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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

The Missing Pieces of the Wealth Puzzle

by Laura Rowley

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Posted on Thursday, January 25, 2007, 12:00AM

In the Jan. 8 issue of The New Yorker, writer Malcolm Gladwell examines the Enron collapse in a story called "Open Secrets." He suggests that much of the company's risky dealing was out in the open, and investors could have uncovered it had they analyzed it correctly.

A Matter of Semantics -- and Debate

Gladwell uses the Enron case to draw a distinction between a puzzle and a mystery. A puzzle involves a buried secret, and we can solve it once we've collected all the relevant pieces -- such as in the Watergate scandal.

Washington Post reporters Bob Woodward and Carl Bernstein broke the story of the Nixon administration's dirty dealings once they uncovered all the information with the help of their inside source, Deep Throat (former FBI official W. Mark Felt).

In contrast, a mystery is when we have the relevant facts but have to figure out how to interpret them. Gladwell gives an example from World War II, when Allied intelligence had to analyze hours of Nazi broadcasts to figure out if a "super weapon" they described was real and, if so, where it was being developed.

Gladwell's New Yorker piece set off a spirited debate in the press, with Joe Nocera of the New York Times enumerating ways that Enron had indeed withheld essential information about its financial condition.

Nocera argues that this was no mystery that could have been resolved by taking readily accessible pieces and applying the right analysis, insight, and perspective. Instead, it was a puzzle -- something that couldn't have been solved because Jeffrey Skilling and other Enron execs hid the pieces.

Net Worth Number-Crunching

The puzzle/mystery distinction is an intriguing one when applied to money management. Some people think achieving wealth is a mystery. It's requires a certain type of person, a special kind of insight, or an analytical expertise with numbers to make it happen. So they don't approach it with confidence.

Consider a startling statistic from "The Net Worth Workout" by New York financial planner Susan Feitelberg: The average U.S. citizen works 44 years and retires with a net worth of $46,000, excluding home equity.

That represents $1,000 a year for every year in the workforce, or $83 a month. If the worker invested the $1,000 in the S&P 500 for 44 years, at age 65 they would have more than $650,000.

The Missing Pieces

I'm convinced that wealth is a mainly a puzzle to solve -- a fact-finding mission that demands each person assemble the missing pieces for himself. It doesn't require a Midas touch, or the extraordinary insight of Warren Buffet (although admittedly, that doesn't hurt). It requires basic information, discipline, and patience.

Here are 13 pieces to help solve the wealth puzzle:

  1. Get as much education as you can.

    Someone with a bachelor's degree earns about a million dollars more over a lifetime than someone with a high school education, according to the U.S. Census Bureau.

  2. When you get a job offer, come prepared to negotiate for a higher wage.

    Workers who fail to negotiate a first salary stand to lose more than $500,000 by age 60, according to Linda Babcock and Sara Laschever, authors of "Women Don't Ask: Negotiation and the Gender Divide."

  3. Always spend less than you earn.

    Save at least 10 percent of your gross income every year.

  4. Establish very specific written financial goals.

    Put a time frame and price tag on them, set up a monthly budget, and track your spending so it reflects your goals.

  5. Resist advertising and the media.

    If they greatly influence you to desire a certain kind of clothing, car, vacation, home decor, high-tech toys, etc., get rid of your television, and don't buy magazines that glorify luxury products and services.

  6. Never, ever carry a balance from month to month on any credit card.

  7. As soon as you have an income (no matter your age), open a free checking account and an interest-bearing online savings account.

    As soon as you begin receiving regular paychecks, have the online savings account automatically withdraw money from your checking account month after month.

  8. Establish an emergency fund.

    Save enough in your online savings account for an emergency fund equal to at least three months of your living expenses.

  9. Once you've saved $3,000 above your emergency fund goal, begin investing for your written financial goals.

    If the goal is more than five years away, buy an index mutual fund that mimics the performance of the broader stock market, such as Vanguard Total Stock Market Index Fund (VTSMX). Have the financial firm transfer the same amount of money automatically from your checking into this account every month.

  10. Once your assets grow to $10,000, begin to diversify your investments into other low-cost mutual funds.

    Base these on your goals, time frame, and appetite for risk. To learn more, go to Morningstar's online Learning Center. You can get investment basics here for free, and move on to higher courses for a minimal fee.

  11. Get your employer to help with retirement.

    If your employer offers a retirement plan such as a 401(k), max out your contribution or contribute at least enough to get any employer match. Allocate your contributions among the mutual funds offered or invest in a single target-strategy fund or life-cycle fund. Visit 401khelpcenter.com for more information.

  12. Buy real estate.

    Homeowners enjoy significantly higher net worth than renters who earn the same income, according to the Federal Reserve's Survey of Consumer Finances. Among people earning $50,000 to $79,999, for example, homeowners had a net worth of roughly $195,000, compared to $25,000 for renters.

    (One caveat: Your mortgage, real estate taxes, and homeowners insurance should add up to no more than one-third of your gross income.)

  13. Protect yourself and the people you love.

    At a minimum, take out a catastrophic health insurance policy. If you have children, buy a cost-effective 20-year term life insurance policy worth 7 to 10 times your annual salary. Also draw up a will; for more information, see Nolo.

