Thomas Rees on Building Wealth

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In this episode of Lehigh University’s College of Business ilLUminate podcast, host Stephanie Veto talks with Thomas Rees about how to start building wealth. 

Tom is a senior professor of practice in the accounting department, and he has more than 35 years of diverse accounting experience, holding senior management positions in public accounting and consulting with the federal government and with private and public companies. 

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Below is an edited excerpt from the conversation. Read the complete podcast transcript [PDF].

Veto: Today's topic is about building wealth. We're going to give some personal finance tips and tricks for young adults, but also anyone who needs a little bit of a reminder. I really think this is an important topic for every stage of life. Where are we going to start? 

Rees: I have three fundamental rules for building wealth, kind of getting your feet on the ground and having some financial stability. Those three rules are: one, avoid debt; two, spend less than you make, less than you bring in; and three, invest when you can and start as early as you can. The real power of starting early and letting that compound and grow. 

Veto: Can you talk a little bit more about that first rule, avoiding debt? 

Rees: I would say debt is probably the biggest constraint to building wealth. Most debt is harmful. You can't really ever get ahead and start building wealth if you're paying somebody else as opposed to investing in yourself. So generally, debt is not good. 

I'd say there are potentially two exceptions to that. One is if you're buying a home and you apply for a mortgage and get a loan. They always say that owning a property is a good way to build wealth, and I think that's right. There's risk involved. But if you're going to stay in that property for five years, typically you're paying the loan off, and you're also building equity. The prices of homes typically go up, not always, but most of the time. After five years, you're going to be a little bit ahead of it. If you're paying rent at the end of five years, you really don't have anything to show for it. 

Second is education. I would avoid taking out debt to go to school, if possible. But if that's not an option and you know what you want to do and you have a good career plan–whether it's college or a trade school or something else– it may be worthwhile. The key, I think, is your field of study. Is your degree or the credential that you earn going to enable you to get a career that offsets the cost of education? Taking out a $50,000 loan to become an engineer when you get a starting salary of close to $100,000 probably is a good decision. Taking out $50,000 for a loan for a major that's not really valued that much in the marketplace, maybe not, right? So, pick a school that you can afford to go to and take it from there. 

One other thought here. I'd say if you're a young person and you have the option to live with your parents for a while after you get your first full-time job, do that. It can be very beneficial. As long as it's a good living situation, it's a great way to get started and to a little investment fund that you can have. Build some wealth to get started and get your feet on the ground. Otherwise, I'd say most other debt should be avoided if at all possible. 

Veto: It's important to not live above your means. What are your tips with that? 

Rees: It's kind of common sense, but it's not easy. There's a lot of pressure, again, from marketers saying, "Hey, you need this. You really should have this." Maybe even your peers. 

But, just to put this simply, if you make $500 a week, you’ve got to live like you make $450. Invest the difference and start paying yourself first. That doesn't mean you don't reward yourself periodically. You need to. But you want to live beneath your means. I read an article recently in the Wall Street Journal and there are a couple of ways to do this. One - I like this suggestion - is never save your credit card information when making an online purchase. If you save it, it just makes it too easy to make the next purchase. It also increases the risk of somebody else getting your card. So, my habit is not to do that. If you have to enter it every time you make a purchase, you're more apt to think about it and maybe not complete the sale. 

The second suggestion is if you're going to make an online purchase, and it's not something that you have to immediately buy, wait 24 hours before you complete the sale. This will give you time to think through it. It might be something you don't really need. 

Veto: What's rule three? 

Rees: Rule three is to start investing as early in life as you can. A big part of that is if your company offers some type of savings plan like a 401(k) or a 403(b), you want to take advantage of that. Most companies have such plans. If you make a contribution of, say, 3%, they'll match it. In fact, the most common one is that they'll match the first 3%, and then for the next 2 or 3 percent, they'll match 50% of it. 

So, if you end up contributing 5% of your salary, you end up getting 9% put away. And that's going to grow. Deferred, it's going to be invested every month. You can pick the investments. It could be low risk or higher risk. But, if you can invest in something like the broad stock market, like an S&P 500 index, chances are it's going to go up over time. 

If you start young, the power of compounding is amazing. If you invest $5,000 in a year, and you increase it every year as your salary goes up, the amount you invest goes up. Even if you keep it at 5%. If you can raise it a little bit more, even better. After 10 years, you're going to have about $80,000. After 20 years, you'll have $275,000. And after 30 years, you'll have over $700,000. Of that amount, you'll only have contributed about 300,000 of your own money. The rest will have grown from compounding and through the interest that's paid. So, it's a very powerful tool. We call that dollar-cost averaging. You put the money in, and every month or every two weeks, the company invests those funds into a stock. Over time, the stock market does go up. Sometimes you're going to have ups and downs, but if you can do that, you're going to end up actually getting more shares at a lower price. That's a real benefit of dollar-cost averaging.