For the latest business news and markets data,please visit CNN Business
How to become wealthy: Its simpler than most experts say
Ask any honest financial planner how to become wealthy, and theyll tell you the simple act of saving money is far, far more important than picking the next hot stock.
So I was surprised when I came uponan articlefrom The Billfold titled You Dont Get Wealthy from Savings. The article was so wrought with pessimistic thinking and ridiculous assumptions that I couldnt help but debunk the most alarming.
Hopefully, by the end of the piece, youll see that saving — and some easy steps toward investing — is key to becoming wealthy.
Related: Warren Buffett Tells You How to Turn $40 Into $10 Million
Problem No. 1: Saving 3% isnt how you become wealthy
Ill tackle the easiest problem first. The article said that if you have the median household income of $51,939, and youre saving 3% of that income pre-tax, starting at age 30 and following suit until age 65, youll only have $192,686.34 by the time you reach retirement.
First of all, lets get one thing straight: If you want to prove that savings cant make you wealthy, you cant assume were saving a measly 3% of our income to prove your point. All the example proves is that not saving will keep you from getting wealthy.
If we upped the familys savings to 10% and assumed an inflation-adjusted return of 6.86% — which happens to be the true annualized return of the stock market since 1871 — the family is now retiring with $745,000 in todays dollars.
Related: Social Security: 3 Things to Know Before Taking Benefits Early
Problem No. 2: Saving and investing for five years isnt how you become wealthy
The second problem with the article is a little more complex. Again, using the median family, the author ponders what would happen with a family that is able to sock away $10,000 per year, which comes out to a pretty awesome savings rate of 19% — pre-tax.
But $10,000 in a year is not wealthy. Even $50,000 in five years is not wealthy. That is the type of savings that pays for one year of your childs college education.
Who in the world thinks they can get wealthy from just five years of savings? Thats ridiculous. If, as in the previous example, we were talking about someone investing over a 35-year time horizon, the results would be much different. The final balance in your portfolio — again, using the average inflation-adjusted returns of the stock market — would be $1.4 million in todays dollars.
If we take Social Security into account, this couple would even be able to retire early.
Related: Social Security: 5 Facts You Must Know
Now, that figure might actually be a little lower, because youd likely want to diversify toward less risky investments as you aged, but you get my point. You cant claim that saving and investing in a total-market ETF doesnt create wealth if youre only using a five-year time frame.
Problem No. 3: Whats our definition of wealth?
But the most insidious problem with this article is that it doesnt define wealth. All were told is that $50,000 isnt wealthy, nor is $193,000 in a retirement account at age 65. Of course, you wouldnt have a hard time getting most people to agree with those two premises, but thats not the point.
Without some kind of threshold, anyone could say that wealth means being a multimillionaire — or maybe even a billionaire. If thats the line being pushed in the article, its a sad statement of where our priorities are.
Ive often said that findingyour Enoughis what matters most, and fellowFool Morgan Houselhas shown how easy it can be to feel wealthy if you adjust your perspective and understand that the only true measure of wealth is freedom of time — not your net worth.
Related: 9 Critical Investing Lessons From a Nobel Prize-Winning Economist
I guess that leaves us with two simple questions: What is your definition of wealth, and is obtaining it important to you?
Brian Stoffel has been writing for The Fool since 2010, and loves all things Wisconsin. This article wasfirst publishedin The Motley Fool.
First published November 26, 2014: 12:15 PM ET
This site finds and compares 3 financial advisors in your area
Check this off your list before retirement: talk to an advisor
Answer these questions to find the right financial advisor for you
An Insane Card Offering 0% Interest Until Nearly 2020
Transferring Your Balance to a 14-Month 0% APR is Ingenious
The Top 7 Balance Transfer Credit Cards On The Market Today
Get $300 Back With This Outrageous New Credit Card