You Don't Have to Make a Fortune to Become Rich

In It's Easy to Become Wealthy, I commented that I loved the book The Millionaire Next Door One commenter left this response:

I remember a few years ago when I was in college we had an entire lecture in my stats class about the flaws in The Millionaire Next Door book. I wish I had the notes on me from that time but suffice it to say there were a host of problems and it is why the book is popular with the average Joe but not with any professionals, researchers, etc. A couple of things I remember, the focus for instance was on the lowest end of the "rich" scale and was disproportionately skewed to much older people. So their typical "rich" person tended to be people who saved for a long time and built a decent (but by no means large) nest egg for retirement. The surveys took several hours and they paid something like $100 to the respondents to do it. I know of few rich people who would spend an entire day taking a survey for $100, this biases the results to "penny pinchers".

The best wealth studies I've found are the ones put together by private banks because for them it is actually their business to understand the profiles and habits of the rich, they are after all the people they service. If you read these you will see that the rich in fact ARE what you'd expect. They are mostly people who earn a lot and build up considerable net worths ($5mm+) and do live the life. They typically have nice vacation homes, I think the median amount they spend on a 1-week vacation was something like $25,000 from one of the reports I read. They do tend to buy high end luxury brands and pay for personalized services. They are overwhelmingly disproportionately educated in top schools like the Ivy Leagues.

The Millionaire Next Door book is popular because it gives the Average Joe some hope. It tells you what you want to hear, that even though you're not earning a great deal you can be "rich". It sells well because it makes you feel good that you can point to people who have $100,000 BMWs and make the ridiculous assumption that they probably can't afford to live the way they live.

If you want to really be rich, put down the dumb mainstream books like The Millionaire Next Door and instead read about how truly wealthy people became wealthy. More importantly go out and EARN MORE MONEY. Saving is important but there is a strict limit to it. If you make $100,000 a year which is pretty average for most white-collar professionals these days, after taxes and very tight living expenses you might be able to save around $30k. Not a lot of money. If you try to earn more money, making an additional $30k is not much at all. If you're young enough, try to get into top schools. The average MBA from places like Harvard, Columbia, Wharton, etc. makes over $500K/year between 5-10 years out of school. I know a lot of these types of people, they don't own their own businesses, they don't have to take all the risks associated with that, they worked hard, went to top schools, work as investment bankers, doctors, lawyers at top firms, etc. and make several hundred thousand or more per year and they are in their 20s or early 30s. You can save a million dollars in a couple of years that way, after a little while you'll build up enough to make great passive income from your investments.

I remember a profile of an investment banker after the dot-com bust. He was in his early 40s and got laid off, he was not a rock star banker, just an ordinary one. They were talking about his life as transitioning from being a banker to being a stay at home dad. The thing that struck me though was that he had saved over $15 million in liquid investments. Partly do to getting out of the dot-com stocks in time, but the point is even these average guys in some industries make millions. The entry ticket to these industries is usually an Ivy League degree, hard work, and luck. Of course if you're already out of college thinking about this is pointless.

I have a few comments on these thoughts that I wanted to give:

1. Whether or not the book's research is accurate or not is not really the point to me. For me, I find the principles the book touts as much more valuable -- ideas like living below your means and so on. To me, this is where the real value lies in the book. The principles work -- my life is proof of it.

2. I think I disagree with the comments above that state you can not get "rich" on an average income. Of course, it depends on what you mean by "rich." If the commenter means having a net worth of $10 million or more, then I agree with him. However, very few people have this amount of money and to me they would be classified as "ultra-rich." But if you look at the net worth's of most Americans, you'll see that as little as $500k in net worth will make you richer than most people. This is a level of net worth that even someone with a very average income can achieve.

3. The commenter proves my assumption in his own example. If a person saves $30k per year and invests it at 10%, in 10 years he'll have $478k. In 20 years, he'll have $1.7 million. And in 30 years, he'll have $4.9 million. And this isn't rich? Maybe I'm missing something.

4. Yes, certainly having a high income helps -- and that's why I write so much about managing your career. Yet people CAN achieve high levels of net worth without making $500k per year. Run the numbers and you'll see that they prove this to be true.

