Potential vs. real wealth: Saving is key
You make a decent living, maybe even border on being rich. Can you maintain that wealth and if so for how long? Here's some perspective on how to build true wealth.
Part of the American Dream hinges on the freedom to pursue prosperity and success through hard work. We Americans enjoy the personal liberty to determine our own path in life; our capitalist society supports a path to financial freedom.
Most of us will end up short of what many consider wealthy or rich. Becoming rich calls for risk-taking, dedication, persistence and luck. First, you must find an entrance to the pathway to riches.
Professional football, for example, ranks as one potential pathway to wealth. The bright lights, media exposure and big-money contracts entice a prospective National Football League player. Most players and their families falsely assume that they are set for life on draft day after hearing their name called or after signing their first free agent contract.
Most NFL players, by some estimates up to 80%, find themselves worse off financially after their playing days. Signing a big contract in the NFL likely feels like wealth. Unless all comes guaranteed, pro athletes' wealth often vanishes in a flash.
Many of these athletes, just like many running the road to riches, confuse the potential of becoming wealthy with actual wealth.
Professional athletes enjoy — sometimes later lament — a reputation for large salaries. Players' high income provides them with the potential to create wealth. Sadly for most players, along with their high salaries come high monthly and annual obligations including cars, houses, support for relatives and a lavish lifestyle. These obligations destroy the player's chance at creating actual wealth.
Far from a failure of only flashy jocks, this confusion helped scuttle the fortunes of such varied celebrities as real estate mogul Donald Trump, music icons Michael Jackson and Willie Nelson, television child star Gary Coleman and movie sex symbols Burt Reynolds and Kim Bassinger.
Even historic American luminaries — such as Abraham Lincoln, Ulysses Grant and Thomas Jefferson — filed for bankruptcy.
Income and wealth incorrectly mean the same to most people. While these two often go hand-in hand, they are not interchangeable. Unless you receive a big inheritance, building wealth begins with saving. Regardless of your source of income, you must spend less than what you earn and save that difference.
Two major factors of setting a savings level: income and career longevity. A sales person just out of college stands to work at least another 40 years; an appropriate savings rate for this person may dip as low as 10% of income.
Professional athletes, to continue the example, work much shorter careers and much higher earning power. An appropriate savings rate for an athlete who plays three or four years nears or tops 60%. Alas, too few save what they should, or anything at all.
When building wealth, you first work hard and hope for luck to find and create the pathway. Next comes commitment to setting aside some if not most of what you earn and harnessing the power of compounding interest.
Saving money provides the foundation — the only possible foundation – on top of which you build your real and lasting wealth.
AdviceIQ — @adviceiq on Twitter — is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.