Start Solving the Puzzle Early

Admittedly, there are details to each piece of the wealth puzzle that require ongoing education. And there are pieces people can't control.

Some people have the good luck to be born into a well-off family that pays for college, or hit it off with the boss and find themselves mentored into a high-paying job. Others may suffer a catastrophic illness or have the misfortune of devoting an entire career to Enron. We can try to manage these pieces, but we can't control them the way we can, say, shop at a discount store to cut the grocery bill, or choose a mutual fund with low costs.

But there's a lot we can control if we act on the information we have. Unfortunately, some people ignore essential information that's readily available until there's an emergency; sometimes, by that point it's too late. The earlier you start assembling the puzzle pieces, the better.

With luck, latecomers to the game can still locate the pieces and assemble them into a cohesive financial picture. But the picture will likely be more robust, and fall more easily into place, if you start looking for the puzzle pieces earlier in life.


Help assemble the pieces of the wealth puzzle for your fellow Yahoo! Finance readers. What's your favorite source of information about building wealth? What are the best tools, techniques, or tips you've found to live below your means and save money? Email your best money-saving techniques it to me at laurarowley.column@yahoo.com and I'll include the top tips in upcoming columns.

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34 Comments

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  • Yahoo! Finance User - Sunday, January 28, 2007, 3:07PM ET  Report Abuse

    • Overall: 1/5

    good advice for the past, but not so much for the future, unless you can hide your assets. social security, medicare, etc., will be means tested, so the "average" person who saved will live the same lifestyle as the person who spent freely. IMO

  • Yahoo! Finance User - Saturday, January 27, 2007, 8:48AM ET  Report Abuse

    • Overall: 3/5

    Not bad - there are a number of approaches to achieving wealth and each vary in their level of chance or probability. For me, it all comes down to establishing financial competancy "behavior" at an early age.

  • Coreadrin - Saturday, January 27, 2007, 12:02AM ET  Report Abuse

    • Overall: 4/5

    Good common sense advice for everyday people. To be honest, it doesn't take a lot to get ahead if you take the right steps. I am only 22, and I DO NOT come from a family with money, but my parents made me start putting 10% of my cheques from my part time job into an RRSP when I was 15. I now have 25,000 in RSP (401k) savings at an average return of 10% per year. Parents need to get their kids to start as young as possible on this one. If you invest 50.00 per week from age 20 to 65 at an average return of 8% per year, it's approximately $1.525 Million Dollars. 5% of that in an annuity after retirement is 75k per year, which is definitely livable on top of pensions/government security funds. As Einstein said, "compound interest is the most powerful invention in the history of mankind". Cheers. P.S. If you have a personal interest in the stock market it's pretty fun to save up 5 grand or so in extra cash and compete against your mutual funds to see who comes out better at the end of the year. Better than a casino ;).

  • Ellison - Friday, January 26, 2007, 10:03PM ET  Report Abuse

    • Overall: 4/5

    Very good points. Also it is good to have someone that understands investments to help point you in the best direction. Better understanding of time and money and what inflation can do to your savings.

  • Richard - Friday, January 26, 2007, 7:13PM ET  Report Abuse

    • Overall: 2/5

    if the average worker retires with 46000 (plus house equity) it would seem logical that they would be completely destitute within a few short years after retiring, then have to sell the house, (live in a trailer?) and in another short time be utterly and totally destitute depending on how much they could get for the house, not including all the people who dont own houses. Something is missing here in her oversimplification., example, social security which pays 1000 a month can be viewed as an annuity worth 240,000 paying 5 per cent per year.

  • kim - Friday, January 26, 2007, 7:12PM ET  Report Abuse

    • Overall: 3/5

    For most wealthy people, luck plays a small part in acquiring their fortune. These people are not much smarter than the average person, but they are different in that they have the courage and the stamina to work like animals in their own business. They save every penny, and re-invest into what they see is working. They are smart enough to know what they are good at, and they become the best at it. Playing the stock market (the Wall Street Casino), even through mutual funds is risky and makes fund managers and brokerage houses very rich instead of you. Invest in yourself!

  • Yahoo! Finance User - Friday, January 26, 2007, 6:29PM ET  Report Abuse

    • Overall: 2/5

    Some good advice and common sense to show you how to get to retirement with a decent amount of money. It doesn't really tell what it takes to accumulate enough money to make you really wealthy.

  • Swamy B - Friday, January 26, 2007, 5:51PM ET  Report Abuse

    • Overall: 2/5

    This lady's article explains how to maintain what u have and come upto a level where one can be comfortable. It will not make u wealthy. Wealth can be achieved only by not working for others and investing smartly. The article should be named as "missing piece of the puzzle for Art of living", not wealth.

  • Jah - Friday, January 26, 2007, 4:22PM ET  Report Abuse

    • Overall: 2/5

    I thought these columnists suppose to educate the average investor. Instead they are try to sell the average investors some Wall Street products. If you going to buy are going to invest and don't have the time, just do yourself buy one of those stock that index the indice. Like the SPY, DIA, QQQQ, IWM. In a long run, you will come out much ahead of those who hand their money to the "Pro".

