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August 27, 2014


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1. I know, grow your income, grow your income, grow your income, but...not everyone is going to become a high wage earner. Choice of profession, geography, and other factors definitely influence this factor. I was amazed at some of the salaries paid to Wall Street folks when I read Michael Lewis' Flash Boys recently, but there's no way I'd ever move to New York, New Jersey, or anywhere remotely close to a metro area where people make those kinds of salaries for any length of time.
2. The strategic use of leverage is a tool a little beyond the capabilities of most wage earners. Leverage is NOT consumer debt.
3. Having the big idea, and executing on it are two very different things. I've known a number of very unsuccessful big dreamers.
4. It's just a numbers game, no other way to look at money makes sense. Net worth should have nothing to do with self worth.
5. Hmmm...I'm not sure this is entirely true of some folks who are wealthy. Their guilty consciences seem to require them to go around preaching to the rest of us.

Jon --

You don't need to make $500k to take the income advice. If a person would normally make $50k a year, but works hard to grow his salary to $60k a year, that's $10k extra each year -- and it adds up!

I think that this is talking about a different class of wealthy than I’m in. Very few of these points apply to me. Any of us millionaires in the US are probably in the ninety-something percentile of wealth in this country, but I don’t think that many of us would fall into this “wealthy” category.

1. Early in my career I had a brief focus on earning but became disillusioned with it. I’ve earned an above average salary through most of my career but never stratospheric.
2. I’ve never used leverage.
3. I don’t quite understand what they mean by this either. My guess is that it means you believe that someday one or more of your ideas or strategies are going to catch then you’ll really hit it big like an internet billionaire or perpetual entrepreneur.
4. Of course, it’s only logical to think this way. :^)
5. No, I believe that being rich is a blessing and a privilege and that “everyone to whom much was given, of him much will be required.” How privileged was I to be born in this time into a working class family in this country as opposed to being born almost anywhere in the southern hemisphere, for example? At the risk of sounding cheesy, I think that we have the right to life, liberty and the pursuit of happiness.

I completely agree with M20.
I fall in the category of the "millionaire next door" and my neighbors have no idea at all that I have the net worth that I do. I don't drive a flashy new car, I don't have a gardening service or a cleaning service and neither of us are big spenders. We live in a small and quiet court of very nice ranch style homes, each of which is very well kept up. I do however enjoy the security that wealth brings with it.

I was also born into a working class family, my father was a fireman in England and died with just enough to cover his final expenses. What money brings to me is security and peace of mind and the knowledge that I don't have to worry about an unexpected expense of any kind. Now at the age of 79 I couldn't begin to spend the money that arrives every month in the form of muni bond interest, pensions, and SS checks so it just accumulates, gets reinvested, and will pass on to our three children, two of which are already multi-millionaires, and the youngest is getting close to his first million.

let me preface my comments by saying that as with the last topic here on wealth once again we are not talking about simply doing well financially or having a decent retirement nest egg here. We are talking about wealth and the wealthy which in my mind is a different level of achievement from simply doing well financially and it surpasses the millionaire next door concept.

1. I would change the word earning to income. Earning is a form of income but not the only one. Earning for most people can be improved but has upper limits. Unless you can hit the C suite or are in a highly lucrative profession such as a doctor, you may increase your earning and that will be great but it will not be massive. And I have done very well with my earnings and it has helped me move into real estate. Increased earnings is the best path for most people but while it can lead to a decent financial life it is unlikely to lead to strong wealth for most people. It takes other income to do that usually.

2. Normal laborers do not use leverage to gain wealth, they use debt and it costs them wealth. Debt != leverage. As a real estate investor I used copious amounts of leverage. In my real estate 101 series I listed 6 benefits and 2 that were the biggest. The most important benefit was cash flow but the most powerful benefit was leverage. Leverage is the key to creating large wealth more quickly unless you are to create a business idea that explodes. Leverage drastically magnifies returns. It increases risk and magnifies losses too so it must be done carefully but it is amazingly powerful when deployed in a fertile environment in the proper way.

