Ask ten people about investing and nine will tell you what to buy. A stock, a coin, a fund their colleague swears by.
That question sits at the very top of the pyramid. It is the level that matters least to your result, and it is where most money is lost.
This article is the map for our Wealth Principles series. It is based on a 47-page private notebook on building wealth, checked line by line against peer-reviewed research. Each level gets its own deep-dive. Start here.
Quick check before you read. Three questions, no calculator:
- You have €100 in savings at 2% a year. After 5 years, do you have more than €102, exactly €102, or less?
- Your savings earn 1% a year and inflation is 2%. In a year, can you buy more, the same, or less?
- True or false: "A single company's stock is usually safer than a fund holding many stocks."
Economists Annamaria Lusardi and Olivia Mitchell have asked these "Big Three" in more than 40 countries. Only a minority of people get all three right. Answers are at the end.
The problem: starting at the top
The notebook's framework comes from Maslow's hierarchy of needs: until the lower levels are in place, the higher ones are hard or impossible to reach. Translated into money, there are six levels, built from the ground up:
- A goal with a number
- How much you save
- Your asset allocation
- Your own behavior
- Being tax efficient
- Investment selection
Most people run this list upside down. They spend hours picking investments (level 6) while they have no target (level 1), no surplus (level 2) and no plan for what to do when the market drops 30% (level 4).
What it costs: the data
This is not a matter of taste. It shows up in the data.
In one of the best-known studies in finance, Brad Barber and Terrance Odean followed 66,465 households at a US discount broker from 1991 to 1996. The households that traded the most earned 11.4% a year. The market returned 17.9%. The authors' conclusion fits in the title: trading is hazardous to your wealth.
The professionals don't escape either. According to S&P's SPIVA scorecard, 65% of actively managed US large-cap funds trailed the S&P 500 in 2024, and over 15 years more than 90% did. These are teams of analysts with data terminals, working at level 6 full-time.
The principle: build from the ground up
Every level multiplies the effect of the one above it. A brilliant stock pick cannot rescue someone who saves 0%. An average pick, on top of a clear goal, a healthy saving rate and calm behavior, gets you there.
Here is each level in one paragraph, with the deep-dive coming in this series.
1. A goal with a number
"I want to be rich" is not a goal. A goal is a number, a deadline and a reason. The notebook turns it into a formula, your freedom number: monthly cost of the life you want × 12, grossed up for tax, divided by a sustainable withdrawal rate. At €3,000 a month, 20% tax and a 4% withdrawal rate, that is €1.125 million. Time matters more than anything here: at an assumed 6% a year, €1,000 a month grows to about €462k in 20 years but about €1.0M in 30.
2. How much you save
The first rule, written in red in the notebook: always have more money coming in than going out. Consumer debt is the opposite: leverage on assets that lose value. People who fear leverage in futures happily take it on a car loan. Saving works best when it is designed, not willed. Richard Thaler and Shlomo Benartzi's Save More Tomorrow programme let employees pre-commit future pay rises to savings. Average saving rates went from 3.5% to 13.6% in 40 months.
3. Asset allocation
How much you put into each type of asset matters more than which individual assets you pick. In a classic study of 91 large pension funds, Brinson, Hood and Beebower found that allocation policy explained about 94% of the variation in quarterly returns. Ibbotson and Kaplan later showed the exact figure depends on the question you ask (90%, 40% or 100%). We unpack that in the allocation article.
4. Your behavior
Losses hurt roughly twice as much as equal gains feel good. That is Kahneman and Tversky's loss aversion, and it is why people sell in panic and buy in euphoria. The notebook offers exactly two exits: either don't act, or build a system that decides for you, with no human input at the moment of decision.
5. Taxes
The notebook is blunt: you cannot outsmart your tax authority. Pay your tax, use the legal reliefs your country offers, keep clean records, and never avoid a gain just to avoid the tax on it. Avoiding 10–30% tax by risking 100% of the gain is bad maths.
6. Investment selection
Each step beyond a broad index (sector, then theme, then individual stock, then timing) needs another correct forecast. Even at a generous 60% hit rate per step, the chance of getting four in a row right is about 13%. William Sharpe proved the rest in three pages: after costs, the average actively managed euro must earn less than the average passive one.
Your 10-minute starting checklist
- Write down the monthly cost of the life you actually want.
- Multiply by 12, divide by (1 − your tax rate), then by 0.04. That is your first freedom number.
- Check last month's statement: did more come in than go out?
- List every consumer debt with its interest rate.
- Decide how often you will look at your portfolio. Hint: less often than you think.
Answers to the quick check
- More than €102. Interest earns interest.
- Less. Inflation outran your interest rate, so your money buys less.
- False. One stock carries one company's risk. A fund spreads it.
If you got all three, you already beat most of the world on financial literacy. The rest of this series turns that knowledge into a system.
The series
| # | Level | Article |
|---|---|---|
| 1 | The map | Wealth Principles (you are here) |
| 2 | A goal with a number | Your freedom number |
| 3 | Your behavior | The behavior gap |
| 4 | How much you save | Saving rate and consumer debt |
| 5 | Asset allocation | 90, 40 or 100%? |
| 6 | Investment selection | Why complexity multiplies risk |
| 7 | Taxes | Pay them, understand them |
Want to see what a rules-first approach looks like in practice? Here is how Pace works.
Sources
- Lusardi, A. & Mitchell, O. S. (2014). The Economic Importance of Financial Literacy: Theory and Evidence. Journal of Economic Literature, 52(1), 5–44. Link
- Barber, B. M. & Odean, T. (2000). Trading Is Hazardous to Your Wealth. Journal of Finance, 55(2), 773–806. Link
- S&P Dow Jones Indices. SPIVA U.S. Scorecard, Year-End 2024. Link
- Thaler, R. H. & Benartzi, S. (2004). Save More Tomorrow. Journal of Political Economy, 112(S1), S164–S187. Link
- Brinson, G. P., Hood, L. R. & Beebower, G. L. (1986). Determinants of Portfolio Performance. Financial Analysts Journal, 42(4), 39–44. Link
- Ibbotson, R. G. & Kaplan, P. D. (2000). Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? Financial Analysts Journal, 56(1), 26–33. Link
- Kahneman, D. & Tversky, A. (1979). Prospect Theory. Econometrica, 47(2), 263–291. Link
- Sharpe, W. F. (1991). The Arithmetic of Active Management. Financial Analysts Journal, 47(1), 7–9. Link
- Morningstar. How Do Your Financial Priorities Stack Up? (financial priorities pyramid). Link
Educational content, not financial, investment or tax advice. Nothing here recommends buying or selling any specific instrument. Investing carries the risk of loss, and past returns do not guarantee future results.