The math behind growing wealthy is really simple. You need to make more than you spend. That’s it:
Make more than you spend.
There are then various ways that people can either increase what they make or reduce what they spend. They finish high school and college to be able to get a job that pays a good salary and covers healthcare, retirement, and other big expenses. They learn a trade so that they have valuable skills others will pay them to use. If they have the natural talent, they practice and work hard to become sports stars so that they can get a big salary plus sell their name and image to earn royalties. They start a business or create something they can sell over and over so that they can increase their income in an unlimited way rather than being tied to what someone else is willing to give them as a salary. They invest their money in companies so that they can take advantage of the work others are doing to grow their income. Investing in particular is a great way to grow your income and is really open to everyone since it takes little effort for you and everyone can do it. To learn how you can use investing to grow your income, check out the SmallIvy Book of Investing. , where I go through the whole process and risks involved.
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The spending side is a challenge for most people. Even people who make a million dollars or more a year through their job will spend most of the money they make or more each year. It is natural to keep adding things to your life – new cars, bigger homes, entertainment subscriptions, vacations – until every dollar that comes in each month goes out. This works fine until you have an unusual expense, like a big car or home repair or a medical bill, at which point you add another payment on a personal loan or credit card, causing you to spend more than you make each month and go deeper into debt. I go into the ways to turn things into your favor, where you earn interest each month and add to your salary rather than pay interest, leaving you with more money to spend and invest in great detail in FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early.
(If you enjoy The Small Investor and want to support the cause, or you just want to learn how to become financially independent, please consider picking up a copy of my new book, FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early This is the instruction manual on how to become financially independent.)
But even if you just put away a few hundred dollars into a savings account to pay for things like car repairs and a few hundred more into a mutual fund each month, you’ll end up doing better than most people. Really, it can be as simple as just opening a savings and a mutual fund account and put a fixed amount into each regularly. If you find that you don’t have the money to do so, look at where you can cut expenses like going out to eat less or buying clothes less often. Look at where you can get rid of payments like selling an expensive car and buying a cheap one for cash. Think about lifestyle changes like making coffee at home or at the office rather than stopping by Starbucks on the way in each day. (Over a month, just skipping a daily latte can easily add up to $80 per month or almost $1000 per year. That’s enough to pay for car maintenance.)
Why aren’t most people wealthy?
So, if it’s so simple, why aren’t most people wealthy? The answer is that most people do not make more than they spend. To say this isn’t making a judgement upon people. It is a simple statement of fact, like saying that gravity pulls us down or you’ll get wet if you go out in the rain. Or saying that in order to complete a marathon, you need to be moving in the direction of the finish line. If you spend less than you make, and if no one comes along and takes away what you’re saved, you will eventually become wealthy. The more you can save each month, the faster you’ll become wealthy. These are statements of truth.
Now, there are all sorts of reason that people don’t make more than they spend. In some cases, there is a limitation that prevents people from being able to earn enough money to spend less than they make. There are some people who truly don’t have the mental capacity to make it through high school and therefore cannot get a job that pays more than just above minimum wage. There are people who have medical conditions that prevent them from working a full day or being able to do many jobs, resulting in their being on welfare where they’ll never make enough to save and get ahead. Perhaps the most disabling issues are mental health conditions that cause people to make irrational, self-destructive decisions. There are also people who are subject to the destructive and/or abusive behavior of others who prevent them from achieving: people who live with others who are addicts or controlling.
In other cases, people are making choices that keep them from making more than they spend. They could be earning more or saving more, but they make choices that cause them not to do so. It usually isn’t a single choice either. It isn’t like you turn left instead of right one day and your whole life is different. It is normally a series of choices that are made. Choices made so often that they become habits – things that we do each day, week, or month. Our lifestyle.
