Have you heard of this?
I am endlessly curious about how people build wealth. It’s interesting to me, not because it’s the answer to all of my life’s problems, but because I like to learn and share with others little bits of information that may help them.
I recently finished a book that has been on my list for a long time called The Wealthy Barber. I follow Jim O’Shaughnessy on Twitter (founder of O’Shaughnessy Asset Management) and it’s always a book he recommends to new investors. Although the information is a little outdated since it was written in the early nineties, the principles are solid.
There are a couple of things that stood out in this book, but one of them I’ll write about today.
It’s called the ten percent solution.
The basic premise is to pay yourself first, ten percent of your paycheck and then invest that money.
What I found really interesting about this “10% fund” is that the recommendation was not to a retirement account.
I’ve known for a long time to make recommendations in percentages and not dollar amounts due to lifestyle creep. I’ve been taught to “pay yourself first” by many in the industry. I’ve been taught to fund an emergency account first and then retirement. I’ve been taught to fund an emergency fund and then retirement and then if anything is left over put it into a brokerage (non-retirement investment) account.
But I’ve never been taught to fund a brokerage account first before funding a retirement account.
So I had to think about this. And it does make sense..
A brokerage account creates flexibility. A retirement account is designed to not be touched until age 59.5. A brokerage account creates possibilities as life happens. A retirement account is great for deferring taxes and possibly eliminating taxes later in life. Both have their spot.
The question then becomes what happens if I would like a down payment for a home in ten years? Or maybe buy some rental properties in 20 years? Or start a business in 15 years? Or use a portion of it for a need before I reach retirement age?
Obviously I am talking in generalities here and there are some exceptions to the rule. This is why it’s important to consult with professionals before making decisions.
But, the general rule of starting a 10% fund in a brokerage account to build wealth is one to consider for everyone.
Set your intentions. Build a plan. Leave a legacy.