The Three Best Rules for Building Wealth

These three rules trump all others.

  1. Spend less than you earn.
  2. Buy low, sell high.
  3. Watch every penny.

That’s it. You’re probably thinking: That’s it? They seem so trite. But follow these rules religiously, and you’ll almost certainly end up wealthier. At the very least, you’ll have more peace of mind. You’ll take control of your financial future, instead of bobbing about blindly on the capricious seas of fate.

Over the years, I’ve tried to flesh the rules out. See what you think.

1. Spend Less Than You Earn

Limit spending

This rule is the most important of them all. If you follow it and no other, you have a better than even shot at living comfortably, because the only way to get rich is to save and the best way to save is to limit spending. Yes, maximizing income helps, but you have more control of your spending than you do of your income. Non-rich people who manage to retire at age 50 or younger report having saved half or more of their income for several years. They bit the bullet. They controlled their appetites. They weaned themselves from luxuries. They avoided impulse purchases. They waited till things were on sale. In short, they lived like Scots so they could retire like lairds. They listened to Jefferson: “Never spend money before you’ve earned it.” And: “Never buy what you don’t want because it is cheap.” To these rules, I would add: 1) Buy a reliable car, take good care of it, and drive it into the ground. (And when you replace it, buy used, not new, and pay the whole price up front in cash.) 2) Pay cash instead of credit (it’s harder to part with cash). 3) Dare to haggle. Ask your doctor’s office if they’ll give you a discount for cash. (Many will.) 4) Minimize taxes. Take every available credit or deduction, within reason. Err on the side of too little income-tax withholding. A big refund is a temptation to splurge. 5) Buy insurance (auto, home, life) to protect your assets, but be frugal about it. Don’t over-insure. ‘Buy term and invest the rest.’ Review your policies annually, prune needless coverage, ask about discounts. (This rule is a key part of the the so-called ‘financial independence and early retirement’ or FIRE strategy that many people use to achieve their goal. Here’s a good summary of the FIRE strategy.)

Maximize income

Within reason. Don’t make yourself, or your loved ones, miserable.

Borrow the minimum

Avoid debt like the plague, because it is. This rule is important. Debt eats up future wealth. Never borrow to pay for luxuries—or necessities. Sometimes borrowing is unavoidable, of course. When doing so, minimize the loan amount, the interest rate, and the repayment term. Keep your borrowing costs down by maintaining a good credit rating. How do you maintain a good credit rating? Simple. Never miss a payment. Pay your credit card bill off every month without fail. Avoid closing a bank account or credit card account (account longevity improves your credit score). And don’t open too many bank accounts or credit cards in a short period of time (that worsens your score). (Here’s an informative article about how wealth-minded people manage and improve their credit.)

Pay off debt

Pay off high-interest debt first. Pay down principal ahead of schedule, if there’s no penalty for doing so. Pay off your home mortgage as soon as you can.

Keep a cushion

Maintain an emergency fund equal to between three and six months of pre-tax income. You never know what will happen. Be prepared.

Set a savings goal of 25 times your annual expenses

This is a famous rule of thumb: you can retire safely when you have 25 times your annual expenses invested in income-generating assets. For example, if you need $40,000 to live on annually, then you need $1 million in savings to be confident you won’t run out of money. If you need $50,000 to live on, you need $1.25 million in savings. And so on.

2. Buy Low, Sell High

Make your money work for you

Never eat your seed corn unless you are literally starving.

Invest early and often

As a general rule, try to put every penny you save into appreciating assets and income-generating investments. A good way to do that is to participate in all of the following kinds of investments, if you can, and contribute to each of your accounts the maximum the law allows, every year. (These are listed in order, from most valuable to least.)

Note: These investments do not come without risks. That’s why they offer higher returns than a bank account. No risk, no reward. The younger you are, the more risk you can probably afford to bear, since you presumably have more time to recover in the event of a market dip. But let’s be honest, the market does dip fairly seriously every few decades and even sometimes every few years. If you’re unable to bear the ups and downs, then avoid risky investments. If you’ve got the stomach—go for it.

1) Your employer’s defined-benefit pension plan. Be sure to study the vesting rules. ‘Vesting’ means that you’ve participated long enough to qualify for the pension and keep the money your employer has contributed to it. If you leave your employer’s pension plan before you’re vested, you lose that money.

