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Getting Rich Is Simple

Getting rich is simple, and the key ingredient is discipline.

Only three ingredients are needed: income, discipline and time. Chances are, you already have two of them, income and time. All you need to do is add the third, discipline. And armed with the following knowledge, that key third ingredient may be a lot easier to find.
Here's how it works: Say you start with nothing, invest $500 (of your income) a month (a healthy discipline), and let your money ride (over time) in diversified investments. Long term, the stock market returns at least 10% annually. Assuming a 10% return, you'd have $102,000 after 10 years, $380,000 after 20 years, and $1.1 million in 30 years.

Alas, it seems that Americans are spending more than we earn, illustrating that "simple" doesn't always mean "easy".

The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Depression.

The savings rate, as reported, leaves out some important factors. For instance, it includes contributions to a 401(k) but not the interest an existing account accumulates. Still, spending more than you earn is one of the best ways to get poor, quick.

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4 Comments

the Pirate said:

The WSJ mentioned that in this article.

As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.
Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets--in other words, your gains in overall wealth.

For our part, these columns long ago began to watch a far more instructive figure known as "household net worth." That number, released by the Federal Reserve, includes all assets (tangible and financial) held by individuals less their liabilities (mortgage and other debt). At the end of last year's third quarter, U.S. household net worth had climbed to $54.1 trillion. That was an increase of more than $3 trillion over the previous four quarters. Rest assured, that's a much higher figure than during "the Great Depression," AP notwithstanding.

February 5, 2007 11:42 AM

Michael Williams said:

tP: Yeah, as with all accounting it really seems to depend on what numbers you decide to add up :)

February 5, 2007 3:50 PM

Randy Kirk said:

I need a definition of rich. If you mean accumulating a pile of money. Great. That will work. Hope you don't get sick or die along the way. Hope you don't make some bad investment decisions or get caught in a really bad market.

I don't have as much money in the bank today as I might have, but I have a wealth of experience, education, children, grandchildren, and helping others that I consider to be riches that are bearing much better interest than the treasure in the vault.

February 5, 2007 9:23 PM

Michael Williams said:

Randy: Yes, in this instance I'm talking about money :)

February 6, 2007 8:35 AM

The comment login system is acting strange. If you get an error message saying you aren't logged in when you are, just reload the comment page and try again. I'm trying to track this bug down, but it's not easy.

Getting Rich Is Simple

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