Saving your way to riches is a lie. At least a partial one. It came to me one day when a coworker said “just remember, invest regularly and heavily in your 401K and you can retire a millionaire.” Yes, of course, that’s a no brainer you might be saying to yourself. I studied compound interest, and I know that if I put just $50 a week into a tax free investment and get 10% return on that, if I do that from the time I’m 20 ’til the time I’m 65, I’ll have over a million bucks saved when I retire.
But there’s the catch… what if you’re just making enough to survive? Maybe you’re just starting out in life, or you have debt, or you have kids, or you have few skills that could get you a better paying job? Then to put $50 into a 401K might mean you can’t buy food, or can’t make rent. $50 a week might not seem like a lot, even proportionally to the salary of someone working full time at a retail store, but it could mean the difference between minimal comfort and suffering… or between shelter and homelessness.
$50 is nothing to someone who earns well in excess of their living expenses though. Take a look at this chart. It shows that the rich spend a much higher proportion of their income on investments than middle or low income households do. Is it just because they’re smarter, or is it just because it’s easier for them because they have much more disposable income?
I assert that much of wealth generation has to do with two factors: being above the threshold so that you can invest toward wealth, and second, making good choices in your investments. Therefore, if there’s a barrier beneath which one cannot reasonably hope to save, then one’s primary goal at that point is to increase income and control expenses. Seems simple enough…
Oh, and this leads to the conclusion that flat, or fair taxes are lies. Below a certain threshold, there can be no wealth generation. There is only survival. Above a certain threshold, every extra dollar is all upside. More on this next time.