2) Your employer’s group health benefit plan, if offered. A workplace health plan is generally going to be a better financial deal for you than individually purchased health insurance. The latter is usually more expensive because of misguided federal tax laws, which I hope will be changed in the future to level the playing field. If you can find individual-purchase health insurance that’s a better value than what your current and future employers are likely to offer, go for it. Otherwise, stick with workplace coverage. (To save even more money, you may wish to consider forgoing health insurance altogether, in favor of a non-insurance alternative like health care sharing or paying doctors directly from your savings.) To keep your premium costs down, choose the highest deductible option you can afford. Pick the plan that gives you the best access to the doctors and hospitals you prefer.

3) A Health Savings Account (HSA). Use it for routine medical expenses. An HSA is a great way to pay for medical expenses because the money is not taxed if you use it for medical expenses (if you use it for non-medical purposes, you have to pay taxes and a 20 percent penalty). It’s also an excellent retirement investment, because after you turn 65 you can take the money out, penalty-free, for any purpose. Note: HSAs are linked to health insurance. To qualify for an HSA you must also have a qualified high-deductible health plan (HDHP), as defined by the IRS. A growing number of employers offer an HSA-qualified HDHP option, but many still don’t. Try to persuade your employer to do so. Of course, you can always buy your own HDHP on the individual-purchase market, in which case you own it and won’t lose it when you change jobs. But again, individual-market health insurance is generally more expensive than employer-sponsored.

4) Your employer’s defined-contribution retirement savings plan (usually a 401k or Roth 401k), if offered. Defined-contribution plans are always vested, so you own the money from day one. When you leave your employer, you keep the money and are allowed to roll it over into a personally owned IRA or Roth IRA. If he offers one, participate and accept every penny of available employer matching contributions. But as a general rule don’t contribute beyond that amount. Instead, if you want to invest more, do so through a private IRA or Roth IRA that you purchase, own, and control (see point 5 below). Note: This rule doesn’t apply if you’re a federal employee. In that case, you should prefer the Thrift Savings Plan, the best 401(k)-style savings plan in existence (because its fees are significantly lower than others’): contribute as much as your budget can afford and roll any personal IRAs or Roth IRAs over into your TSP, when you can.

5) If you can afford it, open a personal savings plan, either a traditional IRA or Roth IRA. What’s the difference? With a Roth, you put money in after it’s been taxed and take the money out, untaxed. With traditional, it’s the reverse: you put untaxed money in and pay taxes on it when you take it out. Use the traditional version if you want to minimize your taxes at the time of contribution, a Roth if you want to minimize them at the time of withdrawal. I have both kinds, but my preference is for the Roth approach. Decide what makes you more comfortable, and don’t worry about it.

Plan to claim Social Security around age 70

Should you take Social Security at age 62? age 65? age 67? even later? My instinct is to advise filing for benefits on the later side. In this, I am swimming against the current of popular opinion, and perhaps of human nature. Most people file for Social Security retirement benefits ‘early,’ often at age 62, the earliest age allowed, rather than waiting till age 65, the traditional retirement age, or later. The arguments for early retirement are straightforward. A bird in the hand is worth two in the bush. You don’t know how long you’ll live. And Congress is likely—nay, certain—to cut future Social Security benefits to fill the program’s funding shortfall. So why not consume hay while the sun shines? All these reasons are sensible. But here’s why I think everyone should consider waiting till their ‘normal retirement age’ (it’s 67 for people born in 1960 and thereafter), if they are in good health and can keep earning a decent income. If you claim your Social Security benefits early, they will be permanently reduced by a considerable percentage (up to 30 percent for those who retire at 62). By contrast, if you retire late (up to age 70), they’ll be permanently increased, by similar amounts. Yes, increased. (There’s no benefit to retiring after 70.) So my advice is if you’re in good health in your 60s and have a decent earning potential and expect to live for many years to come, plan to file sometime between the ages of 67 and 70, with a slight preference to doing so on the later side. Obviously, this decision is personal and there is no ‘right answer.’ The key thing to ask yourself is ‘What is my breakeven point?’ meaning the age at which my retiring will probably produce the same amount of income as, or less than, a later retirement date would do. This date is the point at which I should go ahead and file for benefits. The biggest factor in determining the breakeven point is health. If you’re pretty sure you won’t live for many years past the breakeven point, then retiring early makes sense for you. A good illustration of the tradeoff calculation is found here. The basic rules are here. But don’t over-think it. If you retire too early, it’s not the end of the world. They’re sending you a check every month!