Sometimes they are noble choices where people decide to give up on wealth for a higher goal. Many people are taking care of others, such as young children or elderly parents, and are unable to work at a job that will earn them enough to outpace their expenses. They may also be paying the bills of others like those of elderly parents. While these may seem like obligations and that there is no way out of them, these are normally choices and are not forced upon anyone. You could drop these obligations and doing so would enable you to do what is needed to grow your wealth, but that would truly not be the right thing to do. Sometimes we must just accept that there are things preventing us from becoming wealthy and that the trade-off is worth the sacrifice. These situations are also often temporary, meaning that we just need to start the climb to wealth a few years later. The trick is recognizing when we are no longer burdened and not just stay with old habits because we’ve become comfortable with them.
But many others simply make choices that cause them to stay poor or stay in the middle class. They start out making choices as children like not paying attention in class, not doing homework, not studying, and maybe even not going to school. Sometimes it is the adults around them who encourage or require these bad choices be made and the child has little choice but to go along. If these choices go on long enough they may not graduate from high school, greatly limiting their future earning capability from standard jobs. People continue to make choices as adults that affect their income such as the performance they put in at work, whether they do things like get additional training and learn new skills to become more valuable, whether they look for new opportunities or just settle in at their job, whether they take on side hustles and do other things to earn money beyond work, and whether they open their own business where they would have limitless income potential or stay in a comfortable job working for someone else.
Choices on the spending side are also important. Many people get a good job with a salary that would allow them to save and invest, but they make choices on what they do with their money that prevent them from doing so. They buy a house that is unreasonable for their income level. They buy new cars and put them on payments. They take regular vacations to expensive places where everything costs two or three times what it really should. They regularly go out for drinks or buy a latte everyday on the way to work. After making these choices for a long period of time, these become habits. A single choice here or there will not normally have long-term consequences. Once they become habits, however, they drive us towards our destiny. We need to make our habits be aligned with saving and investing to become wealthy.
The trick is to recognize that these are choices. Often, if you expand your thinking, you’ll realize that while often it may seem like you have no other choice you actually do have a choice. You may think that you need to pay “X” for a house because there are no homes in safe areas below that price in your city, but you could move to some other less-expensive city if you really wanted to pay less for a home. You may think that you can’t afford a new car without car payments, but you could get an old used car and repair it for far less than the car payments you’ll make each month. You may think you need to eat out every night because you’re busy, but you could cook large amounts on the weekend and have food that you only need to heat up on your busy nights. Almost always when we rationalize a bad decision by saying that we have no choice, there is another choice that we could be making. We would just rather make an excuse for not making a change.
Culture and choices
One of the biggest factors that influences our habits, and thereby the choices we make every day, is our culture. Here I’m not talking about food, holidays, religious practice, dress, etc… although these things can have an effect on our financial practices as well. I’m talking about what we feel is “normal” based upon what we learn from our families, friends, and people in our communities. Many occupations develop cultures as well, leading to people who work in that occupation sharing the same behaviors. Each individual workplace will also have a culture. In companies that are run well, management will set this culture.
Often our culture creates what is expected of us, so many of us do what is expected because if we didn’t we would be seen as odd or bad by others in our culture. Every culture has things about it that are good and bad. Some cultures have expectations that cause people to make good financial decisions and thereby become wealthy, where others cause bad financial decisions. As an example of a good financial choice, in some cultures it is perfectly normal for multiple generations to share the same home for their whole lives. This means those after the first generation do not need to pay the cost of buying a home, a huge financial savings. An example of a bad financial culture is neighborhoods where everyone is trying to “keep up with the Joneses,” where everyone ends up running up huge amounts of debt trying to look more successful than they are by creating lavish homes to impress others.
Going against culture is difficult for most people. They don’t want to do things that seem odd. They want to meet the expectations of others in their family and community. They don’t want to face criticism from others. It also feels comfortable to follow your culture because doing so seems “right.” For example, if most people you know move out and buy their own home at 18, you think that is the right way to do things. If you instead stay home your whole life, that feels wrong even though financially it makes a huge amount of sense. As another example, if all of your friends and coworkers are buying shiny new cars, you will probably want to get a new car to fit in. It would make far better financial sense, however, to drive an old car and invest the savings.