To end this post, I'll leave you with another comment that was left on the same post as the comment above. It demonstrates EXACTLY what I'm talking about:

In 1980, I started as a lowly staff accountant in a national CPA firm earning $14,500/year. I managed to save money by living below my means. How? I drove the same car for 10 years and then bought another small, fuel efficient vehicle; I shopped for bargains; and my first priority, paying me. I worked more than 70 hours per week electing to be paid for the comp time instead of taking time off. Hard work and savings paid off; my salary increased but my life style did not incrementally keep pace. At age 40, my net worth was $1 million and I was still driving a Toyota Corolla. At age 50, my net worth is three times that at age forty but I still live as though I was earning substantially less. I am now 51, the house has been paid off some 4 years and I don't have to worry about losing a job or relocating to find better pay. I work about 60 hours per week not because I have to but because I love to. My parents had no money but I am proof, that with discipline and the ability to forgo gratification, it can be done.

Comments

[Way-Below-Average Joe]

Are there any books which offer hope to the Way-Below-Average Joe?

[rocketc]

Very interesting post.

I am always fascinated by different people's perception of "rich". Right now, $40K a year seems unbelievably wealthy to me, but I have an uncle who would rather continue his job search and stay on unemployment than accept his latest job offer for $100K a year.

[Chief Family Officer]

I've also come across statistical criticism of TMND and my reaction was the same as yours: it's the principles in the book that matter. TMND was my first real introduction to going beyond living within my means to living BELOW my means. And implementing that principle has given me financial peace and security.

[bigbuddha]

Why don't people strive to be able to retire at say 35 or even 30. Rather than the old and very tired "spend less than your earn" schtick. Sure doing this will leave you room to invest a portion of our income, but you'll probably have to to wait till your into your mid 50's or early 60's to enjoy it in any meaningful way.

That doesn't sound like a particularly good plan to me slave for 30 years to only enjoy enough "wealth" to meet your living expenses. Actually that sounds like my nightmare!!

When looking at the tail of any distribution, sampling it, or saying something relevant about it is always difficult. The reason most are old and spent their life accumulating it, is simple statistics, most are, due to long term compounding. What is the annual output of the Ivy League? Quite small really. Is it the top 0.01% or top 1% you are interested in?

No doubt those with net worths above $5m do live very well, after all, they can afford to and still accumulate at a prodigious rate. They very likely are not spending more than they make and in fact spend far below it. Some stars have such great incomes even reckless spending can't absorb it. Still there are many that gamble it away, push it away, or squander it anyway.

Most financial advice does not focus on very wealthy. Kiyosaki is about the only one that comes close which is what makes him so interesting. But it is also hard to generalize advice with them either.

I agree that people should look at a lifetime of work and turn away in horror. There are better ways.

[Lord]

That was me.

[muntz]

regarding point #3. 1) 10% is an agressive assumed return. and 2) don't forget inflation. Assuming ~3% inflation, the 1.7mm in 20yrs is only worth a bit more than half that in today's dollars. And by "rich" i'd define that as not having to work, being able to enjoy the good things in life, etc. And 1mm in no way gets you that. You might be able to live on the income from 1mm, but not like a "rich" person.

[FinanceAndFat]

Criticizing TMND as not being about 'rich' people is silly. The title is MILLIONAIRE Next Door, not 50-Millionaire Next Door. If you want $50 million, fine, go work on getting it. Most people would be satisfied with a couple of million in the bank and the promise of a comfortable future. Considering the average American, I would call that rich.

[JC Carvill]

I think that being rich is what everyone wants in life. It's amazing to think that you don't need a fortune to be rich. Thanks for this post!

[annab]

it's funny what we think of as rich. If I had 30k that I could invest, I'd feel rich. And a hard assessment of the numbers tells me I could easily do that with a salary of <100k. So a two income household, or 1 good career could get a person there. That's an achievable goal, which makes me wonder what I could do with the income I have. Better than what I have been, surely.