  • ThomasO - Friday, January 26, 2007, 4:05PM ET  Report Abuse

    • Overall: 5/5

    Mutual funds are fine for most people. Just stick to low-cost funds like Vanguard and you'll avoid the high management fees that vegas_pinhead is worried about.

  • Sloth Machine - Friday, January 26, 2007, 3:45PM ET  Report Abuse

    • Overall: 2/5

    Mutual funds are for SAPS. You enjoy getting cryptic tax forms at year end and paying 8 figure salaries and bonuses to your pinhead fund managers? Keep the profits for yopurself and BUY STOCKS AND OPTIONS DIRECTLY. Mutual funds skim most of the profits for themselves before you see dime one.

  • Yahoo! Finance User - Friday, January 26, 2007, 3:40PM ET  Report Abuse

    • Overall: 3/5

    Contributions to an IRA are missing from the list... Otherwise it is a good list...

  • JunA - Friday, January 26, 2007, 3:28PM ET  Report Abuse

    • Overall: 3/5

    Saving, investing, and retirement planning is a psychological thing. Human being wants to experience them first hand before they are convinced. As rational beings, we cannot tell to simply follow these instructions. Being responsible for oneself needs memories of poverty as inspirations. Bottomline, if we need to educate the young ones or even ourselves, go to a place of poverty and experience the life of survival. The next time you read these instructions, it will be a different.

  • Yahoo! Finance User - Friday, January 26, 2007, 2:50PM ET  Report Abuse

    • Overall: 4/5

    This advice will not make you rich, but it will keep you from suffering during retirement. Still, it is a good start.

  • Yahoo! Finance User - Friday, January 26, 2007, 2:02PM ET  Report Abuse

    • Overall: 5/5

    My kids will have a copy of this in their email by the end of the day. Great summary

  • Chuck - Friday, January 26, 2007, 2:02PM ET  Report Abuse

    • Overall: 4/5

    It is all very true, I can say this from my own experience. Unfortunately because of our want it now culture, most people do not have the discipline to become wealthy. It seems to me a lot of people will spend every thing they earn (and more) because they will not wait until they have the money to buy things.

  • Yahoo! Finance User - Friday, January 26, 2007, 1:56PM ET  Report Abuse

    • Overall: 3/5

    Good advice, but her puzzle/mystery analogy is inconsistent -- compare the way she uses it in the first two paragraphs to they way she uses it in her finance advice: she switches the definitions!

  • Yahoo! Finance User - Friday, January 26, 2007, 1:52PM ET  Report Abuse

    • Overall: 4/5

    Very good advice. If some people would just look at their spending habits instead of trying to keep up with the Joneses, they would be able to pay themselves first, and compound their net worth as they near retirement.

  • Living Dead - Friday, January 26, 2007, 1:51PM ET  Report Abuse

    • Overall: 5/5

    Great advice. It is a shame it is not taught in school. I have been doing all these steps for a long time and almost every book on the subject of retiring early says the same thing. My question is after you do all these things what can you do to get to the next level?

  • BlairF - Friday, January 26, 2007, 1:48PM ET  Report Abuse

    • Overall: 5/5

    Great reference and links. Granted much of it is common sense but it is good to reinforce these habits.

  • joe - Friday, January 26, 2007, 1:29PM ET  Report Abuse

    • Overall: 5/5

    Slow but sure. It isn't sexy or exciting, but it works.

  • Yahoo! Finance User - Friday, January 26, 2007, 12:43PM ET  Report Abuse

    • Overall: 4/5

    I already do all of this and I am still struggling.

  • Yahoo! Finance User - Friday, January 26, 2007, 12:42PM ET  Report Abuse

    • Overall: 5/5

    Common sense advice. It's a shame most people don't invest time and a little effort into a life-plan early enough.

  • BRETISLAV - Friday, January 26, 2007, 12:38PM ET  Report Abuse

    • Overall: 4/5

    I wish this approach woold be more popular for younger generation. It is boring, not rewarding for a few years. But it will bring peace and freedom later.

  • JayK - Friday, January 26, 2007, 12:19PM ET  Report Abuse

    • Overall: 4/5

    Excellant advice. Too bad most people ignore these pieces.

  • Yahoo! Finance User - Friday, January 26, 2007, 11:35AM ET  Report Abuse

    • Overall: 4/5

    Overall this is very good. There is one small mistake that I hope will not mislead people. Point 12 has a caveat that should say "... LESS than one-third...".

  • Cool - Friday, January 26, 2007, 11:19AM ET  Report Abuse

    • Overall: 5/5

    Perfect. She summed up everything in an one page article. If people can't follow these simple steps they are losers.

  • tom - Friday, January 26, 2007, 11:02AM ET  Report Abuse

    • Overall: 5/5

    This works just do it.

  • Yahoo! Finance User - Friday, January 26, 2007, 10:42AM ET  Report Abuse

    • Overall: 3/5

    I usually like Rowley's comments and I like her steps to help solve the puzzle.

Showing comments 6-34 of 34<< Previous
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