The secret to getting rich is simple.
Of course, I am not talking about owning a bank, or inheriting riches, or marrying someone rich as the secrets to getting there.
My simple secret of getting rich that is available to all is –
start early, spend less than you earn, and invest that surplus well for the long run.
Now, consider the middle part of the equation, that is, spending less than you earn.
A lot of ink is spilled upon the part about spending less. I am guilty at that too, of focusing a lot on saving money, which of course is very important. Frugality is a virtue, no doubt, and one of the key pillars of financial freedom.
But what gets lost often from the discussion about ‘creating the surplus’ is the part about trying to grow your income. Like it applies to all businesses, you can save on cost only to a certain extent to create a profit/surplus. After a point, the business must grow its revenues to grow its profits. Similarly, trying to grow our incomes is a critical element to creating that surplus in our personal financial lives that is not talked about as much as saving whatever we earn.
I was reminded of this aspect by a post from Nick Maggiulli in his blog Of Dollars And Data –
…all of these early retirement articles are the same. They all say things like, “Make it a goal”, “Track your expenses”, “Establish a system.” Blah. Blah. Blah.
But none of these things are the actual reason for how they retired early. Because the actual reason is either (1) earning a high income or (2) having an absurdly low level of spending, or both.
…many of us keep reading these articles. I think we keep reading because we want to believe that there is some “secret” to getting rich. But, as I have said before, “there are no secrets.”
Actually, the only “secret” that I know to get rich is to grow your income and invest in income-producing assets. Of course, that is far easier said than done.
The best way to grow your income is to increase your human capital and keep increasing it. Full stop.
I would suggest you read the whole of Nick’s article.
Meanwhile, here is an illustration I made after reading his article, which I call the Getting Rich Quadrant –
Just to explain a bit about the illustration in case you have any doubts reading it –
- High income-low cost is the best combination that can take you to self-created riches, but only if you are able to invest the surplus so created sensibly, and for the long run
- High income-high cost is the life a lot of people working in white-collar jobs live. We enhance our lifestyle with every increase in income, without much consideration to calling it ‘enough’ and creating greater surpluses as incomes rise. It’s like running on a hedonic treadmill (Wikipedia explains hedonic treadmill as an observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes ). This is a must-avoid situation when you start earning good income.
- Low income-high cost is a disastrous situation if not corrected early in time. In such cases, people borrow from the future to live in the present, and the situation can get really painful and unmanageable with time. If you find yourself in such a situation, the first thing to do is to move to the low income-low cost quadrant, by spending as less money as you can. Moving straight to a high income-high cost quadrant could be difficult as incomes could be decided by various external factors. However, first moving to the low income-low cost quadrant before finally shifting to a high income-low cost quadrant is relatively easier.
- If you are in a low income-low cost situation, congratulations! Now you just need to find ways to move to a high income situation. This is easier said than done but you may search for ideas around you to grow your income. Maybe, start a side business, work on additional jobs, or ask your boss for a raise. However, if you are stuck in this situation for long, and only have a tiny surplus available, the only way to get rich is to invest so well that you can compound even this small sum greatly. This, in most cases, is hope against hope and impossible unless the investment Gods have destined for you multi-baggers after multi-baggers.
Someone wise said –
Save part of your income and begin now, for the man with a surplus controls circumstances and the man without a surplus is controlled by circumstances.
I hope you are already doing this in your pursuit of financial freedom.
If not, I hope the above quadrant guides you, even if in a little way.