Every other guru on the internet claims to know how to get rich in the shortest time possible. But these are empty promises meant to persuade people to buy their products. However, there are other ways. They are neither quick nor sexy. They are slow and boring. But they work. This article shows you simple steps on how to reliably build wealth with discipline and patience. This article does not sell you a product but merely provides you with a guide on how you can achieve it. The execution is up to you. The article is inspired by the book “The Simple Path to Wealth” by JL Collins but does not directly quote from it.

Earn more than you spend

First, you need to get control of your expenses. Anyone who spends more than they earn cannot possibly build wealth. It’s like a barrel without a bottom. It will never be full. To reduce your expenses, you first need to get an overview. The best way to do this is to write down all your expenses categorized in a spreadsheet. This way, you can see where you spend the most money and where you can save the most. Now you can consider on which expenses you can do without major restrictions. This is individual and depends on your priorities.

Spending less is not the only way to increase your savings rate. You can also work on earning more. However, this is a significantly more difficult and time-consuming process. But it’s worth it. For example, you can improve in your job to get a salary increase. Or you can further educate yourself to work in a better-paying job. Or you can build a side income. There are many ways to earn more. But it’s important not to fall into the trap of spending more just because you earn more. Otherwise, you’ll end up with nothing in the end.

Once you have implemented this, your savings rate is optimally optimized. In the next step, we will look at what we can do with the money.

Build an Emergency Fund

Before you can even think about investing, it is essential to build an emergency fund. Why? Unexpected things can happen at any time that require you to spend money. Your car could break down, you could lose your job, or you could suddenly have to go to the hospital.

Although we have a significantly better social system in Switzerland than in the USA. Even if it’s not about your existence, it’s still important to always have enough money on hand for unexpected expenses. Because if you don’t have money in such situations, you have to take out a loan. This is expensive and can lead you into a debt trap. Therefore, it is important to build an emergency fund.

The rule of thumb is that you should have enough money for 3-6 months of expenses on hand. This is individual and depends on your life situation, environment, and risk tolerance.

But where to put the money? I recommend using a separate savings account just for this purpose. This way, you won’t be tempted to suddenly spend the money on something else. Read our article on Swiss savings accounts comparison with the best interest rates. However, it is important that you have access to the money at all times. Therefore, it is not a good idea to invest the money in bonds, for example.

Pay off Debt

If you have high-interest debts, it is important to pay them off as soon as possible. The interest you pay for them is higher than the interest you can earn through investments. Credit card debts, for example, are charged at 14% interest, while you can expect about 7% returns in the stock market. So you lose money if you invest in stocks instead of paying off debts.

Not all debts are bad. Mortgage debts, for example, are generally cheaper than the returns you can expect from investments. If you have a loan with a 2% interest rate, you can earn more by investing the money instead of paying off the debts. But it is important to weigh the risks and only invest if you are sure that you will earn more than you pay in interest.

Depending on your personal situation, it may also make sense to pay off debts before building an emergency fund.

Utilize Tax-Advantaged Retirement Savings

Now that you have your finances under control, you can start thinking about investing. Before you invest on the open market, it makes sense to invest in tax-advantaged retirement savings. In Switzerland, this is the 3rd pillar. It is voluntary, but it’s worth it. In 2024, you can invest up to CHF 7,056 per year, which are completely exempt from income tax. Some important facts about the third pillar:

• Avoid insurance offers connected to the 3rd pillar at all costs. They are not a good deal.
• The money can only be withdrawn under certain conditions. For example, for your retirement or to buy a house.
• Use a low-cost solution like VIAC or Finpension to minimize fees.
• Choose a low-cost fund mainly consisting of stocks to maximize returns

More on this in this article. Many other countries have a similar system. This step is therefore also applicable if you do not live in Switzerland.

The Power of Stocks

You are now debt-free, have built an emergency fund, and are maximizing tax-advantaged retirement savings. Now you can start investing in the open market. There is much to consider when investing. Investing is risky, and you can lose a lot of money. That’s why many are afraid to invest in the stock market. But if done correctly, the stock market is by far the best tool for building wealth. The reason: compound interest.

