There are four key levers that determine how wealthy you will ultimately get.
The most obvious one is how much money you make.
However, as this guy has shown, that’s just the starting point.
If you want to build wealth, you’ve also got to put some of that hard-earned money away.
This is where your savings rate comes in.
I don’t want to belabor the point here. Instead, let me point you to this instant classic from Mr. Money Mustache that shows the impact of your savings rate on your retirement prospects.
Once you’ve put some money away, you can start playing with your asset allocation.
The higher your risk tolerance, the higher the returns (up to a limit) that your portfolio can achieve:
And finally, there’s your time horizon.
It’s tough to lose a job in 10 years.
But extend that time horizon by a decade, and the path to retiring at 45 is lined with some easily achievable savings rates:
Now, the reality is that in order to build real wealth, you need to combine all four components.
No point making millions if you squander all the money that comes in on questionable habits and alimony payments.
Equally, even a 99% savings rate won’t get you there if you aren’t making enough.
Some folks start their investing journey in their teens. Others might not get there until much later in life.
Some prefer and slow and steady approach to building wealth.
Others have the tenacity (and audacity) to take repeated outsized shots – until they ultimately succeed.
In other words, everyone has a unique set of skills, attitudes, and opportunities.
But if you are serious about building wealth, you need to look in the mirror and ask yourself:
What exactly is my edge?
And if you think this only applies to building wealth, you may want to think again.
When I was growing up back in the 90s, I loved watching tennis.
Pete Sampras was my favourite player. But if I had to pick another one, Michael Chang would be a close second.
Now, if there’s one thing you’ve got to know about Michael Chang it’s that he had a massive handicap when it came to tennis.
At just 5’9’’, he was one of the shortest players on tour, in a game where height provides an enormous competitive advantage.
What he did have, however, was speed.
Michael parlayed that edge into a mega-successful tennis career, becoming the youngest player ever to win a Grand Slam and reaching a career-high of world #2.
Look around and you will find these stories playing out all around us.
Anyone familiar with the rise of Arnold Schwarzenegger knows that he certainly wasn’t a shoo-in for an action movie hero and the governor of California.
A poor kid from an Austrian village, with a horrible accent and an impossibly long last name.
What Arnie figured out very early on, however, is that he had a body that responded incredibly well to weight training (and steroids, which were legal back then).
He then used that advantage to embark on one of the most inspiring rags-to-riches journeys of all time.
Sometimes, you don’t even need to be better than anyone else in a specific area. Rather, it’s a combination of traits that becomes your edge.
For example, Scott Adams isn’t the best cartoonist, writer, or businessman.
But it’s a combination of those things – in addition to his sense of humour and risk tolerance – that made him one of the most successful artists of modern time.
The argument goes beyond reaching movie stardom or becoming a cultural phenomenon of your time.
Take investment banking as an example.
Day in and day out, I see folks deploying their individual edge to reach the pinnacle of an ultra-competitive profession.
Those with superior technical skills and an ability to drive a tough negotiation rise through the ranks in M&A.
Bankers who love becoming absolute industry experts thrive in sector roles, such as healthcare or technology.
And the gregarious, charming types become country coverage officers (also known as relationship bankers).
Sure, you need to possess some measure of all characteristics in order to be a successful banker.
And it is also true that those bankers who can excel in each of the aspects above become real superstars.
But take a closer look at their careers, and you will find that they “majored” in one of the areas above as they ascended to the top.
In real estate, every property needs to have a unique selling point.
It may be the neighbourhood, the lot size, the proximity to transport links, the curb appeal – anything that will stand out and appeal to prospective buyers (or tenants).
Properties that have this special component will continue rising in (or holding) their value. Others are unlikely to make for successful investments.
This even applies to dating.
Some people capitalize on their natural good looks. Others use their sense of humor.
And yet others simply whip out the credit card and try to impress their date by spending inordinate amounts of money.
Warren Buffett once said:
How do you beat Bobby Fischer? You play him at any game but chess.
I try to stay in games where I have an edge.
The process of discovering your edge isn’t straightforward.
It requires experimentation, iteration – and a whole lot of time.
But in today’s hyper-competitive world, it might well be the most crucial building block of a wealthy and fulfilling life.
Do you know what yours is?
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
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