I spend a lot of time talking to people about cash flow. You need to understand where your money is coming from and where it’s going. To build wealth over time, you want to make sure more is coming in than going out, and you want to invest as much of that as you can.

That’s really the key to becoming rich. It’s a simple formula, yet so many people fail. Why?

Maybe you aren’t one of them. Maybe you have used this formula to build wealth. Or maybe you are young and just starting out. You just need time. But you also need knowledge.

Failure to Understand Money

Why do people fail to get rich?

Sometimes people fail to achieve wealth for reasons beyond their control. Each year medical issues force many people into bankruptcy. But those issues tend to disproportionately impact the elderly. If you play your cards right, you will have many years to build financial protection against potentially ruinous medical issues.

The most common reason people fail to achieve wealth is that they simply lack the knowledge and the discipline. You have to understand the power of compounding over time, and you have to understand it at an early age to keep the savings requirement low.

Let me illustrate with an example. Recently a friend who had just entered the workforce told me “I am not going to get wealthy forgoing my daily Starbucks treat or by skipping eating out once a month.” I asked if he was sure about that. “Of course. It’s not enough money. What we really need are living wages.”

Sure, we would all like to earn more money, but we could also stand to learn a lot more about the money we do make. Many people tend to spend everything they take in, so there’s no excess cash flow to invest.

Take my friend, for example. He’s spending $3 every weekday on coffee. He’s eating out every weekend, probably dropping another $25 or more on food and drinks each time. What if he made a few changes so that he captured that money and invested it instead? Maybe he can brew his own coffee, and he could skip eating out once a month. He doesn’t think that would make much difference. So let’s see.

Small Treats Add Up

If he captured that coffee money, that’s $60 a month. Add in the price of one meal, and it’s $85. Now, take that money and invest it into the stock market. It’s not that much, right?

This is where people, including my friend, don’t understand the power of compounding over time. If you started at the age of 25, invested that money into the market, and achieved the average long term return of the S&P 500, here is how much money you could accumulate at various ages (presuming it went into a tax-deferred account).

By the age of 35, you have $20,531. It’s not huge money, but it’s not bad for the small sacrifice you made.

By the age of 45, it has grown to $69,972. You have to resist the temptation to spend it. Spend from the rest of your cash flow. Don’t dip into your growing wealth.

At the age of 55, it has grown to $195,896. It’s looking more and more like my friend has underestimated the impact of a lifetime of small, insignificant purchases.

At the age of 65, you have $516,619. More than half a million dollars from making some small lifestyle changes.

At the age of 72, you become a millionaire. Are you rich? Well, that depends on how much money you need to support your lifestyle. But this millionaire status was hypothetically created by making changes that have no negative impact on your long-term quality of life.

Of course people have a hard time thinking that far down the road. Even if they have the knowledge, they don’t have the patience. As that nest egg grows, the temptation to spend it, perhaps encouraged by a spouse, may grow.

Start Soon and Invest Consistently

On the other hand, you don’t have to wait nearly 50 years to become a millionaire. If you can find other places to cut spending or increase your income, you can get there a lot faster. If you can bump your savings rate to $100 a week, you could get there in 30 years. You don’t have to earn six figures, although if you do you can get there faster still.

But the longer you wait, the tougher it is to achieve wealth. Remember that after 10 years, that coffee savings had only grown to a bit over $20,000. You need compounding over time, and that takes patience.

Probably the most important factor in getting rich is how you behave with money. If you look at it as a tool to reach your long-term goals, and you work to maximize your cash flow, you have what it takes to grow wealthy. If, as my friend did, you overlook the impact of saving small amounts over long periods, you may never get there.

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