We recently hit the basic level of financial independence. We’re not done yet, but it does mean we’re nearing the end of our active accumulation phase.
We won’t be shifting into a wealth drawdown phase anytime soon, but no longer need to hustle to accumulate. We’ll undoubtedly still continue some of our wealth accumulation strategies, but our attention will shift to planning the eventual next phase of drawdown.
For now, while in this liminal state, it seems appropriate to reflect on the accumulation phase and what worked well for us. I wish I’d thought in these terms when I began working towards financial independence.
Table of contents
- What Is Wealth Accumulation?
- Wealth Accumulation Strategies
- What Our Wealth Accumulation Phase Looked Like
- What Comes Next?
What Is Wealth Accumulation?
This post will focus on the intentional act of individual wealth accumulation. It’s part of the path to financial independence where one builds enough wealth to make work optional.
Wealth accumulation definition
Simply put, wealth accumulation is increasing your net worth over time. This is typically done through a combination of active earning and investment. Individual wealth accumulation is a positive act – to a point.
The modern concept of retirement is built on the model of wealth accumulation through earning years, then drawdown when entering retirement. The FIRE (financial independence retire early) movement shortens the accumulation phase and lengthens the drawdown phase.
Here is what wealth accumulation looks like using average net worth by age.
We tend to save, invest, and build wealth through our 30s, 40s, and 50s. Once we reach retirement age, we shift to wealth preservation or distribution phases. The trend is the same, though not as pronounced, if we use median wealth instead.
There have been some disturbing trends with younger generations accumulating less – so the amounts are different, but the trend still holds:
You can see that, on average, we accumulate wealth over the course of our working life. Debt load on younger workers is slowing this down, but that’s a topic for another time.
There is also a larger societal aspect to wealth accumulation which is more accurately called wealth concentration. Wealth concentration means wealth is concentrated in fewer and fewer individuals. The dramatic increase in the fortunes of billionaires during the pandemic is an example of wealth concentration. I believe this is a significant problem but you may think otherwise.
Regardless, let’s look at the individual wealth accumulation phase in order to build adequate net worth for retirement.
Wealth Accumulation Strategies
Wealth accumulation is a fairly simple process to describe: the money you earn, through any means, is greater than the money you spend. As long as your income > expenses you are accumulating wealth. Your net worth is growing.
I’ll summarize some common components of a wealth accumulation strategy.
Yes, it’s a bit odd to lump one whole side of the equation under one strategy. But the first thing you need to do for wealth accumulation is get a handle on your expenses.
If you are currently in a neutral state (income = expenses) then lowering your expenses will shift you to accumulation.
If you can just maintain expenses while increasing your income, you’ll avoid lifestyle inflation and start to accumulate wealth.
Strategies for lowering expenses are myriad because everyone spends differently. In general, you’ll get the most impact from lowering your housing, transportation, and food costs. These “big 3” account for 60% or greater of consumer spending in the United States.
I don’t believe that most people can accumulate significant wealth only by lowering expenses, but expense awareness is an important part. That’s why I named it first.
The vast majority of people use wages earned from employment as their primary income for wealth accumulation. I certainly have. While much of the personal finance community will focus on other activities, there is nothing wrong with most of your income coming from your work.
If you want to accelerate wealth accumulation through wages, you have two choices:
Increase Pay Rate
Can you increase your pay rate? Earning a promotion, changing to a better paying career, getting more education, or relocating all may lead to a higher rate of pay.
You also may be able to negotiate a higher salary for your current work.
Another strategy to increase your wages is to work more often. The same rate multiplied by more hours means more income. This is an effective strategy for increasing income to accumulate wealth, but it has clear limits. There are only so many hours in the day, and you can only work so much before you collapse or burn out. Still, it is a strategy available to most people
Using Money to Make Money
While increasing your income and lowering your expenses will lead to wealth accumulation, most people take the step of using wealth to grow wealth. This is where wealth accumulation really takes off.
Here are some common strategies to do this:
Tax Advantaged Investing
I name this one first because it can be used by the majority of people – especially those who are accumulating wealth through wages. By investing in an IRA (individual retirement account), 401k, or 403b and 457b for those who have them available, you can build wealth over time.
These accounts have the additional advantage of potentially lowering one of your major expenses – taxes. While nothing is universally true, just about everyone who is working should be putting money into one of these accounts for wealth accumulation.
This is probably the second most common strategy for wealth accumulation. In this, you invest some of your wealth to generate returns. You are putting your money at risk in order to generate more money. Generally, the greater the risk, the greater the return (if you don’t lose your money.)
The stock market is the most commonly thought of market for investing. Bonds, cryptocurrency, investing in other businesses, or precious metals are other examples of investing.
Real estate is also market investing, but I’ve pulled it out separately because it’s another very common wealth accumulation strategy. Real estate investing can include flipping, developing, or buy and hold for rental real estate.
