Wanna Be Really Rich?
Being "really rich" is something like finding "true love".
Lots of people find "love", and lots of people find "rich". Almost everyone knows someone who’s "rich", i.e. "has a crapload of money". But having lots of money doesn’t make you rich any more than being married means you’ve found true love. Trust me on this; I’ve helped lots of rich people file bankruptcy. Having lots of money often just means that you’ve managed to spend more money, and get into more debt.
Likewise, when you’re a kid you think that being really rich means having more than x dollars at your disposal (and that finding true love means scoring a prince/princess, or something equally silly). And of course, the truth is much more complicated. Thankfully, though, the truth of being really rich isn’t quite as hard to explain as true love: Being really rich is simply the state of having enough money to support your chosen lifestyle indefinitely, without needing a source of more income. That means that you have enough money that you can spend your X-per-month that you need, and the rest of the money makes X or more per month in interest.
(If you have enough money to support your chosen lifestyle provided you keep working to make the monthly amount you do now, then you’re "independently wealthy", which is awesome, but different from being rich. However, being independently wealthy is very desireable, because it makes getting to "really rich" much, much easier.)
Of course, just as you can’t "have true love" unless you’re willing and able to commit to the relationship, you can’t "be really rich" unless you’re willing and able to not overspend your money. Winning the lottery, then, doesn’t make you rich, not really. It just gives you a large chunk of money, which, most of the time, you’re going to overspend until it’s all gone and you go back to whatever you were before, or worse. (I had a relative who won \$14 million, and five years later was on welfare. It’s more common than you’d think.)
There’s one other difference between true love and real riches that’s totally awesome: Whereas your momma said "You can’t hurry love, no, you just have to wait," being really rich is something you can make happen. It takes time and effort, but at least you don’t have to just hang around being futiley patient half your life for it, right?
So how do you get really rich? The simple answer is, by saving money until you have enough socked up that the interest on it makes the monthly amount you need. That’s a little vague, though — how about something more specific? Say, how do you get really rich in twenty years?
Thanks to a blog I really like called The Simple Dollar (which is chock-full of good advice), we now have an answer to this question as well. It’s an answer that anyone can understand — no Pocket Protector of Finance +5 required — but that would take some gumption to pull off. Rather like polyphasic sleeping schedules, which, in my occasionally-humble estimation, makes it perfect for readers of this blog to hear about.
The trick to getting really rich in 20 years is this: Save 20% of your income every month. And by "save" I mean "invest", but not in the way that requires Nerd Superpowers — all the investment has to be is one that appreciates at the average index rate. This means your run-of-the-mill broad-based mutual fund or its equivalent, basically. If you go to a bank or financial advisor and tell them, "I want to invest this in something reliable and long-term, not anything special, no need to set the world on fire," then what you’ll get will be good enough.
Now, 20% is a lot of income to save, and it would certainly be a hell of a lot easier to do that if you got used to it right off the bat, but that doesn’t mean it’s impossible for your average joe who hasn’t started yet — it just might require some lifestyle adjustments, is all. But the numbers pan out: 20% of your income, socked away in a plain-ol’-average-performing-long-term investment account, over 20 years, will have that money producing enough interest for you to live on it at your current standard of living. If you wait 25 years, you can give yourself a 4% "raise" every year and still keep your nest egg. So whether you’re 30 looking to be happily retired by 55, or 50 needing to have your old-age income taken care of by the time you’re 70, the answer is the same: Figure out how to save 20%, and you’re golden.
Now some will say, "But I want to be able to live a fantastically expensive lifestyle!". Well, that’s pretty much the same as the boy who can’t be happy until he’s found the perfect woman, who loves him and he loves her, and oh yeah, she absolutely must be a supermodel. You’re missing out on a lot by having excessive (and quite arbitrary) standards. It’ll be a lot harder for you to find wealth if the lifestyle you want is very expensive — but again, unlike love, if you’re willing to work for it, you can actually get there most times. In order to reach the level of savings that would let you, say, spend \$5000 a week through your whole retirement, you’d need to live very lean for a while, and maybe save 50% or more of what you make. But it could be done; if you happen to think that much sacrifice now is worth that much gain later, then go for it. The numbers don’t lie.
But for most people, real riches are much closer at hand than they think, and simply being somewhat frugal — living a little bit below your means now — puts you in a very nice place later, free from financial worry in your old age, and able to live the kind of lifestyle you’re used to (with some extra for travel, helping out the kids, or whatever) without having to work at all.
And that sounds like a happy ending to me!
17 devoted students of Roshi accepted this page in 0.265 seconds without moving, or saying a word.
Bravo, this post. (Nodding head with vigour)
Starting this year, I’ve been doing just this: intending to keep permanently (invest) 50% of my gross income. A heroic goal on a truly average income. Naturally, I failed. The result - The first 4 months, I achieved 22.3% - and without struggling.
Hey -that’s pretty good.
For me, the mere act of tracking income and spending has been vastly enlightening. Seeing day-to-day that every dollar I spend frivilously is gone forever, dead without issue - whereas every dollar I keep will keep on working indefinately.
The relationship to money, how I think about it, has changed. I used to see it as ’stuff to spend’, and now I see it as a remarkable substance which reproduces itself as it is conserved. Of course, one must spend a little, now and then…
I have little discipline, but have found that when your thinking changes, your actions change effortlessly.
one further thought:
My pet theory:
All Interest Rates Are (subconciously) Predicated On The Average Persons Life Span.
Think about it. Imagine what interest rates would be like if humans lived 150 years - or 20 years. Would current interest rates (i.e. between 4-24%) make any economic sense?
As part of being wealthy, therefore, beat interest rates by investing genuinely in long-term health and longevity. It is possible. It’s the twenty-first century, you know.
See y’all downstream.
Foggy
Nice comment about health & interest rates! Living a long time definitely gives you an edge in the system. ;)
My favorite book on finance is “Your Money Or Your Life” — it’s an older book, but it’s all about changing the way you look at money so that being responsible about it comes naturally. Reading it made a *huge* difference for me, with hardly any actual “effort” at all.
Bravo on your 22%! That is fantastic. Thanks to the wonders of direct deposit, I’m at 36% right now, but that’s temporary due to saving for a house — once I *have* the house, I’m sure that number’ll have to come down! Still, it’s a lot easier than it seems once you just buckle down and do it, that’s for sure.
Thanks for your comment!