now that you can weather a layoff or emergency, start investing. The simplest, safest long-term investments for anyone under 40 are the stock market and your home (real estate). Some people will cite everything from bonds to Bitcoin, but candidly, that is complex and unneeded. If you are under 40 you will probably live 50+ more years. So you need to invest within that time horizon. That means only stocks and real estate unless you have far more time than this article to put into learning about wealth management.
If you have a 401k matching opportunity at your workplace, make this your first investment. Free money from your employer plus no taxes from your government. Too good a deal to miss.
Homes go up in value and you get to keep all the increase, but you get to buy them using someone else’s money and usually at a very low rate by having a mortgage. Buy a house you can afford in the nicest neighborhood with good schools. Then take care of it and wait. Rates are higher right now, but that will not last. They will go down as inflation retreats.
Mutual funds and anything managed by a bank will do worse than just buying an S&P Index Fund. 85% of fund managers did worse than the S&P index for the last 10 years. Some funds are much worse. Are you an expert to know the difference? For gosh sake, even Warren Buffett recommends this strategy, and he is an expert.
Hold stocks forever (more or less). Years. Decades. Day trading is a form of gambling. Sure, some people have made money. So have lottery winners.
Money accumulates very slowly at first, but the miracle of compound interest means that it explodes upward over time. If you are reading this at age 30 and retire “early” compared to the norm, at 60, you have time for a dollar you invest in the market today to multiply roughly 21 times. Time and patience are your friends.

Palacio Nacional da Pena — The result of great finances!

Now let’s handle all the usual objections.

But Ethan, you do not cover…[insert commentator’s favorite nuance]. You’re right. It’s called 10 simple steps, not a book on finance. Doing what is written here works. Your favorite strategy might also work. Bitcoin or day trading may have made you or someone you know rich. But it is not reliable with a decades-long track record of predictable, easy performance. There is nothing easy about day trading except losing money. That is easy.
But Ethan, you are an executive and a coach, not a financial planner. Right again! I am in no way a professional financial planner; you are free to discount my opinion based on that. The good news is, to spend less than you make, pay off debt, put the rest into the market, and wait a long time (really just 4 steps) you do not need to be a financial expert.
But Ethan, you are writing from a position of privilege. How can you just say live on less than you make when that is out of reach for so many? I get that. I’m writing what to do, not saying that America or the world are fair or that any of this is easy. But, if you do not live on less than you make, you cannot possibly build wealth. So, I’m addressing a mathematical fact rather than engaging the social justice issue of who can do so.
But Ethan, what about this or that stock? Picking individual stocks is a nightmare. Maybe you will do it well, but remember that 85% of professional fund managers under perform vs just buying the index. They spend 60+ hours a week for decades picking stocks. How much time are you going to be able to invest?

If you are living paycheck to paycheck, then step 1, getting your income above your costs will be the hardest thing to do. Focus on that.

How to actually invest is very straightforward.

The hard step is WAITING.

I wanted to be secure and retire by 35. Then 40. Then 45. I made it by 50.

Most people either (a) make it in their mid-60s or (b) never.

This article is written at the request of a younger reader. For this person, 60+ years old probably seems like a century away. An unimaginable distance. More time until retirement than they have been alive.

I understand that making a plan to retire securely only in what you now view as “old age” may seem unhelpful.

So here is the thing. This advice is right whether you do better or worse than the timelines I have laid out. Are you a star and you save an incredible amount? Great. You’ll beat the timeline. Are you working at a unicorn startup and going to make a killing on equity? Great again! Nothing about doing these steps will make you worse off if you do get lucky…but they will protect you if you do not.

Happy saving.

Audience Insights

I have consolidated additional ideas worth considering from my LinkedIn audience, including:

You can become “rich” by getting more or by being content with less. Give yourself the permission (and practice) to be satisfied with less.
Famed investor Charlie Munger (Warren Buffett’s business partner) said “Show me the incentive and I will show you the outcome.” Actively managed funds/financial services do not have an incentive to push a simple hands off the wheel market index approach because there it lower margin for them (the incentive). That’s why you often see the highest expense ratios (you pay them more money) get promoted. Simply put, the financial industry incentives are not aligned with small investors (sometimes referred to as “retail investors”).
If you need help spending less than you make, try these methods:
Get two bank accounts: (1) Main Account for your one dedicated salary and bills; (2) Daily Account for your daily spending. Then, set up an automated weekly allowance from your Main Account to your Daily Account.
Write down everything you spend before you spend it. Adding this friction will help you reconsider if it’s really worth spending your money on (similar to how every extra click before checkout reduces the conversion rate).
If you want to create generational wealth (e.g. $100,000,000+), the majority of the examples show that concentrated investments (big bets on one or a few things) beats a diversified portfolio. Popular examples are founders of startups that went public or early FAANG employees. Once that wealth is made, they move from wealth creation to wealth preservation (diversified portfolio).

If you found this article helpful and/or know someone who may benefit from this information, please share this article.

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