For the vast majority of people, building wealth is an evolution, not a revolution.
Unless you come into an inheritance, win a lottery, marry rich, or knock it out of the park with a highly speculative investment, you can expect the journey to take at least 15-20 years, if not longer.
There are ways to accelerate the process. One is to reduce your FI number to one that’s more easily achievable. Another is to combine a high income with an aggressive savings rate.
But even then, you can expect the process to take at least a decade. Any way you cut it, it’s a long time. And as it happens, both you and your attitude towards money will change over that time period.
To be clear, this isn’t one of those “17 Gazillion Things Rich People Do Differently” posts. While I am sure they serve their own purpose, I never found them particularly insightful.
Instead, today’s post is about three discrete mindset changes that are likely to happen as your nest egg grows in size.
Whether you like it or not, they will have a direct impact on both the pace at which you build wealth as well as the evolution of your spending habits over time.
1. Your Risk Appetite Goes Down
Early on, you may envisage yourself building up a one / two / three / [insert dream number] million nest egg. Just imagine having two million quid working for you in the stock market.
Assuming a conservative 6% nominal return, that should average out to a cool 120k of annual returns.
Awesome, right? Well, not quite.
Assume you’ve got 100k invested and are socking away another 20k per year. If the stock market corrects by 30%, you can fill the resulting 30k “hole” in just 18 months. It’s unpleasant but manageable.
Now imagine the same situation once you’ve got a two million stock market portfolio. Market tanks by 30%, you’ve “lost” 600k. All of a sudden, that’s 30 years of contributions down the proverbial drain.
Yes, it’s temporary. Yes, the very fact that you’ve managed to amass a portfolio of that size to begin with means you’ve probably got the right attitude to ride out the storm.
And yet, don’t underestimate how powerful that lizard brain of ours can be. Loss aversion kicks in with a vengeance.
The problem is compounded by the fact that by this point in time you are (i) older, and (ii) closer to retirement.
By default, both of these factors imply a reduction in risk tolerance. As a result, you may struggle to hold the course the way you did in the past.
2. Your Asset Allocation Becomes More Conservative
This is a direct result of #1 above, with clear implications on how long it will take you to reach your “number”.
The basic point is that you should expect your portfolio returns to decline along the way as you allocate a greater portion of your investments to lower risk, lower return instruments.
Depending on when you start out, you may well end up with a 100% allocation to equities. Bring on those stock market returns.
It’s all fine and dandy for years and decades until you find yourself within striking distance of FI. At that point, you will likely want to hold a much greater proportion of your investment in bonds or even cash.
Inevitably, this will put a drag on your portfolio returns. You thought retirement was months away, but in reality, it’s still a few years off.
Make sure to factor this into your calculations.
Your portfolio returns sneaking up on your plans
3. Your Spending Goes Up
Predicting your spending needs 10 or 20+ years out is a fool’s errand. Prices keep going up, lifestyles change and so do everyone’s circumstances.
But whatever the number you’ve got in mind, chances are the actual spending will be higher. And no, it won’t be the luxury items that will tip you over the edge.
Most wealthy people I know are quite good at keeping their spending habits under control, except when it comes to education and healthcare. Come to think about it, that’s not an unreasonable approach.
If you’ve got an urgent healthcare issue, are you really going to wait four weeks for the next NHS appointment if you can get one done privately the following day for a couple hundred quid?
If you are young and haven’t got that much money – probably.
But if you are older and are getting close to FI, that actually becomes an irrational decision. And if the person in question is your child, you’ll be reaching for that credit card of yours in a millisecond.
Then there’s education. Early on, state school seems the only reasonable option. Then, private school slowly appears on the agenda, though the actual price tag is nothing short of eye-watering.
But once you are on the home stretch to FI, the trade-off becomes much simpler.
Send your kids to the local state school – and cross the finish line in a hurry. Or suck it up for a few more
laps years – but have your kids go private.
Sadly, none of the items above serve to accelerate your journey to financial independence. Then again, might as well set the right expectations up front. You won’t necessarily buck the trend – but at least you won’t be surprised along the way.
Enjoy the journey!