Hi Piggies! Today, we’re going to discuss a simple rule to follow that will give you a great chance at becoming rich. It’s crazily simple but it has worked for tons of people for a very long time. Here it is:
Spend less than you earn and invest the difference in something that goes up.
Ta-da! It’s really that simple. Just spend less than you earn and invest the difference in something that goes up.
This is essentially the thesis of one of my favorite books, How to Get Rich and Stay Rich by Fred J. Young. It hasn’t been published in years, but you can (and most definitely should) find a used copy and read it. It is written by a person who spent most of his career working with people who were wealthy, and shares what he learned in the process. It’s truly an amazing book and isn’t as well-known as it should be.
Now, how does this give you a great chance at becoming rich? There are really two aspects of this rule: 1) spend less than you earn, and 2) invest that in something that goes up. Let’s discuss these.
1) Spend less than you earn…
This is pretty straightforward. The reason this works so well is that if followed, you should be able to save. If you earn $45,000/year after taxes and spend $40,000/year, you will have $5000 at the end of the year that you have saved (which is actually way too little…you should be saving much more than that). But the bottom line is that you’re saving something and you’re not going into debt, where you’ll be using the magic of compounding to screw yourself over by paying interest other than getting paid interest. So you’d be slowly (again, too slowly) saving, but that’s far better than going into debt.
Let’s compare this with someone pulling in $1 million/year after-tax (nice!) but who spends $1.1 million/year. With every year that goes buy, he is losing $100,000…and is thus ending up worse-off financially than a year ago…all the while being a year older (and closer to the end of his life). If he had savings with which to pay the difference, it would quickly deplete, and if not, he would be going into large amounts of debt and thus having the magic of compounding screw him over.
2) …And invest the difference in something that goes up.
The person spending $100,000 more than his after-tax $1 million/year income is digging a hole for himself. If he had money saved, it will quickly be gone if he doesn’t correct his course, and if he doesn’t (which he probably doesn’t if he’s dumb enough to make $1 million after-tax but still lose $100k/year), he’s going into debt. He probably has no money to invest.
If you are saving $5000/year, that’s money that you can invest in something that goes up (and bitcoin is, at this point at least, purely speculative and simply a form of gambling…so that doesn’t count as an investment at all). I’d recommend good-quality stocks or an ETF that closely follows an index fund (like the S&P500, for example). Even investing $1200/year and getting a 7% real rate of return will leave you with $523,000 in 50 years. Now that’s nothing to scoff at, considering that you would have only put in $61,000 over the course of those 50 years. That’s the power of compounding.
Follow that simple rule consistently and you will probably end up very wealthy.
It’s the underlying principle of the Millionaire Next Door mentality…and it can be done on even a very modest income. In the end, building wealth comes down to how much you save and invest…not how much you make.
Oink oink, Piggies.
-Mr. Piggy Bank