[Foobarista]

The "millionaire next door" types where I live (Silicon Valley) are these sorts: a hardworking Chinese, Indian, Persian, or Mexican business family who has built up a restaurant, body shop, medical supply outlet, or other successful business, frequently in some obscure field, often combined with investments in income property. They drive comfortable, well-made cars like Acuras and Lexuses, live in small, overpriced Silicon Valley houses in very good school districts, and typically live carefully money-wise. My business broker wife interacts with such people daily.

Another one is the IPO type who hit it big, although this is more rare than it once was. But even people who hit it big with IPOs or buyouts often don't hit it massively huge, although they can end up with significant money at a relatively young age.

A third is the grind-it-out professional (I'm this type), who makes a good Silicon Valley salary but lives cheap and saves every possible penny, often chasing the IPO or buyout dream as a chance to move from "mere millionaire" status to Big Money. We drive old, paid-for Toyotas and Hondas.

As far as I can tell, people who manage to get much over $5M tend to take a risk and get a big windfall or they grind it out somewhere like Goldman Sachs, working 25 hour days, 8 days/week, for many years - while managing to avoid trying to live like Donald Trump.

[plonkee]

The average MBA from Harvard may make $500k a year, but it sounds like a hard life to me. I think that the MMND tells us that there is a way for everyone average to be comfortable. It doesn't really say anything about the particular challenges of starting out with being below average income, or about what you can do if you are *really* rich.

[FMF]

Wow, I take one night off and you all go wild with the comments. ;-)

Here are a few thoughts from me in response:

BigBuddha -- First of all, being able to retire in your 50's or 60's isn't the bad deal you make it sound like. If you're average, you still have 20-30 years to live! Also, if you have some proven ways that the average person can retire at 30 or 35, I'd love to hear them.

Muntz -- I've had people over and over tell me that $1 million, $2 million, etc. is "not what it used to be" and "won't be worth as much in the future." Yeah, that's true, but it's still more than 99% of Americans have to their credit, so I'd say it's doing pretty well.

Foobarista -- "A third is the grind-it-out professional (I'm this type), who makes a good Silicon Valley salary but lives cheap and saves every possible penny, often chasing the IPO or buyout dream as a chance to move from "mere millionaire" status to Big Money. We drive old, paid-for Toyotas and Hondas."

I'm this type too (grind-it-out professional.)

[mjmcinto]

I have a bone to pick about the $500K/yr salary for ivy league graduates. While they may be making that, they probably also have mounds of student debt, and work 80+ hours a week in a high stress job, which could very well take a toll on their health. Sure there are plenty of doctors, lawyers, etc that make more than I do, but they also have to work many more hours just to pay back the cost of school to get them there. It's only until many years out that they're really making the big bucks, once their eduction has been paid off. However, what was the true cost when you add up the amount of time they spent at work and away from their family?

I for one have done the high stress and high paying job. I was making in the six figures by age 27, and didn't go to an ivy league grad school (or grad school for that matter). However I was working obscene hours, and was always under a lot of stress. I had to work on multiple consecutive holidays. And while yes, I do kind of miss it (some people like me thrive in that environment), I also realized the toll it was taking on my family. My wife did not like the person I was turning into, and did not like all the time I was spending at work. I decided no salary was worth destroying my family over, so I'm now working at a less stressful job, and while I'm making less (though still a decent salary), I'm also working less, and my family is happier. To me, that makes me richer than if I had stayed where I was making more money, and ruining my family. I'm not saying that everyone that has the high income or works alot is ruining their family....just that you have to look at all costs when you look at the high income (family, social-life, monetary obligations from school that you had to get there, etc).

[beastlike]

I am with you mjmcinto!!! Living comfortably and having time with the family is being rich!

And just to repeat what FMF said because it was what I was thinking the whole time reading through the comments: Muntz -- I've had people over and over tell me that $1 million, $2 million, etc. is "not what it used to be" and "won't be worth as much in the future." Yeah, that's true, but it's still more than 99% of Americans have to their credit, so I'd say it's doing pretty well.

"Are there any books which offer hope to the Way-Below-Average Joe?"

yes, they are called textbooks. i suggest a degree in business administration.

this is a great post. i agree with comment #1 but know personally a person who lived #2, although they were a lowly road paver, not a high earning cpa, who saved/invested in r.e. and food/utility stocks.

