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.
The barrier is real. It’s so much easier to make money now, that it was back in Boston on a fixed income. I really did feel like I was fighting a physical barrier then. Now it’s much easier – just focus on a new product, and expand into it. And it gets easier over time.
I don’t think I’ve broken the barrier in a meaningful Western sense (while I did lower costs, it would have been nice if I had managed to that while still living in the West), but as far as Sri Lanka is concerned, I’ve pulled it off.
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In Singapore, it feels really bad. The inflation is through the roof! Everyone has a slightly higher salary, but property prices, rentals, food, taxes, gas, transportation is really getting unmanageable.
10 years ago when there was a last property boom, (dot com boom), property prices was high, but everything else was still affordable. I could save 50% of my salary with my immature spending behavior (Nice car, nice clothes, fast computer, newest phones)
Today, being really thrift, and occasionally going to buffet, I feel that I can NEVER buy property here as I don’t earn enough to live…
In Boston, with a $85k salary, I could change cars every 3 months, spend $3k on my car a month (tires, rims, ICE, mods), live in a full service apartment and probably still afford to travel around the US and Europe.
I guess if you are looking for financial freedom, saving $$ may not be enough as inflation really makes whatever you save become worthless. My mother had a fixed deposit for $120k, for the last 10 years, and if she had bought a real estate, it would be worth at least $300k by now.
Though there are bad times for real estates, the new cycle tend to make property prices higher than the last cycle in area where there is scarcity in land, (large metropolitan area)
I believe that housing is a necessity now, and until we all can upload ourselves from the physical world, investing in real estate and managing it well is a good path to break the barrier.
Not only is saving your way to riches a lie, but so too is earning your way to riches, and saving is only possible if you earn enough to do it. While the miracle of compound interest can turn $50/week into $1,000,000 over 45 years, a million dollars just isn’t what it used to be, and it’ll be even less when our cohort retires in 30 years or so. If we can afford to retire at all. We’re living longer, and paying for 20+ years of post-retirement life will be expensive enough just living, even more expensive if we incur serious medical or long-term care expenses. Furthermore, the choice of a “safe” investment vehicle for an average return of 10% with suitable tax consequences isn’t obvious or certain.
I agree that it’s very very hard for people who are earning just enough (or even less) to get by to save or invest to haul themselves up from that state, the fact is that some people do. Are they more determined, smarter, luckier? Probably some combination. It might be counter to the premise of the blog, but I’m not convinced there is a “science of wealth” at least not a complete one.
The principles seem to be decently well-established – be frugal, use debt smartly, invest in productive assets, etc. – but some of the most visible examples of spectacular wealth growth seem to ignore these. We sometime glorify the entrepreneur who used credit card debt to get started or the real estate mogul who flipped no-money-down properties, only because they succeeded. If they had failed doing those same things (and many have) we would scold them for being irresponsible. Sometimes listening to successful people (millionaires, entrepreneurs, artists, etc.) sounds like they’re trying to figure out a good explaination for how they got there themselves, anything but luck.
The hardest thing about finding a science of weath seems to be the arbitrage problem. If there is a systematic way, why doesn’t everybody do it? If there were a systematic way and everybody did it, it probably wouldn’t work, at least not for everybody.
Limeduck, I think the answer has two parts: first, there is a lot of common knowledge about how to manage our money that isn’t smart at all, and we need to study our world to discern the difference between effective strategies and garbage, and second, like with keeping fit, the majority of people simply don’t have the habits to reach the goal, so that even with all the information and tools out there, a very large number of us are out of shape and overweight.
Here is an anecdote about my first point: Many people buy property specifically to offset taxes through the tax deductions from interest on a mortgage. They feel really smart that they’re getting that tax deduction and paying less taxes, but they forget that they’re paying approximately three times what they’re saving in taxes to the mortgage lender as interest. Are they really saving then? That’s one place where the common wisdom of how to save money seems to oppose the real benefit.