Poverty to Prosperity

One of the greatest financial challenges people deal with is the simple concept that everyone can be well off, if not rich, by following simple, fundamental principles of money management. Most people actually believe the opposite: that the rich get richer, the poor get poorer, and there are only a few, lucky individuals who start life poor and end up financially sound.

I'll agree that the cases of people starting poor and ending rich are not that numerous, but it's not because some are lucky and most are not. No, it's because some are disciplined and most are not. For all but the most poor in the most desperate conditions, financial well being can be had in a lifetime as long as the person learns and applies solid financial principles. Unfortunately, these principles require perseverance, commitment, and the willingness to spend less than a person earns. For most people, this is simply asking too much.

I've already posted on the research which showed that the key to financial freedom is spending less than you earn over a long period of time. This is the way that people who've never earned more than $30,000 a year can retire rich (by following the principle) and how people earning $1 million a year can die broke (by not following it). That's really good news for all of us because cutting expenses/living below your means is much easier and more controllable than trying to increase your income.

However, once you generate excess cash by living below your means, you need to invest that surplus wisely to maximize its growth. That's where this piece from the Motley Fool comes in -- it shares the Fool's thoughts on how to go from poverty to prosperity by investing wisely. A few of their thoughts:

The fact is, you don't need a trust fund as large as Paris Hilton's to start securing your financial future, and you don't need an accountant's grasp of financial jargon to profit from the stock market. All you need is the willingness to begin and learn. A commitment to regular, small investments -- I'm talking as little as $50 or $100 a month, folks -- can be the start of a million-dollar retirement account.

Without question, the earlier you start, the easier it will be and the more money you'll actually accumulate. But if you're like me and put off investing until later in life, you still have the ability to achieve your goals. The idea is to start, but start now.

The article goes on to tell about the power of compounding and how you can use it to multiply your savings over and over again to turn your little savings into a massive portfolio.

So the path to prosperity is quite simple:

1. Spend less than you earn.

2. Invest your surplus to make your money grow.

3. Repeat steps 1 and 2 for many, many years.

Yes, it's that simple.

Update: For more details on this line of thinking, see the Free Money Finance Guide to Getting Rich.

Comments

[TADollar]

I couldn't agree with you more. It really is about discipline. I know people with good salaries who could easily be building a nice nest egg, but instead are scrimping by each month because of poor financial habits.

[Canadian Capitalist]

You're right. It's simple but not easy. But all it takes is discipline and patience.

[Stephen A. Howell]

You are correct! I'll never forget my father telling me about a man that worked with him at the post office. This particular fellow never married, but he was very enthusiastic about saving and investing. He lived in a small apartment in downtown Oklahoma City. He was single, and as far as I know never married. On one occassion he asked my dad to come by his apartment after work to pick up something. What my dad saw was stacks of the Wall Street Journal. Of course, my dad being the inquisitive type asked him what all this stuff was, and he explained his interest in investing. He told my dad that every extra nickle he got he bought stocks and that at that time his net worth was approximately $600,000. A number of years later I asked my dad what happened to that fellow. Apparently, he left millions of dollars to charity upon his death.

I never forgot the story! I started saving rather late in life. I was 42 when I opened my first brokerage account, but I'll never forget the feeling I got when the first two stocks I bought for less than $2.00 per share were sold for over $20.00 a share.

Here are some simple things you can do to increase your saving. They worked for me and maybe they can work for you.

l. Pay you home off as quickly as possible. Refinance for 15, 10, or even 5 years then try to pay it off in two or three years.

2. Do not tolerate any form of debt. If you owe money get it paid off as quickly as possible. Especially credit cards.

3. Once you pay your house off, hopefully in five years, don't buy a bigger house or plan any spending for the savings instead start putting it into solid stocks. Advice: DO NOT BUY MANY OF THE MUTUAL FUNDS BEING SOLD BY INSURANCE COMPANIES.....MANY OF THESE HAVE A 4% charge. You can never make money in mutual funds paying high fees.

4, Make a list of everything that you are spending money on you don't need such as: newspaper subscription, magazine subscription, memberships, insurance policies, cable movie programs, checking fees (never pay a checking fee or an overdraft) Promise yourself you will never again pay a late fee, checking fee or overdraft fee then keep your word. Then take this money you save and put it into your savings. Example: I was buying two or three cokes per day at Sonic. The cost as approximately $3-$4 per day. That was $1,500 I saved enough to finance an IRA or Roth. I am not suggesting you stop doing the things you enjoy simply cut back on them so when you do it you will really appreciate. Avoid restaurants with a passion! You will never have anything living in restaurants. Cook healthy food and eat at home. Going out to eat should be one a week or every two weeks. You will appreciate it more.