3. Non-linear is simply not in a straight line. Exponential is non-linear. One of the most common ways to grow exponentially at a high rate is with leverage so this idea overlaps with #2. If I can grow my real estate business in exponential terms at my current rate pretty soon the real estate income overwhelms all other forms of income. I am already at the inflection point where it's crossing over. It gets more difficult to keep the same level of exponential growth, as with all growth curves they tend to slow, but as long as it remains a curve with a relatively high slope, it is considerably exponential and that makes a huge difference for reaching wealth and doing it quicker.

4. I would consider this point somewhat redundant. I view the explanations I just gave above to be based on logic. This point seems like a tautology to me.

5. I believe the exact opposite about being wealthy. I think being wealthy (unless you were handed a trust fund and then I guess it's pure luck and probably viewed as a right) is a combination of being smart about money, working hard to earn it and grow it, and adding in some luck, sometimes a lot of luck. When I consider all those things I reach the conclusion that very few will ever reach it or even can ever reach it. I don't believe that is just the way it happens to be either. I believe that is the way it must be. True wealth or even drastically improved wealth is only available to a small percentage of the population.

First of all I don't believe everyone or even the large majority of people posses the abilities to be wealthy. Be that will power, or education, or work ethic, or natural talents and abilities, or environment, or luck and circumstance. Not everyone is in position to achieve wealth. Improve their situation some - yes. Improve their situation drastically --- for most, no.

Secondly wealth is somewhat relative. If everyone is wealthy then no one is really wealthy. I don't believe that everyone can just follow the advice of personal finance and become wealthy or even relatively well off. Even the advice about how to increase your salary. Most of this advice is about standing out and providing extra value to your employer which is great advice. But it only works because so few do it. If everyone did this no one would stand out. By definition not everyone can get the promotion to manager. Not everyone can get an out-sized raise. Well maybe everyone can get an excessive raise then? But that presumes that the benefit people are providing is purely elastic and non-competitive. But many things are competitive. As a sales person when you get the sale someone else does not. You don't magically create sales out of the air. Maybe a few sales are create out of the air but mostly companies have a budget and they are only going to spend so much. Not every sales person can increase their sales by 20%. When you increase yours, someone else lost that sale. Some things may be more directly related to massive productivity gains that can be spread across the spectrum but studies also show that when people are put in highly competitive environments where they can't stand out above the crowd they pull back. It's human nature. The person who goes to Harvard but finishes in the middle of his class has far higher test scores than the person who finishes in the top 5% of a typical state school. Yet the person who finishes in the top 5% of that state school outperforms the person from Harvard at the 50% both at school and in work performance after school because when you see you don't stand out you tend to step back and let the leaders lead, even if you have more ability than other leaders from a different environment. Malcom Gladwell has a great speech and presentation on this based on his book David and Goliath. It's a great bit of information that makes it clear that it is far better to be a big fish in a small pond than a small fish in a big pond. That is something to think about in life and with respect to advice you give your kids. So even if we could all drastically increase our productivity, it appears that very few humans will push hard when it doesn't separate them from the pack. So it simply is not possible for everyone to do exceedingly well. We aren't built to accept that kind of an environment.

As such many can improve their lot in life somewhat but being wealthy or drastically improved finances by definition cannot be achieved by very many. I used this exact same reasoning to argue why both the stock market of the 90's and the housing bubble of the 2000's had to end (I didn't say it had to crash although I though that was likely, just that the growth had to end). I was not able to predict when it would end but it had to end. The reason was that the stock market had been returning 30% for years. I argued that if it continued to do that for another 10-15 years there would be huge percentages of the working population (maybe 15-25%) who would reach strong levels of financial independence. If that many people reached that point many would extract themselves from the work force (recent polling showed that something like 2/3 of people want to leave their job). When they did that productivity would crash through the floor. That would cause profits and company stock to fall precipitously. That's what happens if you take it out to the extreme. But it can't ever get there because the system starts to fall apart before it ever reaches that point. The same logic can be used with housing. If houses kept going up at 15% while wages go up at 3% eventually no one could afford a house.

