Getting rich, made simple – part 1

In ‘raises- are they for suckers‘ I promised a followup on how to get rich.  I have discovered it through years of painstaking research and the results may disappoint you.  I am basing this on nothing but the accumulated reading of my life to date.  So with no more buildup, here it is – how to get rich:

Spend less than you earn.
Stay healthy.
Stay happy.

That’s pretty much it.  I’ll break down each one of them starting today, but that is the short version.

1.  Spend less than you earn.  Quite simply, being rich in a financial sense – to me – merely implies that you have enough money.  Whoa!  What constitutes "enough money" is a very subjective concept.  However, I would say that as long as you are making enough to provide for your basic needs – food, shelter, clothing – anything above that is gravy.  Food does not imply lobster and champagne, but bread and milk, for example.  Shelter is not a 4-bedroom house with 2 bathrooms for 3 people; it’s a warm one-bedroom with a bathroom… and so on.  I am talking minimal needs, but once those are met the formula for ‘enough’ becomes pretty simple:  if your income is $10 per year (after basics), spend no more than $9.99.  If you can do this consistently, you will be more or less rich.  That $9.99 may include savings for the future – and it should, unless the $10 will keep coming in forever.  However, if you spend less than you earn, and have a plan to ensure it STAYS that way, you’ll always be rich.  Here are the main tips:

  • Don’t borrow money.  Spend less than you earn.  Spend less than you earn.  You can’t complete that formula if you borrow money, because you’ll be spending more than you earn.  Doesn’t work.  Don’t borrow money.  Ideally – and I realize this would be very difficult – that means don’t even buy a house if you don’t have the cash.  That can be argued, but ideally you wouldn’t, right?
  • Avoid buying, well, everything.  Other than basics, stop and consider a few things before you buy stuff.  I have 7 things to consider before you buy stuff right here.
  • Have an emergency fund.  This helps you deal with unforeseen circumstances that might make you borrow money. Again, in an ideal situation you would have an emergency fund for any possible emergency.  That is probably unlikely, but you should aim to construct an emergency fund suitable to deal with the most likely emergencies:  job loss, a catastrophic event or health troubles.
  • Invest.  Many people hear that and think ‘stocks! real estate!’ or something similar, but investing can cover more than that – building a business, getting an education, helping others.  All of these activities have a return, although some have greater financial returns than others.  Put some of your money away from you and let it work at creating something, be that dividends or improving the life of a child.

I’ll cover #2 and #3 Wednesday.

12 comments

  • Great advice. In particular, I like your idea of investing in not only real estate, stocks, etc. but investing in your future by getting an education.

  • Great post! You could always go into more detail about how to cut out the biggest money eaters in a budget…cars and homes…avoid both…ride a bike (no public transportation costs) and live rent free (parents, as a care taker for an old person, etc)….Just kidding! It was a great post! I think the most important thing you mentioned is spending less than you earn. It’s a pretty novel concept in the U.S…..

  • There are several ways to borrow money and make money out of it. At the very least, buying a house is a great way to improve your personal situation and, technically, you house will increase in value overtime.

    Borrow money to learn is always a great way to improve your wealth. You can get a promotion or invest better from a better education.

    One last thing, you can also borrow money to invest in the market to to create a company. While being more risky than my other examples, there are several people who become rich by leveraging.

    If you are making 25K and you don’t spend more than you earn, you won’t eat much and probably will never be rich anyway 😉

  • Excellent post! The one area where I believe in allowing myself to spend more than I earn is with the house. Saving up enough money to buy a house outright is an admirable goal, but one that I haven’t been able to bring myself to do. Although I plan on taking a loan out to get our next house, I will be paying off more than just the mortgage amount in order to pay the house off more quickly, and hopefully avoid some of the nasty interest.

  • I’ll have to respectfully disagree with TFB above. I was making 25k when I first graduated doing contract work and managed to live well below my means. Its all a matter of controlling costs. I drove a beater, didn’t go out to eat much, and went out to the movies/bowling once a month. I’d hardly call that starving, I even had enough money for an annual vacation! 🙂

  • Frank, I guess it depends on where you live and what is your definition of being rich. Let’s say your rent is $600 a month (for a very small apartment in a major city), you pay $150/month for power and another $100 for cable/internet/phone/cel phone (you can’t obviously have all of them for $100 so you’ll have to make a choice). You are left with $1,233 a month (assuming a 25K salary).

    Out of that amount, you have to take out groceries, entertainment, taxes, gas(or bus pass), clothe and several other expenses. While you may not be starving, you will not become rich by living below your means.

    My definition of being rich is to have a net worth over 500K (real estate should not be the bulk of your net worth) and an income that allow you to make all your payments and still save money. I don’t think you can ever achieve this financial level by making 25K a year.

  • Thanks for all the comments! I know that a mortgage is more or less inevitable if you want to be a homeowner in North America, but I think my point is still valid. Because of interest, I will end up paying almost $1,000,000 for my “$450,000” house. Ideally I would save $450K and then buy with cash, and save the other $550,000, right? I know that might mean I wouldn’t buy a house until I was 45, but then again, I would have an extra half mil in my pocket…

    I think you can become rich making 25K per year. TFB, I’m not sure that 500K net worth would be rich if you lived in Manhattan or San Francisco or Tokyo. On the other hand, it would be a fortune in Memphis, TN (where I used to live). I know people who live well in Memphis off 30K a year, and people who struggle to get by on 80K in Manhattan. When I lived in Memphis making 30K right out of college I was able to max out my 401(k) contributions and still had money left over for investing and all the things you mention.

    I guess my point is that it’s largely dependent on where you live, which is a part of your choice to spend less than you earn. Living in NYC I have consciously chosen a place where that’s hard to do. If I moved to a smaller town, I think I could spend much less than I earned, even if I earned less. But it is possible, since I’ve spent less than I earned since I was 18. Not easy, but doable, and I earned less than 30K until 10 years ago.

  • Do you know that most Europeans would never consider to buy a house by taking out a mortgage? It is a strange concept for them. If their apartment in Florence cost 450,000 EUR, trust me, they pay with cash that they saved and saved…..
    But, remember, it is easier for them to SAVE for a house or apartment because they don’t have to save for retirement and buy medical insurance, etc…. which in the US is the major drain for an average American.

    TFB: Yes, most of the time, the house will appreciate in value, BUT so?????? If you don’t sell it, you don’t make the profit on it. And if you sell it, where are you going to live? And if you are buying a new house that is cheaper (if you move farther inland maybe) then you can consider yourself lucky, you made some bucks on your house. If your house appreciates in value, then all other comparable houses will do the same. I wouldn’t count on the house appreciation value to become rich unless I move from NYC to Kansas City or similar….

  • BripBlap,
    I must agree that 500K net worth not that much if you live in NY but still, you are better off with 500K in your pocket than working minimum wages in the same city ;-). My point was that I really wonder how you can manage to build a strong net worth if you are stuck at 25K/year. Even if you don’t spend much, it is just not enough to become wealthy. You’ll need to do something else in order to increase your income.

    Lora, I prefer using the equity in my house to do something else (like investing) with it. So if my house grow in value by 100K, I can go to the bank, borrow that 100K for the best rate possible and make much more money with it. This is why your house should be included in your net worth.

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  • You forgot to add increase your income as you do these things. Most focus on lowereing their spending and they forgot to find ways to increase your income