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The formula for building wealth is simple: Save Money + Grow It. The challenge is in the execution.

Wealth and Net Worth

Let’s discuss what wealth is first.  Some people confuse a high income with wealth. It’s not.  Wealth is better thought of from the perspective of Net Worth. While income is an important tool for growing assets, it’s only one variable in the equation.

Here’s the definition of Net Worth:

Net Worth = Assets minus Liabilities

• Assets are things like cash, investments, retirement accounts, a house, Bitcoin and your Pokeman card collection
• Liabilities are things like a mortgage, credit card debt, student loans and a car note
• Net worth can be a positive or negative number
• You can have a lot of assets, but if you have a similar amount of liabilities, you aren’t wealthy

Do you know your net worth?  If not, take 10 minutes and do a back-of-the-envelope calculation – it’s an important financial metric that will help you analyze all sorts of questions like how much money you need to retire and whether you can afford a particular purchase.  If you don’t know where to start or need some help, here’s a simple net worth worksheet I created that you can download.

Save Money

Let’s tackle the first part of the formula to building wealth: Saving Money

You can’t build wealth if you have nothing to start from.  Saving money means spending less than you bring in. For most of us, savings means whatever is left over from our incomes after taxes and our bills.

Income plays a very important role in saving money.  The greater your income, the greater your saving potential.

Lawyers are good at earning money from their jobs.  As knowledge workers, we are able to exploit our human capital, our training and specialized knowledge, to earn high incomes.  For most lawyers, working hard and focusing on developing one’s legal career is going to be the best way to generate income over one’s lifetime.  If you’re able to earn the average lawyer income of $141,890 over a 40 year career, that’s $5,675,600 of income earned over one’s working lifetime!

However, as you no doubt know, income is only one part of the savings equation.

Spending is the other.

If you make $200,000 per year but have $250,000 of annual expenses, not only are you not going to be able to save, you are going to be in a world of hurt.

How much one spends, what one spends on, and what one perceives as needs vs. wants are, of course, personal decisions, but lawyers seem to be really good at spending money.  A lot of this, no doubt, comes from perceptions of what a successful lawyer should look like – the big house in a tony neighborhood, luxury cars, vacation home, private school for the kids, etc. For the lawyers who make the high incomes and can support the high spending while still saving lots of money, congratulations to them on their success.

But, for all of the other lawyers who don’t have the incomes to support that lawyer money spending while still being able to save, chasing the stereotyped image of the successful lawyer is going to be a recipe for financial disaster. Not only will it be hard to build wealth, those lawyers will be totally dependent on their jobs to maintain their lifestyles – if a bonus comes in lower than expected or if there is a layoff, the over-spender is going to be at much greater financial risk than the person who decided to live a little more modestly and saved 20% of her income.  The lawyer who saved 50% of her income year after year is going to be laughing and skipping her way to finance independence and early retirement.

Grow It

Let’s now talk about the second piece of the formula to wealth: Grow It

A job isn’t the only way to generate income and grow assets. With each dollar saved, there is an opportunity to make your money work for you.

Investments, such as stocks, bonds and real estate, provide an opportunity to set aside money that isn’t needed today in order to earn a return in the future. Financial investments aren’t without risk, but in exchange, they can create the opportunity for passive income and asset appreciation. It’s here where your money saved can grow and compound dramatically.  The key is to start saving early so that you can invest early and allow compounding to work.

The more you can grow your money from investments, the more wealth you can create. Over time, many lawyers who are saving and investing regularly may see greater contributions to their net worth from their investments than from the income they get from their day jobs.

While the concept of investing to grow money is fairly straightforward, figuring out how to invest, when to invest and what to invest in is not so simple – not because investing is complicated, but because there is a lot of noise and distraction, particularly in the financial media.  In addition, there is a whole financial industry competing to take your investing dollar and looking to pitch you on all sorts of sub-optimal investing opportunities.

As lawyers, we also have to be careful about how our egos and biases can unconsciously impact our investing decisions.  A lot of lawyers, particularly successful ones, have a tendency to be overconfident about their ability to manage their investments. Just because you’re successful at being a lawyer does not make you a financial wizard.  

At the same time, lawyers are trained to be risk averse, and this can spill over beyond the practice of law. I know because I’m risk averse in many aspects of my own life. In the context of investing, being too risk averse can also lead to sub-optimal choices. A lawyer who parks all of his money into a savings account yielding 0.04% interest is leaving an awful lot of money on the table and is going to have to work more years and spend less than the lawyer taking advantage of higher return investments.

So, Why Do We Care About Wealth Again?

Having wealth means the ability to use money for your goals. No matter where you fall on the spectrum from miser to spendthrift, money ultimately is there to be spent.  This is intuitive when we think about spenders, but it’s also true for savers. All a saver is doing is delaying spending today for spending in the future. Even the stingiest of savers will have their money spent – if not by them, by their heirs, donees or the government.

Everyone is motivated by different things, and building wealth is a means for enabling life goals.   Some have very specific goals, like wanting to be debt-free, save for children’s college funds or leaving behind a large estate to support charitable causes. Others have general goals like “being comfortable.” Building wealth creates options, whether it be financial security, supporting a certain lifestyle or choosing how to spend one’s time.

What motivates you to want to build some wealth?