I agree with comment #1 because being too focused on saving every penny one can miss some great opportunities. The saying after all, unless i am misinterpreting of course, which is always possible, "penny-wise but pound foolish." by the way, did Jon Bon Jovi become one of the richest modern men in america by being frugal? i doubt it but i don't really know and would like to eventually know the answer. although i doubt we will ever know because britney is blonde.

i agree that m.n.d. strikes a chord with joe/jane craft beer but that comment #2 is a nice life too. what to make of it all? well, keep learning better, and take what you read on a pf blog with a grain of salt.

[ChrisV]

Was it just me, or did anyone else read the latter part of the post--the part about the accountant--and think "Is this guy for real?" His life, of working 60 hours weeks, sounds like the life of a slave. Maybe he likes that he didn't take vacation and kept earning money but that doesn't seem life a life lived well to me. He is now 51, still a workaholic, and has money constantly on his mind.

I feel sorry for him, actually.

[Richard]

You can't save your way to real wealth. On paper you can save money and attain numbers associated with the being "rich". However you won't be living the life of the rich and famous. If you want to be "rich" and enjoy your money and wealth then you will have to take some risks and learn to work through failure.

[JACK]

What a heap of dung in that first comment you quoted, FMF.

First, who on earth is reading TMND as a stastically accurate representation of the entire population of "rich" people? Nobody. Do I give one darn about whether it missed the boat on the spending habits of the jet-setters? No. It's a survey of people who have built up decent wealth through long term thinking and delaying gratification or learning to take satisfaction in a life not wound up on consumerism. Nothing wrong with that and frankly an incredibly healthy strategy.

The average mba (even from the top schools) does not make 500K a year. My guess is the commenter didn't actually go to Harvard or his view of average is an i-banker in Manhattan. I did go to Harvard. I work routinely with GCs, CEOs, CFOs, Senior VPs, etc from across the country. Some are incredibly well compensated. Some make less than me. They are not on average making 500K a year. They are doing fine, but there are plenty of them who are pulling in 200s or lower.

You can make 500K a year. If you are one of the lucky few and are willing to accept a lot of life trade offs that you don't want to accept. This is not exactly the strategy for the masses or much of a strategy, for that matter. It is more of a gamble. How practical is it to recommend to the masses that their financial strategy should be built around landing an i-bank job with Goldman Sachs in NY?

I know many of the people that this commenter describes, in and outside of the i-banking world. Now, some of them outside of the i-banking world have been at it for a while and they do have a decent reserve built up. But I know many who wouldn't survive this question: suppose you lose your job tomorrow and their isn't another one, how long would your present lifestyle last?

Very, very, very few people are making so much in wage income that they can save up a couple million bucks by their late 20s or early 30s. And believe me, most aren't saving anywhere near that.

Take the law profession. The average starting salary at big time law firms is 160K. 8 years out they'd be making around 240K (plus 25 or minus 60, in terms of a bit of a range) with chances of making bonuses up to about 60K. If you work in Manhattan you could do much better. These people are typically billing (not working, that's more time) 2400-3000 hours a year. Eating dinners in their offices. Never really spending time with their families. Some like it because, well, they are the types who would like it and god bless them and keep them away from me. Others are miserable, but rationalize that the money's worth it. Of course, they probably are living not so much above their means, but certainly above their ability to change jobs. In other words, yeah they are probably spending less than they earn and saving some money. But could they make the jump to a new job that would give them more time and satisfaction, but requires a 50% paycut? Not without a real change in lifestyle. They are not building up passive income that exceeds their wage income.

Oh and average lawyer salary is sub 50K. So don't think these jobs are out there for everyone.

mjmcinto is right.

But I'd push the envelope even further. These people aren't rich. They are wage slaves like the rest of us. They just have a nicer cell and have developed an attachment to it. Very few are working with the ("endure the hell, save up a ton, and break free" attitude.)

i-bankers are just the wrong comparison. If you got rich being an i-banker, great. You probably didn't need money to begin with or are one of the lucky few who broke their way into it. Hopefully you didn't crush your soul in the process.

[JACK]

Richard's comment is great in this regard: what's the purpose of wealth.