So when it comes to wealth, you can't have large percentages of people achieving it. If you are to achieve it you have to stand out as the exception. There are principles that will help you increase your odds of doing so but not everyone who dreams of it can achieve it. It just cannot happen by definition.

"For many are invited, few are chosen."

I read about a guy who in 2012 bought a small house in expensive Toronto ($425k) with the goal of paying it down in 4 years when he'll turn 31 yrs old. He rented out the top and lived in the basement. He worked 2nd and 3rd jobs. He missed out on social events with his friends. Any extra cash or minor windfalls went to principal repayment. He is, in my mind, insane.

But we all *could* do what he's doing without causing chaos in our economy or social order (as Apex suggests). And we'd be financially better off from then on. But I won't. And neither will most others.

But almost anybody could.


This person is the exact opposite of what the article is talking about.

He doesn't have a wealth mindset. He has a miser mindset.

And when he is done he won't be wealthy either, just a bit better off financially. Wealthy takes more than tricks like this.

On #3, I think the key point is simply that the non-wealthy equate income with time spent. The wealthy, on the other hand, look for ways to generate income that is not tied to time spent. There are many ways to do this, though the article only seems to refer to having a great idea that becomes profitable. Common ways the wealthy make non-active income include rental real estate, dividends, company profit, royalties. Each of those things have something in common - they require some investment of time/money/talent upfront but with a potentially perpetual payoff. Far different from the non-wealthy idea that "To earn more income, I must dedicate more time."

I'll comment on #3. I think @jonathan has the right idea. If you are working for a fixed salary or at a fixed hourly rate then your income will at best grow linearly. As a consultant you can bill a high hourly rate and earn a lot of money but your earnings are linear with effort. If you hire consultants to work for you, suddenly it is no longer linear with your effort.

I recently moved into a sales position. I am taking on more risk but I have tremendous upside and I am earning in a non-linear sense.

Erik, exactly right. Ironically, I AM a consultant - not only that but a salaried consultant, so I can't even increase my earnings linearly by working more (though it's certainly a major factor come bonus time).

That said, I have a "wealth mindset" and channel a ton of my earnings into various kinds of investments. Some produce cash flow, some build equity, and some are speculative (boom or bust). With luck, I'll be able to leave my consulting job within the next 5 years and pursue...?

Apex...Your points are excellent, as usual. But I have to say I do think there is scope for most people to be much better off financially than they actually are. I'm talking, we should have many more people who are "millionaire next door" types (or close to it) than we actually do. Wealth levels in other developed countries are higher than in America because America has a pathetic savings rate around 5% (which is actually better than it was compared to the last half of the 1990s to 2008). The cost of living in other developed countries is as high or higher than here. Yes, I know our health care is a rip off, but taxes and the general cost of living here is lower than most other rich countries, so we should be saving more. Most people can save more than they do. Another blogger, Sam, at Financial Saurai had a recent post that showed the top 10% earners in America (excluding the top 1%) only saved 12% of their income. I think that's pretty sad.


I don't disagree with you. Many people could do a little better or even quite a bit better in America. Our consumerism is over the top. However it is also the case that our economy has grown dependent upon it. If we switched to a savers economy our GDP and economic growth would vastly under perform for at least a generation as the economy adjusted from a high consumption to high savings economy. A switch over-night would be devastating to the economy and a gradual adjustment would take quite a while.

It is also the case that societies tend to follow the norm for that society. We do not have a norm here of savings. So it is very hard for most people to do differently than everyone else. That is a huge barrier for most people. When everyone else has cable TV and a cell phone and eats out 3 nights a week and a new car every 2 years and 2 remote vacations a year and a large house and, and, and. They just can't see how them not having those things could possible be a good thing. I mean they see everyone else enjoying all these great things. If they sacrifice and give up a good portion of those things that will benefit them how exactly? By having a more secure retirement 30 years from now. That's a tough sell. But if most people in society were saving and not spending on most of those things then most people would feel like outcasts if they did it and they also wouldn't feel the peer pressure or comparison pressure to do it.