Culture and privilege
There is a big trend today to equate success with having privilege. If you have a job that pays benefits, you’re privileged. If you are able to pay off your home early, you’re privileged. Often people of a certain race are seen as privileged because of being from that race. “Privilege” means that you have rights that others don’t have – like if your family has a business that only hire others within the family. An “advantage” is when you start further ahead than others, like having parents who give you a car when you move out or pay for your college. If you are not privileged, you will never have access to the goal sought no matter what you do. If you are simply disadvantaged, you will need to work harder, but you can obtain the goal.
For example, a woman is privileged when it comes to having babies. No matter what a man does, he cannot have a baby. It is beyond his capabilities, regardless of training, hard work, or good fortune. A child growing up in a rich household is advantaged. Certain things will be easier for him because he doesn’t have some of the worries a child growing up in a poor family has. The poor child, however, can still obtain the same financial status as the rich child if the poor child puts in the work and makes the good decisions while the rich child does not. It isn’t as easy, but it is possible. There is nothing stopping him. If they both make the same choices and put int he same amount of work, will the rich child end up ahead, sure. But that doesn’t mean the poor child can’t improve his status greatly relative to where he started.
The truth is that while each individual will have certain advantages and disadvantages, very rarely is there true privilege, and advantages can be overcome through making the right choices. The culture we’re born into can be an advantage or a privilege. For example, my culture was an advantage when it came to getting an education because the expectation of my family and community was that I would graduate from high school and go onto college. I didn’t have a great deal of support from my parents in achieving this, other than having a safe home to go to, a home in a good school district, and a ride into school now and then, but I had the expectation of my culture to do well. As a result, I did my homework, studied for tests, and did what i needed to do to graduate with honors and go onto do the same in college. My parents didn’t check over my work or take a huge interest in my grades, other than to view my report cards. I just did what was expected and did well.
Now I had friends (of the same race) that did not have the same culture. His family would put themselves before their son’s education. As a result he would sometimes be asked to miss school to drive his mother to an appointment or go have the car fixed. He was made to feel that he needed to do these things because his family was more important than school. He would be bad if he went to school and didn’t help out. As a result, while he did graduate, he didn’t have the academic success and didn’t have the job opportunities I had.
In some cases our culture can cause advantages. This happens when the culture results in the ability to get help from others. For example, if the culture is that parents save up and pay for their children’s first home, children born into it would then be advantaged by that culture. Likewise, if you come from a culture where people are willing to take you in or give you money and other assistance if you fall on rough times, that can be a big advantage. In some cases the culture is to hire others within a family or within the same community. This can be a privilege of the jobs are very unique and someone who is not from that culture could not get an equivalent job elsewhere, no matter how hard he or she worked. Most of the time, however, these are advantages and not privilege. Someone who doesn’t have the same advantages can still reach the same point. He or she just needs to work a lot harder and make more of the right choices to do so.
If the culture of your family or your neighborhood is not conducive to gaining wealth and you would still like to do so, you might want to find people of another culture who are good with wealth creation. Having people around you who are doing the right things to grow wealthy can be a big motivator. Instead of having everyone making fun of you for making different choices and feeling like the odd man out, you can feel the support of others and feel like one of the group if you find a group with the grow-wealthy culture. Sometimes people who are from a culture that does well will also decide to help to those who are not. People who are successful generally like to see others succeed as well. The converse is also often true, which is why it is often difficult to succeed when everyone around you is not. They become jealous and may even sabotage you.
You’ll get the last laugh
Going against a spending or underachieving financial culture is difficult and will often result in ridicule. But realize that most people are around you are broke, and following the advice of broke people will cause you also to always be broke. While many, many people have the ability to become wealthy within their lifetimes, very few do. This is because to be “normal” is to make bad decisions. Take pride in not being normal when it comes to financial choices.
You may get laughs from your coworkers for the old car you drive. You might have questions on why you bring your lunch most days when everyone else is going out. You may have friends saying that you need to “live for today” and not worry about money. But the day will come when you’ll have the ability to pay for everything you need without a job and have a huge amount of freedom over your life that your friends and coworkers will not have if you make enough good choices. It is difficult to fight culture, but it is often what you need to do if you want financial security.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.