4 min read

How to Avoid Building Wealth (And What to do Instead)

Wealth can mean a lot of different things, but it essentially is freedom. It's freedom away from what you don't want, and towards pursuing what you do. It's the freedom to live life on your own terms. It doesn't need to mean extravagance, but can instead mean comfortable and sustainable. It's the freedom of being exactly what you want it to be.

“Having more control over your time and options is becoming one of the most valuable currencies in the world.” – Morgan Housel

When we think about building wealth, the possibilities can be vast, and feel overwhelming. So much so that many people fail to take the first step.

Sometimes the best way to solve a problem is to figure out what has to be true for the opposite to happen. If you want to do ___, what would have to happen for there to be no chance that you could do ___?

If you're looking at becoming a runner, there are countless suggestions over diets and training and frequency. But if you look at how to avoid becoming a runner, it's simple: don't run. So to become a runner, as long as you're running, you're doing it. All of those other details can fall into place along the way.

With a long-term goal of building wealth, rather than getting hung up on the complexities, we could instead look at what we’d need to do to accomplish the opposite: not building wealth. Which is lucky, because how to avoid building wealth is a short and simple list that is relevant no matter what route you take.

Key Takeaways:

  • Figuring out how to build wealth can feel complicated and overwhelming, but figuring out how to avoid building wealth is quite simple.
  • By identifying what not to do, we can simplify our approach by avoiding to do those things.
  • Building wealth is fundamentally doing the little things right for a very long time, it doesn't need to be more complicated than that.

Spend more than you make

Building wealth requires you to direct part of your cashflow to assets that appreciate in value over the long-term, like stocks, bonds and real estate.

In order to build wealth, you have to be a participant, not just an observer. By spending more than you make, you'll constantly be on the sidelines without anything to put towards appreciating assets. You can't invest money you don't have.

What to do instead: get in the habit of regularly contributing a portion of your paycheque to building wealth. The easiest way is to set up automatic contributions that align with your paycheque, think of it as a bill.

Pay high fees/Get no advice

Paying high fees reduces your rate of return, while adding to someone else's. Over along period of time, like decades and decades, high fees can greatly reduce your overall account balance.

Getting no or bad advice can also put you in a position of less efficiency or utilizing methods that aren't suitable for you. Studies show that professional advisors can add significantly to annual returns, so ignoring such advice goes along way to avoiding wealth.

What to do instead: the solution here is twofold: 1) pay less fees, and 2) ensure you're getting value for what you're paying and implementing good advice. Paying 0.5% in fees without advice can be a lot more expensive than paying 1.0% with advice.

Accumulate debt

If building wealth is like climbing a mountain, accumulating debt is like digging a hole beside that mountain. It brings you further from wealth, making the climb even longer and more challenging.

High interest debt, like credit cards, is a great way to pay interest and essentially burn your own money. Making the minimum payment can stretch debt over years and years, making it impossible to get ahead and back into an advantageous financial position.

What to do instead: avoid high interest and bad debt! Debt does two bad things for us financially: 1) it restricts our cashflow, and 2) it costs us interest. Paying high interest debt builds wealth for someone else.

Avoid investing

If we look at historical data, investing in stocks has been the best way to build wealth. Investing produces the most benefit when we earn a rate of return that is greater than inflation and then some.

In order to avoid building wealth, we should keep our savings in accounts earning a return that is far less than inflation. A checking or saving account earning below 1.0% is an almost guaranteed way to consistently lose buying power because of inflation and the fact that our funds don't grow.

What to do instead: instead of having your money sitting idle, or losing value, put it to work! Invest in stocks and let compound interest work its magic for you so you can earn while you sleep, when you're on vacation, 24/7.

Rent instead of own

When you buy a house, a portion of your mortgage payment goes towards paying off the principal, which builds equity in your home and increases your net-worth and wealth over time.

Renting is typically seen as throwing your money away, while paying off someone else's mortgage and increasing their net-worth and wealth. Plus renting can last indefinitely, whereas a mortgage is eventually paid off. Renting is a great way to ensure you always have your largest monthly payment and avoid building equity.

What to do instead: owning allows you to build equity, which can give you huge flexibility later on (can't borrow against a property you don't own). Eventually being mortgage free allows you to maintain your lifestyle with less cashflow, like living rent free!

Keep doing things your future self will thank you for.