That's why it's only the very few who are able to make the choices necessary to provide for a better future. Because in the present and quite a bit into the future most people would feel like they are always living below everyone around them and it would make most people very unhappy as they cannot help but make comparisons and would always feel they are coming up short.

Society is a huge force and it's a rare minority who can stand against it.

What does it take for you to consider yourself "wealthy"?

I believe this is a difficult question in our current society. You don't have to go too far back in time to the days when the word "millionaire" meant a great deal. These days in Silicon Valley just about everyone whose home is paid off is by definition a millionaire, thus the term no longer represents what it used to just a decade ago, yet I still see people holding up cardboard signs at freeway intersections. One I saw on Monday made me chuckle, it said, "Bet you can't hit me with a quarter."

@Apex...I disagree with your first paragraph. We had a near 0 savings rate from the late 1990s until 2008. Now it's 5%. In the aftermath of the financial crisis, it climbed above 6%. We can ratchet up our aggregate savings rate to about 10% - 15% over a 5-10 year period without it hurting the economy.

I also sort of understand about paragraph #2...people comparing themselves to others. But it's still dumb, and it drives me crazy. As far as having a more secure retirement 30 years down the road...I would say it benefits someone FAR SOONER than 30 years into the future. It benefits folks in the here and now. It means the car repair doesn't have to go on the credit card. It might mean you are a little more confident and don't have to snap at the first job offered if you're looking for work, etc. Yes, I get it, this is how people think. But is it really impossible to change social norms? It used to be normal for people to save about 10% of their incomes. From the 1950s through the first half of the 1980s, our savings rate typically exceeded 8%. It's not like we've never done it before.

I just think it's long past due to start rethinking our social norms, regarding money and a whole lot of other things. That we've been avoiding doing such things is a major contributor to the various social and economic problems we have today.

It is a frustrating thing that the people who read PF blogs are probably the ones who don't need to read them. The people who need to read them the most either won't read them or will not heed the advice given. Frustrating!!!


US savings used to be about 10%. All through the malaise of the late 60s to the early 80s savings was 10%. Then it started dropping in about 82 up through 2005. This was arguably one of the greatest periods of prosperity in modern American history. There are certainly many reasons for that but one was that we were spending down savings and living beyond our means and that drove a demand for goods that fueled the economy and GDP at above normal rates. For 25 years.

When we got down to about 1% savings in the mid 2000's people were pulling equity out of their house with mortgage equity withdrawals and spending more than their income by living off of equity growth. Taking vacations and buying cars etc, that their current income could not support but vastly increasing asset values allowed to happen. In addition you could just put anything extra on the credit cards and many did that too.

All this extra spending from decreased savings created a fragile economy that was living beyond its means and was setup for a fall. The recession of 2000 was a precursor because it didn't improve the savings rate and it actually made it worse by going crazy on housing.

When the crash of 2008 hit, the equity withdrawals dried up. Debt was foreclosed on. This made it impossible for people to live beyond their means any longer. Those that had been saving all along were still saving and those that had been going negative no longer could. Fear caused many to at least try to save a little because now the lines of credit and credit cards were being frozen and closed. There was no fall back but to have a little of your own savings.

So the savings rate increased from the low of 1.5% to up over 5% in a very quick time frame.

And your conclusion is that had no impact on the economy?

Now clearly many things were at play, including foreclosures, bank closures, housing crash, leading to stock market crash, etc. Clearly the increasing savings rate was only one small piece of the puzzle. But make no mistake, the decrease in demand whatever it was driven by was a huge contributor to the recession. Loss of jobs and restricted credit were big contributors to decreasing demand but increasing savings also decreases demand for goods. The result was the worse recession since the great depression.