Many studies have shown that the stock market generates a return of about 7% per year in the long run. A savings account, for example, achieves about 1% - and that’s optimistic. Now let’s assume you save CHF 1,500 per month over 40 years. Let’s compare three examples: an account without interest, a savings account with 1% interest, and a portfolio with 7% return. Here are the rounded amounts you would have after 40 years:

• Without interest: CHF 720,000
• Savings account with 1% interest: CHF 880,000
• Portfolio with 7% return: CHF 3,900,000

In any case, you have saved CHF 720,000. But the difference in the final amount is enormous. With the stock portfolio, you make more than 3 million in profit. That’s the power of compound interest.

Be Careful - Investing vs. Casino

So we’ve seen that investments are essential for building wealth. But not all investments are equal. On the contrary - all but one form of investment are not recommended. We’ll look at which one is the best in the next chapter. But first, which investments should we avoid?

Risky investments

We all know people in our circle who tell stories of how they made a fortune with a stock or cryptocurrency. Or gurus on the internet who talk about their trading successes and promise you that you can do it too. There may be such cases. But those are exceptions. It is important to recognize that such “investments” are gambling: there is a small chance of winning a lot of money - but most people lose.

Expensive Products

If you go to your bank and ask for investment advice, the bank advisor will be happy to present you their products that promise everything you could think of. In most cases, these are actively managed funds. They cannot be compared to the gambling from the last section. They are serious investment products. The bank hires experts who trade stocks for you and achieve the highest possible return.

However, these funds are not recommended in most cases. Why? On the one hand, they are always more expensive than passive funds. After all, the bank also wants to make money. But even if they would achieve higher returns, that wouldn’t be a problem. The problem is: most actively managed funds perform worse than the market average. This means that if you blindly buy the 500 largest US companies, you would have a better return than most fund managers.

Self-Managed Stock Portfolio

So we don’t want to entrust our investments to a fund manager. Should we then manage our wealth ourselves by buying individual stocks? Many people do this - sometimes with great success. As long as you buy established, large companies, the risk is relatively low. But this strategy requires a lot of expertise and effort. You have to constantly monitor and adjust your portfolio. In addition, it can quickly happen that you are guided by emotions, invest a lot of money in a risky stock, and lose everything.

Building Wealth through Investing

So if the strategies presented in the previous chapter are not recommended, what then? The answer is simple: ETFs. ETFs are funds that replicate an index. This means that they do not have fund managers who actively trade stocks for you. Instead, a fund replicates an index. Take the VOO ETF from Vanguard as an example. This ETF replicates the S&P 500 index. An index that includes the 500 largest US companies. So when you buy the VOO ETF, you are actually buying the 500 largest US companies.

Why are ETFs so good? First, they are extremely cheap. The fees are minimal. Second, they outperform actively managed funds in almost all cases. Third, they are extremely easy to handle. You don’t have to worry about your portfolio. You simply buy the ETF and leave it. Fourth, they are extremely diversified. If one company in the index performs poorly, that’s not a problem. Because there are 499 other companies that are doing well.

Which ETFs should I buy?

There are many ETFs on the market. It is important to buy a diversified ETF. According to the motto “don’t put all your eggs in one basket”. For example, you don’t want to buy an ETF that only includes Swiss companies. Because if the Swiss economy performs poorly, you lose a lot of money.

There are two good options: an ETF that replicates the S&P 500 index and an ETF that replicates the FTSE All-World index:

The S&P 500 index includes the 500 largest US companies. A good ETF that replicates this index is the Vanguard S&P 500 ETF with the ticker VOO. US companies have historically achieved the best returns. But investing only in US companies carries a certain risk.

If you also want to invest in other countries and thus as broadly as possible, you should buy an ETF that replicates the FTSE All-World index. This includes companies from all over the world. A good ETF that replicates this index is the Vanguard FTSE All-World ETF with the ticker VWRL.