Seek a high return, within reason

I repeat: within reason. It depends on how much risk you can tolerate. My own goal for a return is about 6 percent a year on average. Assuming Uncle Sam doesn’t mess things up, I think that’s doable. I’m a believer in riding out the bad times, so I tend to invest a bit on the aggressive side, but I’ll admit I have moments where I want to sell out and protect myself from a big market correction. The problem is I can’t know when a market correction is underway until it’s underway, and I can’t know when things will turn up again until they do. So it’s kind of all or nothing. Either your market-time or you ride things out. You must choose for yourself. But let’s assume you choose to ride things out. Contrary to what some retirement planners advise, don’t ramp down your risk exposure too much as you approach your target retirement date. Remember, your nest egg has to last for decades during retirement. You want to keep it growing, if possible. Take as much risk as you can bear, no more, no less. If in doubt, play it safe and err on the side of too little risk, knowing that you may be denying yourself some modicum of wealth. That’s better than the alternative. In any scenario, do not exchange your assets for a lifetime annuity (guaranteed monthly income). It’s attractive from a security standpoint, but it’s a bad idea because you are turning your property over to a financial institution, and no matter how appealing that institutions ‘guarantees,’ it could go out of business, or the government could change the rules of the game, and you’ll be left empty-handed. Always keep your money under your control.

Prefer a passive approach

The two basic ways to seek a high return are active investing and passive investing. Active is too risky for most people, because there’s no guarantee anyone can beat the market, even the smartest fund manager. Most fund managers and financial experts don’t beat the market. While virtually all actively managed funds fail to beat the market, index funds are the market. They just buy a piece of everything and sit back. The passive approach basically says: ‘I am not smarter than the market, but maybe I can be as smart as the market.’ The logical corollaries of this statement are: diversify, buy and hold, and keep costs down. My advice is pick four or five mutual funds (or exchange-traded funds) that track broad market indexes and which have strong performance records and rock-bottom fees. (ETFs are baskets of securities that trade on exchanges just like stocks; their fees tend to be lower than mutual funds’, but they can only be purchased through brokers, who charge a commission on each trade.) Prefer funds with a broad focus. The narrower the focus, the higher the volatility and potential risk. And of course: Past results do not guarantee future performance.


Diversify across investment types (U.S. stocks, U.S. bonds, international stocks, international bonds, alternatives, cash). Diversify across all stock types (large cap, mid cap, small cap). Diversify across geography (U.S., emerging markets, developed markets). Diversify across all sectors of the economy (industrials, consumer defensives, tech, health care, materials, communications, utilities, consumer cyclicals, financials, energy). Intimidated? Start out by investing in a broad mutual fund that follows the entire U.S. stock market, like Vanguard’s VTSAX. Then, when you’re ready, diversify by adding mutual funds that track U.S. bonds and international stocks and bonds. You shouldn’t need more than three to five good funds. There are hundreds of index funds to choose from. is a great source of information to help you compare your options. I use to analyze my portfolio and help make sure it’s well diversified and so I know when to rebalance (see below).

Buy and hold

Be patient. Don’t churn or day-trade. Don’t sweat the temporary downturns, even the big ones. Of course, we all feel a powerful urge to sell during a crash. Assuming you have time enough to recover, resist that urge. By the time you’re sure it’s a crash, it’s already too late, and all you’ll be doing is foolishly ‘buying high and selling low.’ Your best hope is to ride it out. But wait a minute. Doesn’t ‘Buy low, sell high’ mean that you should take advantage of downturns to snap up bargains? Yes! Go ahead, snap them up. But don’t overdo it. And mentally be prepared to lose all of whatever you spend that way. In the end, ‘buying low, selling high’ is really a species of gambling. Gambling is fun, especially when you win. But gambling is not investing. So while I use the expression, ‘Buy low, sell high,’ what I really mean is: ‘Buy and hold something that seems virtually certain to gain in value over a long period of time.’ Such as, for example, a passively managed index mutual fund.