5. Live in a home that is at least 30% less than you can afford.

6. Take vacations that are fun but not necessarily expensive. My sister has been all over the world, but the most fun she ever had was a camping trip to Yosemite with her two kids.

These ideas along with many other things allowed me to retire at 55. They can do the same thing for you!

[Hamburger Flipper]

Time for a reality check.

Let's say you start out with student loan debt, earn minimum wage for decades, and take a year off for an uninsured extended illness and hospitalization.

How prosperous can you realistically expect to end up?

[db]

@ Hamburger Flipper:

Well, you're as prosperous as you deserve to be if you allowed yourself to only earn minimum wage for decades, especially if you had the advantage of getting an education along with that student loan debt. If you had any gumption at all you should have managed to pull yourself out of the minimum wage category. I certainly did.

[Money Warrior]

Accumulating wealth in today is very difficult if you do not have a fair amount of discretionary funds to invest but one of the best ways is to combine your resources and work together. Something we do not do a lot of in America because of our independent spirit.

Mutual funds are one way to do it, Real Estate investment trust are another, low cap stocks are another but they do not address the fact that you have to generate an income while investing.

You have to play the same game as the rich guys and level the playing field by combining your resources similar to mutual funds but with an income generator included. (membership investment clubs)

That means people of limited resources must work together to build wealth and generate income. It does work!

I know that will make a lot of semi wealthy guys pop a cork but if we don't we will forever be under the thumb of poverty. You can not make enough money to keep ahead of inflation. It will only get worse.

[Dana]

You're right and not right all at the same time. Don't confuse a goal with a current state of being. If someone is being frugal with their spending and wise with their investing they are still going to be low-income and low-asset until they become rich. The percentages are still going to change over time, of course--for instance, the assets will increase--but you don't wake up one day absolutely poor, decide to be good with your money, and then wake up the next day rich. (Unless you win the lottery or something, of course.)

And that's the trouble with the mentality of blaming poverty on laziness. Especially when you consider that a lot of people who are low-income actually hold jobs that require them to work very hard. And oftentimes people don't make wise money decisions because they don't know how. You can't make knowledge appear in your head where there was none previously--you have to be exposed to it, and if your parents don't do the job and the schools don't do the job then whether you ever think to look for the information will depend greatly on luck.

My parents got as far as teaching me to put money in a savings account. I don't recall them ever sitting me down and giving me the "spend less than you earn" talk, and I do remember them having credit cards, and that stuck with me later when I was offered one. (Yeah, it got ugly.) They taught me absolutely nothing about investing and my dad, for sure, is *still* ignorant about money today in his 50s. In fact he even believes he can't get a mortgage simply because of his age, so he settled for living in a mobile home, which depreciates like a car. Ouch. You also don't want to know what his level of credit card debt is. Last I heard it was pretty high. My mom's declared bankruptcy at least once, possibly twice. Those are the people I come from.

School wasn't any better. We had a supply-sider in economics class--good lord, talk about passing on the ideology that debt is good. *eyeroll* She actually told us it was better to borrow and spend than to save. Why people think Reagan was an economic hero is quite beyond my ken. I did take accounting class in my senior year but that was just the mechanics of keeping books, not any financial lessons in particular.

Most people come out of school knowing how to do math and hence understand the *theory* of "don't spend more than you earn," but if they are completely ignorant about every other aspect of finance, the lesson usually doesn't sink in; without financial goals, you kind of don't see the point of being diligent with your money. And if you don't know you can *make* financial goals, you aren't going to bother. I remember hearing something about mutual funds when I was in the Army; a guy I dated briefly was investing in them. But I dismissed them, thinking I had to be an expert or something to even ask about them. Those were the days before widespread use of the Internet (I'm 34 now). Man, I wish we'd had ShareBuilder back then and that I'd known how to use it.

And I came from a relatively privileged background--no inner city, minority-race upbringing, military brat, straight into the military after high school, married right out of the military, kind of thing. Imagine what kind of obstacles people face who had it worse off. They can be overcome, but most people don't overcome them because they don't know how, or don't see how they can, or don't understand why they should.

I was lucky. I got addicted to the Internet and I'm nosy. I just wish it'd happened fifteen years sooner.

[Dana]

Bad punctuation on that last paragraph. Meant to convey, "I wasn't of a minority race and raised in the inner city." Because people with both those strikes against them have even more problems; if you're poor enough to need to be on government assistance, they usually discourage you from having any assets whatsoever. I understand the taxpayer's reluctance to subsidize a person who already has some money, but it's kind of stupid to make a person choose between being able to get an emergency brake job done on their car that they need for their job, and being able to put groceries on the table. (As in, if you have any savings at all, you can't get adequate food stamps.) It's expensive to be poor, especially when you're trying to get *out* of poverty.