Where should I buy the ETFs?

There are many providers where you can buy ETFs. Most likely, even your bank sells you such ETFs - even if they would prefer to sell you their own fund products. No matter where you buy the ETFs, you will always pay less fees in the long run than with active fund products. Especially if you hold the ETFs for decades. Therefore, it is most important to choose a provider you can trust. Here are a few recommended providers. But definitely do your own research.

• Interactive Brokers: the largest US broker, also represented in Switzerland
• Swissquote: Best Swiss broker
• DEGIRO: Best European broker

Not all brokers offer all ETFs. For example, it may be more difficult to buy Vanguard ETFs in Europe. Other providers like iShares offer comparable ETFs that replicate the same index.

Do I Need Bonds?

A pure stock portfolio (also applies to ETFs) offers the highest returns but is also volatile. Although historically, we know that an average return of around 7% has been achieved over a long period, there can still be years when the portfolio drops by 20%. If you’re young and have an investment horizon of 30 years, that’s not a problem - the portfolio will eventually recover the lost value.

However, as you get older, your investment horizon is typically shorter. Investment horizon means how long you intend to keep the money invested. Or in other words, when you want to sell your stocks. If you’re retiring in 5 years, it’s not ideal for your portfolio to drop by 20% over the next 5 years. Therefore, it makes sense to invest a portion of the portfolio in bonds. Bonds are debt contracts that you enter into with a company or government. You lend them money, and they pay you interest. But here again, there’s a risk assessment to be made. You can buy bonds from companies that have higher risks but also pay higher interest. Or you can buy bonds from governments that have lower risks but also pay lower interest.

Since we don’t want to make this choice ourselves, just like with stocks, we turn to ETFs again. A good ETF tracks the broad bond market. A good choice is the Vanguard Total Bond Market ETF with the ticker BND. This ETF tracks the US bond market. There are also ETFs that track the global bond market. But again, do your own research. In the long run, such an ETF will bring you about 2-4% return - albeit with much less volatility than a pure stock portfolio.

The percentage of your portfolio that should be in bonds depends on both your risk tolerance and your age. A good rule of thumb is about 10% when you’re young and 50% when you’re close to retirement. But as a young person, it may also make sense to not buy any bonds at all. Because the fewer bonds you buy, the higher the return you can achieve.

When Do I Sell?

It’s important to hold your portfolio long term. That means you buy the ETFs and leave them alone. You don’t sell them when the market falls. Because it’s impossible to time the market. There are many studies that show that most people who try to time the market do worse than the market. That’s why it’s important to hold your portfolio long term. If you’re retiring in 30 years, it doesn’t matter if the market falls in the next 5 years. Because in the medium term, it will recover.

Many people fail at this point. They sell their stocks when the market falls because they’re afraid of losing money. But that’s exactly the wrong time to sell. Because when the market falls, stocks are cheaper. That means you can buy more stocks. When the market then rises again, you have more stocks and make more profit. That’s why it’s important to hold your portfolio long term.

You should only sell when your life situation changes. Like when you retire and need the money. Or when you’re buying a house.

When Do I Buy?

The most important thing is to invest regularly. If you receive your salary monthly, it’s best to invest monthly. That way, you buy the ETFs at different prices. That means you sometimes buy expensive and sometimes cheap. This is important because it’s impossible to time the market. If you invest monthly, you automatically buy cheaper when the market falls. That means you buy more stocks and make more profit when the market rises again.

Don’t Forget to Enjoy Life

Now we’ve discussed the entire strategy for building wealth. It takes a lot of discipline to follow these steps. But it’s worth it. If you follow these steps, you’ll slowly but surely build wealth. But don’t forget to enjoy life. It’s important not only to save but also to enjoy. Because what’s the point of having a lot of money if you’re not happy? That’s why it’s important to enjoy life. Go out, meet friends, exercise. Because that’s what matters in the end.