Building a real estate portfolio is probably the second most common wealth accumulation strategy for those pursuing FIRE. (behind investing in the paper asset market through tax advantaged and brokerage accounts).
Building A Business / Entrepreneurship
This is a combination of most of the above strategies. By building a business you create your own wealth generation machine. Doing so typically requires increasing your time, investing some money into the business, and being hyper-aware of expenses.
It’s not easy, but the rewards can be outsized for those who are very successful with this strategy.
What Our Wealth Accumulation Phase Looked Like
Over a period of 10 years we grew our wealth substantially, from nothing to seven figures. We did nothing magical to accumulate our wealth. There is nothing magical or special about our wealth accumulation – we made mistakes along the way, but just kept moving forward. You can too.
I share ours as just one example of what a wealth accumulation phase can look like.
While I said before that lowering expenses is the lesser part of wealth accumulation in most cases, for us it was actually a major action. We’d suffered major lifestyle inflation and needed to get it under control.
We went from spending almost $150k a year down to a yearly budget of about $50,000. Here are some of the major levers:
We reduced our monthly housing expenses by 80% by downsizing our home and moving back into our rental property. We used the equity from our large home sale to pay off the rental and achieve mortgage freedom.
Prior to embarking on the path to financial independence, we had purchased two new cars. We paid those off and are now driving them into the ground.
We’ve started meal prepping and planning to reduce our food expenses dramatically. We went from dining out most days to only once a week.
We use credit card rewards to help lower our travel costs. (Note: We still travel. It’s important to spend on your passions – just do it responsibly.)
We live debt free on ⅓ of our previous annual expenses, and life is better than before.
We didn’t really start actively accumulating wealth until almost 40. Lowering our expenses dramatically allowed us to catch-up and make up for lost time. Ideally, we would have locked in our expenses at about age 30 and been accumulating the entire time.
We did most of our income increasing prior to pursuing financial independence, and then spent it all. (Which is why lowering expenses was important!)
After we got our spending under control, that increased income was a huge benefit to wealth accumulation. If we’d done it right and kept our spending low early on, we’d have reached financial independence years ago. Better late than never, right?
We increased our income primarily by increasing our base rate. Our salaries tripled over time. TFI raised hers by increasing her salary as a teacher. I chose to become a school principal and started earning six figures. As a result, our combined salaries have more than tripled over the course of our careers.
We also made more money by spending time doing extra duty jobs for several years. This was after-school work, university instruction, and summer school. These educator side hustles helped us make more while utilizing our existing skills.
Using Money to Make Money
Tax advantaged investing was our primary wealth accumulation strategy. As educators we have access to both 403b and 457b plans. That means we can put away over $90,000 with those two, IRAs, and catch-up contributions. At first we had to choose between the 403b vs 457b, but for the last several years we’ve been capping both.
We contribute anything extra to a taxable brokerage account. Index funds are our primary set-it-and-forget-it investment choice.
We did accumulate some wealth through real estate. One of our big financial mistakes was moving into a much larger home, but we were fortunate that it appreciated in value. Though it wasn’t an optimal financial decision, it helped us accumulate wealth even while we were reckless with other spending. This is one reason I lean to buy in the buy vs. rent debate.
We slowly accumulated wealth for the first ten years of our marriage simply through growing income, paying off debt, and paying into our mortgage. A small 403b contribution as a new principal also helped.
Once we got serious, our net worth accelerated rapidly and we went from clueless to financially independent in under six years.
Our Wealth Accumulation Plan Simplified
Our plan during our active wealth accumulation phase could be summarized like this:
- Set financial goals annually
- Lower expenses (to our 2007 spending levels)
- Max out tax advantaged accounts (see: Annual contribution limits for 403b, 457b, IRA and HSA)
- Remaining savings into index funds
Of course, each of those is backed by a lot of detailed work, which is what I write about!
Thanks to focus and effort, we raised our savings rate to 70% for the last several years. This allowed us to accumulate enough to achieve the basic levels of financial independence in 5 years.
What Comes Next?
We’ve now accumulated all the wealth we need for FIOR (financial independence optional retirement.) In the short term, we plan to continue working while we love the work we do. This means our wealth will continue to grow through our investments but we can relax a bit on the other strategies. Wealth accumulation is no longer our primary driver.
Next, we need to start planning for an eventual drawdown phase. This isn’t all about money, though that is an important portion of the planning. In the next few years, we’ll spend our time making solid decisions in the following areas:
- Investment Allocation for Risk Mitigation
- Tax Strategies
- Health Care
- Giving Plan
While growing net worth was exciting during the wealth accumulation phase, it was actually the optimization and learning that drove me. Gathering information, building resources, and writing about the journey kept me interested.
I’m eager to apply that energy to the coming (eventually) drawdown phase. I’ll share it all along the way. I want my journey to inform yours – so you can do it better!
If you’re just starting out, check out some great financial goal examples.