Keep costs down

A basic rule of investing, whether passive or active, is to avoid needless fees and hidden costs. Even ‘modest’ investment-management and trading fees can be serious fortune-shrinkers in the long run, thanks to the power of compound interest. Avoiding costs is yet another reason to go with a broad index fund that simply buys and holds everything in a given market. Passively managed funds have lower costs than actively managed funds, and ETFs are cheaper than mutual funds. Funds have to publish their fees (‘expense ratios’), so it’s easy to compare. For example, the Vanguard Total Stock Market Index (VTSMX), the largest index fund, charges just 0.17% per year. The expense ratio for the ETF version of the fund, Vanguard Total Stock Market ETF (VTI), is a mere 0.06%. The expense ratio for Vanguard’s Total Stock Market Index Fund Admiral Shares (VTSAX) is a way low 0.04%. By contrast, the average expense ratio for actively managed U.S. stock funds is a much costlier 1.32%. (By the way, can you guess what the expense ratio for the federal employees’ Thrift Savings Plan is? It’s a rock-bottom 0.03%. Can you say ‘pampered’?) Here is what I would say is the most you should ever pay for a particular kind of mutual fund:

  • Large-cap stock funds: 1.25%
  • Mid-cap stock funds: 1.35%
  • Small-cap stock funds: 1.40%
  • Foreign stock funds: 1.50%
  • Bond funds: 0.90%
  • S&P 500 index funds: 0.15%

But remember, those are ceilings. I would suggest trying to keep your overall expense ratios below 0.5% if possible.

Get good advice

By all means, get good advice, but remember that most ‘experts’ fail to beat the market. And if you do pay for advice, be sure to prefer ‘fee-only’ advisors over ‘fee-based’ salesmen. The latter have an incentives to sell you things that aren’t necessarily in your best financial interest.

Employ dollar-cost averaging

This is a way to reduce your risk. It means buying (or selling) on a scheduled basis, rather than according to predetermined prices (‘market timing’). By doing this, you lock in any gains and diminish any potential losses. A typical example of dollar-cost averaging is when you contribute X dollars to your workplace 401(k) with each paycheck, or X dollars to your personal IRA or Roth IRA each month.


Rebalancing is another way to reduce risk, and a very important one. It means selling off investments that have grown a lot and buying investments that have declined a lot. In other words, it’s ‘buying low, selling high,’ but on the basis of reason rather than emotion. You can rebalance based on the amount of time that has passed or on the amount of change in relative values between parts of your portfolio. Even the most passive investor needs to be active about rebalancing. But of course, too-frequent rebalancing can rack up excessive trading costs. A lifecycle fund can be a good compromise: it rebalances itself automatically to reduce your risk exposure as you approach your target retirement date. I use one myself, although I err on the side of being aggressive (that is, I’ve picked a lifecycle fund with a target date later than my actual target date). Use common sense and don’t worry too much about it.

Designate beneficiaries

Don’t forget your loved ones. Designate a beneficiary (heir) for your life insurance and each of your investment accounts. Keep your beneficiary designations up to date. This is important, because financial institutions typically disregard what you’ve written in  your will and give the money to the person or persons you’ve designated on the account, or,  if you’ve failed to designate a beneficiary, then they give the money to someone they think you probably would have wanted it to go to, based on their own sense of what’s appropriate. Don’t give them that much discretion.

Get married

Yes. Get married. And marry well. A good spouse is your best long-term investment. Buy and hold.

Be prepared

Part of being diversified means anticipating worst-case scenarios. That’s why your portfolio should include some physical cash and some physical gold. Yes, I mean physical. Buy a good safe and a shotgun. Seriously. Keep it where you can get to it. In a crisis, you may lose access to your digitally stored cash. Safe-deposit boxes can be confiscated by the government. But physical cash will still spend (assuming no hyperinflation) and gold is nature’s perfect store of value, in good times and bad. How much gold should you keep on hand? Experts say no more than 1 or 2 percent of your investable net worth. I incline to Jim Rickards’s suggestion of no more than 10 percent. By ‘investable net worth,’ I mean the total value of all your liquid assets minus the value of your primary home and your business, if any. Say your investable net worth is $50,000. Then you should keep up to $5,000 worth of physical gold on hand. I prefer coins, but bullion is fine. I’d keep an equal amount of physical cash.

3. Watch Every Penny

Read your statements

It’s boring, but you’ll thank yourself. You’ll find mistaken and fraudulent charges and needless fees. And you will enjoy slaying them. Track your spending habits and monitor your bank account balances. Track your investments and net worth. (I use to do these things.) Keep one eye on your home’s potential resale value, just in case. (I check it monthly at Zillow.) Be the captain of your fate!

Educate yourself

Learn everything you can about money and investing. Read financial websites. Get advice from professionals.

Make wealth building a personal hobby

Why not? Money can’t buy you happiness, but try living without it.

Note: Not professional investment advice. Follow at your own risk. Use common sense. Drink responsibly. Bathe regularly.


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