Tuesday, June 17, 2008

How to Get Rich

In yesterday’s post on the economics of windfalls, I showed how difficult it can be to maintain wealth once you have it. We tend to think that the best way to get rich is to win the money somehow such as in a lottery. But, lottery winners usually burn through their money quickly.

So, this begs the question, how do people get rich, then? This is the question that was tackled by Thomas Stanley and William Danko and led to their excellent book, “The Millionaire Next Door”. These marketing guys wanted to find rich people and figure out how to sell them stuff.

They started by looking in upscale neighbourhoods, but soon found that the people living there weren’t rich. When they did find wealthy people, they tended not to live in upscale neighbourhoods.

Wealthy people tend to live more modestly than most people would guess. The path to wealth is hard work and the self-discipline to spend less than you make for a long time. The book gives a profile of typical millionaires as a frugal couple in their late 50s who continue to save despite their wealth.

This contradicts our mental image of the big-spending millionaire, but it makes sense once you hear it; if you spend less, then you’ll have more. Big spending obviously leads to having less money.

Now that I’ve broken the bad news about the difficult path to wealth, another question is how much money you need to consider yourself wealthy. This depends greatly on how you plan to live. If you want enough to live modestly without having to work, then two or three million dollars is likely enough if invested well. However, if you long for a life of flashy excesses, you may need as much as $50 million to avoid the risk of running out of money.

2 comments:

  1. One takeaway from the Millionaire Next Door is that you cannot judge a book by its cover. I know a high profile doctor who lives in a great neighbourhood, drives a nice car and you would think he's got it all. Problem is, he's drowning under a huge mortgage and mounting credit card debt. If he stopped working, he would quite literally be bankrupt in 6 months. I also know a retiree who worked for forty years in the locker room and pro shop at a golf course. He lived very modestly, saved and invested wisely. He and his wife are set for life.

    The lesson is that it really doesn't take much to retire as a millionaire. The difference between the two is simple. One spent less than he earned and invested prudently. That's it. No magic.

    A quote from Jim Rhon ... "If your outflow is greater than your income, then your upkeep will be your downfall".

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  2. Mark S: Unfortunately, the message about spending less is not what most people want to hear. The masses are likely to continue to buy lottery tickets rather than save some money. I like the Jim Rhon quote -- I hadn't heard it before.

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