One of the best ways to understand any subject matter is to find the most basic, core principles that underlie the topic. The same is true of building wealth, where the rule of spend less than you can applies regardless of where one is in the process.

For someone just beginning to build a portfolio, spending less than you can means consistently setting aside funds for investment. Although during the early adult years there are many demands on ones income (e.g., paying off student loans, purchasing a house), one of the best ways to build wealth is to have time (e.g., the compounding effect) work for you, which means the need to invest early and consistently.

For someone who has already amassed a decent-sized portfolio, spending less than you can means providing an ongoing stream of contributions to supplement the gains made by the portfolios investments. This can not only help to overcome the inevitable low returns during market downturns, but also increase the annual rate of growth of the portfolio. Although it is always tempting to increment spending upwards to take advantage of wage increases, investing it instead is a true sign of a wealth builder philosophy.

For someone who is no longer working and who is drawing on the portfolio for income, spending less than you can means not drawing down the capital portion of the funds. This helps compensate for erosion of the portfolio by inflation, and, if one is so predisposed, to pass on a substantial portion of the funds to heirs, charitable organizations, or a foundation upon ones death.

Of course none of this is to say that one should live sparsely, since regardless of how long one lives, it will likely seem too short. Not taking advantage of some of what the world has to offer certainly would be a mistake. But some of the greatest offerings dont require a lot of money, and building wealth will increase the probability that you can take more time to savor them.

Copyright 2006 Duke Okes