If you define wealthy as being able to spend money like Britney Spears, then, duh, you can't save your way to wealthy.

If you define wealthy as being able to living a lifestyle you desire off of passive income versus wage income, then yes you can, if you definition of lifestyle is realistic.

But who's reading PF blogs looking for ways to save up enough to be able to reach a point where they can spend thousands a month on shoes? Are these people sane?

[Kevin]

Richard - the title of the book is "Millionaire Next Door" not "Uber-wealthy Guy Next Door". If you don't think having over a million dollars is "real wealth" then you are pretty jaded.

Jack - well said.

[Lord]

The other thing is high income jobs rarely last long unless it is your own business, even with an Ivy League diploma. Income must be turned into wealth to provide sustained investment income.

[Richard]

@Kevin - A million bucks is a nice chunk of change but I wouldn't say you are rich. One of my mentor's is a senior financial planner and we have discussed this subject. He scoffed at the idea that having a million is wealthy. Yes, it's nice and you are doing better than most Americans but it doesn't mean you can stop working or lead a life of leisure.

Google the NY Times story "Working Class Millionaires" That story is a nice summarization of my views on money and wealth. The story is focused in Silicon Valley so the numbers are skewed but the theme can be applied to anyone. You can save for a lifetime only to have it wiped away with a moderate life event.

No doubt that some ivy-league grads make $500,000 pa, but not those that I know. The comment FMF quoted left out the element of luck.

Plenty of ivy-league grads went into IT at exactly the wrong time to roll in the dough, including many that I now work with!

[Florida Beaches]

The comments from the CPA are very representative of many CPA's. Financially conservative, work long hours their whole life, and sock away a nice retirement. I should know, I'm a CPA that started out that way. But I tired of the grind. The long hours, the mediocre pay and benefits, and working around so many people who constantly complained about their job. No amount of money could compensate me for that daily experience, so I left. Plus I saw too many people die of heart attacks or devastating cancer in their 40's.

Sure it would be great to get right out of college into a six-figure job, work and save for 20 years and then retire. But few people are savvy enough, or in a position to take that route. Not to mention the fact that having kids tends to interfere with that strategy.

The two extremes seem to be (1)find the job that you can make the most money at, even if you hate it, save all your money, then retire early and enjoy your life, (2)find work you really love, even though it may not maximize your earning potential, or as George Burns used to say: "Do something you love and you'll never have to work a day in your life."

Now I am self-employed and do tax and consulting work out of my home in addition to maintaining several profitable websites (not accounting related )and paid blogging / freelance writing gigs. I work a lot, but it doesn't feel like it, and the money will soon surpass my CPA "McJob" salary.

I'm enjoying today AND planning for tomorrow. Health permitting, I can "work" as long as I want to. Work and service and learning new things are what give meaning to life.

I think too many people are way too hung up on "retirement." Plan for tomorrow, but don't live for tomorrow.

Happy Thanksgiving to all.

chrisv's comment describing 60 hours per week as "slave" work is laughable. my experience has been that significant wage earners are making substantial trade-offs; the young six figure attorney in a large law firm is required to bill 2200 hours yearly; the MBA working as an investment banker works at least those many hours; and doctors put them all to shame. don't feel sorry for that cpa chrisv; he's not a slave to anyone; he's economically free. show me someone who works 8 hours per day, places leisure time ahead of work ethic, earns $500k per year and you're showing me a liar unless of course, the earnings are from a huge lotto annuity.

[chrisV]

Last poster (anonymous),

That CPA guy doesn't make $500K per year. You misread something.

The CPA *is* a slave, in a sense...to his job at least. Anyone who works 60 hours a week and who is in his 50s apparently has no other significant interests.

BTW, the job you describe almost does exist...it's in sales. Ask any sales guy working in high tech.

ChrisV,

Who made you the standard bearer that decides who to pity and conclude other people have no other significant interests? I'm a trial attorney working 60 or more hours per week and I have plenty of outside interests and enjoy my family. I try to get in very early so I can always have dinner with the family and be involved in my kids activities.

This site is about money. Thanks for introducing us to your 8 hour a day formula for wealth. I still think, with rare exception, it's a fantasy.