I recently read a post on one of my favorite blogs, Watch Your Wallet, and would like to respond. In the post, To Get Rich...Do Nothing?, Watch Your Wallet theorizes that most of us spend too much time thinking about what to do with the meager extra income we can allocate to investments and penny pinching, and far too little time thinking about how we can earn more money in our career and/or business. Watch Your Wallet says we would be better served, and therefore wealthier, to focus more on increasing our earning potential, and focus less on deciding what to do with our little pennies.
While I do agree we spend a great amount of time thinking about our pennies, I do not think it is too much time. It is impossible to be over-educated about any subject that you find interesting or beneficial. Is there a law of diminishing returns with knowledge of investment options? Yes, absolutely, but that seemingly unimportant fact you come across Friday morning on Yahoo Finance may link in a beneficial way to something you will learn in the future.
I'll use my favorite example: my friends and myself! This past week, I was in Maine with a group of friends, all young professionals, and all certainly successful in their chosen fields. It was a terrific trip: ocean front cottage, boats, beer, wine, and lobster. One member of our party was an advertising executive for a major U.S. newspaper. His father also happens to be a very senior executive of the very same publication. I would estimate that he earns probably twice or more of what I earn. He has regularly contributed to a 401k since graduating from college over ten years ago, has a financial planner who manages all of his investments, and received an inheritance a few years ago which he had the foresight not to spend on a new car or three.
He leaves all financial decisions in regards to investments to his financial planner, but I'm sure my friend has no idea of what he is paying the financial planner. He does not know the dollar limits on 401k investing, which leads me to believe that he has not increased his contribution amount for at least several years. He has also left his inheritance in the bank since he received it over five years ago (lucky for him it's in Euro's). Despite this negligence, he is quite successful and wealthier than the great majority of his peers, due primarily to his wages as an advertising executive.
Here's the rub: he has worked for more years than me (we are the same age, but I did an extra year of undergraduate, and two years of graduate school), has been given the great advantage of wealthy parents, is connected to a lucrative career, and has made good financial decisions, but I believe our net worth’s are very close. Mine may even be greater.
How is this possible? I have done all of the things you are supposed to do like avoiding debt, keeping my expenses low, regular savings, and pinching pennies like someone out of the great depression. I have also routinely invested in low cost mutual funds without the benefit of an advisor, even (especially) in down markets. For example, I purchased international mutual fund investments when they where returning losses every year. I made what was considered a risky real estate purchase when I was told real estate was dead, and I have done all this without paying an advisor what seems like a small percentage or fee each year.
The basic premise of what I did and continue to do is collect what I believe are valuable assets. This allows me to ride the waves that pass over us every few years. The first wave I caught was real estate, the second was the international equity markets, and currently it's the broader based U.S. markets, which are experiencing a very strong bull market. Do these waves influence my investing decisions? NO! Absolutely not. I cannot control them. I can only control what my dollars purchase: ASSETS!
Is it important to focus on earning more from your work or business? Absolutely. If I had been earning twice as much for these past years I would probably have four times as many assets. Can you achieve wealth on average earnings? Without a doubt, in modern day America, with a solid understanding of finance, YES! It is my belief that the boom of the mutual fund industry and personal finance has finally done what our forefathers claimed to have done, which is to democratize the ability to build wealth.
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Sorry it took me a while to get to this response. I think you make some fantastic points about investment decisions, purchasing the right assets over time etc... but I'm sticking to my guns. If you make $30k a year, your chances of getting rich are so tiny that they almost aren't worth considering.
The main reason for this is that you won't have an appreciable sum to buy all of these assets you're talking about after you pay all of your expenses.
If you bought internet stocks in 1990, real estate in 1995, emerging markets and energy in 1998, and made the right calls on all of the other waves, then you should consider yourself extremely lucky.
However, if you made $30K a year in 1990 and only had $1,000 to invest in real estate after all of your expenses, you're still not very wealthy.
Let's put it this way. If you're one of the best investors in the world, you might hope to get 15% returns annually over a long period of time. If you only invest $1,000 a year in these fantastic assets, you're only going to have $20,000 ten years from now, and when you cash that out, you're going to lose 15% in taxes. That is not rich. That's not even half of a down payment on most homes in the NYC area.
If you want to get rich, you have to increase your income. There's no getting around that. Whether it is through a second job, a side business, or getting big raises at work, you need more income if you want to grow your net worth. You have to get to a point where you have at least six figures coming in. You can spend eight hours a day clipping coupons, but saving 40 cents on a package of hot pockets, signing up for direct deposit, and moving your money to Emigrant Direct from ING direct in order to get 5.6% APY instead of 5.4% APY is not going to win your financial freedom. You have to think much bigger than that.
And let me stress that I'm not talking about "getting rich quick" here. That's not a practical strategy either. You should definitely have a time horizon longer than a couple of years, but you don't have to resign yourself to the "I will be rich when I retire in 30 years" mentality either.
I can sum up my philosophy like this:
-Do what you can to limit expenses, but that's the easy part and it's not going to make you rich.
-Focus on dramatically increasing your income, and pick a goal like $150,000 a year, which a lot of people are making right now, why can't you?
-Invest wisely, work hard, and finally:
-Get rich in 10-12 years
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