That is what happens when there is a drastic decrease in demand. There is a short term dislocation in the economy that it cannot adjust to without time. We are still coming out of the damage and we are coming out very slowly. No one thinks this recovery is anything but the slowest and worst recovery from any recession since WWII. Part of the reason is because the fragile state of the economy that has been built over the last 30 years by depending on an ever decreasing savings rate has not be fully unwound yet. We are still dependent on a lower savings rate to get the growth we are used to.

So you will have to excuse me if I am quite baffled at how you think this proves your point that increasing savings does not impact the economy. It took us 25 years to get from a savings rate of 10% down to 1.5% and that slow transition contributed to a drastic economic boom and GDP growth. Your claim that we can ratchet savings up to 10-15% without it hurting the economy has no supporting evidence. The evidence I see from history shown in this chart and what has happened to the economy during declining and increasing savings rates would tend to show the exact opposite of what you claim.

If you want to make a claim with some supporting evidence that would be interesting to see. I am not aware of any economic or historical data that could support your claims.

Now I think it would be very healthy if we did slowly transition to a higher savings rate. It will likely result in below trend growth for a while just like the decreasing savings rate resulted in above trend growth until we can get back to a more healthy level.

As to social norms and the ability for us as Americans to save 10% of our income I agree with you that we have done it (as the chart I posted shows) and we certainly can do it again. However as to how hard it is to change social norms? I suspect very hard indeed. What brought about the savings culture that occurred in the 50s through the 70s? Likely the fear of those who went through the great depression. What brought about the culture that decreased savings? A new generation that never faced any difficult economic times and had baby boom parents who used debt to be able to provide everything they felt their great depression parents deprived them of. Life changing events is what changes social norms and cultures. People telling people they should stop doing what everyone else is doing because it is good for them seems to be mostly ineffective.

I long ago quit worrying about what other people should do. This is America and I can't make them change nor can I have much impact on the masses. I focus on those around me upon whom I can have an impact and who are willing to listen.

We can't escape macroeconomic factors. Apex makes a sound point. As the savings rate goes up, all things being equal there is less demand in the economy. We can agree that overall we will be better prepared for the future with a higher savings rate but it will affect short term GDP growth.

We don't know that the increase in savings rate caused below average growth over the past few years but it is consistent with what we would expect.

@Apex....You're being way too absolutist here. I didn't mean to say or imply that increasing the savings rate doesn't have an impact on the economy at all. It has some. But as you said, yourself, many factors are at play here.

And the fact that such a low savings rate and high debt levels made our economy fragile (as you concede) was much WORSE in the long run. I don't think a gradual increase in savings is going to hurt our economy that much. Notice the word gradual...increasing the savings rate a percentage point a year isn't going to kill the economy, all other things being equal (which they never are...but for the sake of argument). But people always talk as if a gradual increase in the savings rate is the end of the world. It hurts a little bit in the short run, but it benefits our economy SO MUCH MORE in the long run. We need to start thinking about what's best in the LONG RUN as previous generations (before the Baby Boomers) did, and stop obsessing so much with what happens in the short run.


I am not trying to make this hostile. I was merely responding to the below comment which was rather absolutist in how it was worded:

"We can ratchet up our aggregate savings rate to about 10% - 15% over a 5-10 year period without it hurting the economy."

Any reduction in economic growth is hurting the economy. It may not be hurting it much but you didn't include the word much in your original comment. Perhaps you intended to as you included it in your most recent comment.

If we both agree that there is some impact then I don't think we disagree at all. I am not trying to state how much only that it will have an impact, and that is a reason why many won't advocate for much of it in economic circles.

I agree with you that it would be good if savings was higher. I advocated for a gradual increase in my previous comment which I certainly wouldn't do if I thought it was the end of the world. I was not saying that we should not increase savings because it will impact the economy. I was just stating one of the barriers to doing it along with all the societal reasons why people don't want to.

I think you might care about this issue in American society more than I do. While I agree it would be better if people saved more, I don't spend much time concerning myself with what I think people should do because I have so little impact on it.

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