Self-made millionaire Steve Adcock retired from his job as a software developer in 2016, when he was just 35 years old. Over the years he has curated lots of tips for building wealth. “I started thinking about all of the pieces that most people put into place to reach financial independence. I went down from 20 rules to really just the six most important ones.”
Getting rich means different things to different people. Adcock says: “I think lots of people equate a high salary, like making lots of money, to getting rich. I think there is an element of truth to that. But to me personally, the term ‘rich’ is synonymous with building wealth.”
Build a 6+ month emergency fund
If you don’t have an emergency savings account, Adcock warns, “You’re living at extreme risk.” Not only will you be ill-prepared for unexpected expenses such as medical bills, but you may also have to resort to a high-interest credit card to pay them, which “kills your ability to build wealth,” he says. Having an emergency savings account is more essential now than ever before. It’s so important to have liquid cash, especially now that we’ve experienced this pandemic and there’s still a lot of uncertainty.
Many financial experts advise saving up enough cash to cover 3 to 6 months’ worth of expenses. Adcock’s recommendation is to aim for the top of that range. If that feels overwhelming, “Remember, six months is a goal. You’re not going to get to six months overnight,” he explains. To start, Adcock says to open a separate savings account, money market account, or CD, and to avoid using your checking account as an emergency savings fund. “Your main bank account is not your emergency fund, because if you save money there, it’s going to be way too easy to spend,” he says. Setting up monthly automatic transfers of a small amount to an account you don’t have easy access to will make this process easier, and over time, “that money is going to consistently add up,” Adcock says. Even smaller amounts can add up quickly.
How much money do I need to start investing? Only you can determine your actual hard numbers. One budgeting model many experts recommend is the 50-30-20 rule—putting 50 percent of your budget toward needs, 30 percent toward wants and 20 percent toward saving and investing for future needs and goals. Of that last 20 percent, you should invest whatever you don’t expect to need for at least a few years. That time-frame allows you to take on the risk of short-term losses and ride it out to capture potential long-term gains. But one formula doesn’t work for everyone.
Invest 20% of Your Income for the Future
Adcock’s second rule is to invest 20% of your income for the future. “Alone, salaries don’t build wealth. Neither does saving. By not investing you’re missing out on a lot of wealth potential. You’re missing out on compound interest, and you’re also letting inflation reduce the spending power of every single penny that you earn.”
When you think about investing for your future, it’s not just the money you’ll use decades from now for retirement. Instead, think about the different financial goals you want to achieve, like buying a house or saving for a wedding. Every one of your goals is going to have a different time horizon with it and a different risk profile.
As with Adcock’s six-month emergency savings rule, consider 20% per paycheck invested a target you may need to work up to achieve. To increase the amounts of money you can invest closely examine how you are spending your money. Define what areas of spending you want to focus on that really make you happy and prioritize those, and then cut back ruthlessly everywhere else.
Avoid Credit Card Debt
Adcock says credit card debt is: “addicting, high interest, and tough to eliminate.” The stats back up his claim. Credit cards are one of the most expensive ways to borrow money.
The good strategy you can stick with is far superior to that great strategy you can’t stick with. If you can, always pay your credit card balance in full and set reminders to avoid high-interest fees. Before you tackle building an emergency savings account or investing, pay down high interest credit card debt first. The good thing about debt repayment is that if you can build that habit of paying off debt on a periodic basis, then once you’re debt-free, you can immediately shift those debt payments into savings since you’re already setting aside that money on a regular basis.
Adcock says that you should buy quality. Keeping big costs like your living expenses and transportation down is an easy way to move towards financial independence. “Wealth is the stuff that you don’t see. It’s not the big flashy toys or cars; it’s the stuff that you know you don’t buy.”
Ignore Neighbor’s Buying Decisions
To build long-term wealth, stop comparing yourself to others. Ignore your neighbor’s buying decisions. As an example, Adcock says to imagine your neighbor has a BMW and you know they earn less than you so you go out and buy a BMW as well. “You’re effectively letting the buying decisions of somebody else affect your buying decisions irrespective of your financial position,” he says. “That comparison is a great way to lose wealth.”
Going through the process of realizing whether the money that you’re spending is actually in your best interest, and in the best interest of your family, over and over and over again, you’re slowly going to make that transition from paying attention to what other people spend money on, to ignoring their decisions and really doing what’s in your own best interest.
Adcock’s last rule is to walk often. You’re probably wondering, “What does walking have to do with building wealth?” he says. “I think I’ve come up with some of my best ideas when my wife and I used to walk our dogs after work back when we were both working full time.”
Walking has so many benefits, and it can really help you reflect and leave behind distractions like your TV and phone, he explains. “I think the more we think, the more we process, the more we reflect, and that is going to set us up to make way better decisions for ourselves, whether that means money or career or lifestyle or whatever,” he says.
“Walking, I think, is a great foundation to just let yourself take some time and think about whether the decisions you make are truly right for you or not.”