“Everybody Ought to Be Rich” was an article published in August 1929 just before the beginning of the Great Depression in the Ladies' Home Journal by John Jacob Raskob. Raskob, a wealthy financier at the time, believed in the stock market as a viable means of wealth creation for everyone. However the article is often seen as an example of irrational exuberance due primarily to the unfortunate timing of its publication.
This does not mean that Raskob was wrong in his declaration. The truth of the matter is that everyone ought to be rich, but not everyone will be rich. Becoming rich requires a level of disciplined persistence that few people seem to possess. Becoming rich, as Raskob implies, is not a matter of business genius but a matter of disciplined saving in high performing asset classes, namely the stocks of high quality companies.
It may be helpful for us to define exactly what “rich” is. We could say that rich is some high water mark in terms of dollars. Something like $1 million or more is rich. But like anything, this is just a matter of opinion. Rich is relative. As Chris Rock said, “If Bill Gates woke up with Oprah’s money, he’d jump out of a window.” So for our purposes we will use Raskob’s definition of rich. Raskob begins his famous article by saying,
". . . a man is rich when he has an income from invested capital which is sufficient to support him and his family in a decent and comfortable manner - to give as much support, let us say, as has ever been given by his earnings."
As mentioned earlier, anyone can achieve this level of rich but not everyone will. Those who can follow the simple steps to wealth will fair better than those who can’t seem to muster the effort. So what does it take to become rich? What are the steps involved? Let’s go through them:
- Do What Money Does: Do not attempt to reinvent the wheel when it comes to gaining wealth. Develop a wealth mentality and an investment framework based on what has worked for others. One of the best ways to do this is by reading books on the subject. One caveat: All investment and finance books are not created equal. Many offer very little in the way of sound advice. So buyer beware. Although far from a comprehensive list, here are a few books that should get anyone off on the right “wealth-building” foot.
The Millionaire Next Door by Thomas Stanley
The Warren Buffett Way by Robert Hagstrom
The Intelligent Investor by Benjamin Graham
The Way to Wealth by Benjamin Franklin
The Only Investment Guide You’ll Ever Need by Andrew Tobias
Think and Grow Rich by Napoleon Hill
Start NOW. A favorite illustration of many financial advisors is comparing two investors, one who started investing early and the other who started investing later. For instance, Billy started investing at age 15 and put away $250 per month until his 20th birthday, for a total investment of $15,000. He let the money compound at 10% and by the time he was 65 he had accumulated $1.6 million. Kim on the other hand waited until she was 27 to start investing. She too put away $250 per month but continued to do so until the end of her 65th year, for a total investment of $117,000. Earning 10% on her investment yielded Kim $1.3 million. By waiting those 12 years to begin investing, Kim had to invest $102,000 more dollars yet still yielded $300,000 less than did Billy. Don’t wait.
Follow the 20% Solution: Do as most millionaires do and pay yourself first by investing 20% or more of all you earn. Saving at this level will eventually allow you to achieve the level of Raskob-rich. Investing 20% of your income, at a 5% rate of return and limiting your spending increases to the rate of inflation will allow you to retire in 20 years. Earning a 10% will allow you to retire in 17 years. And earning a 15% return will allow you to retire in just 15 years.
Eat What You Earn: Avoid the temptation to spend more than what you earn. Avoid going into debt to live beyond your means. Work to eliminate high cost credit card debt. Live on 80% of your earned income after you have committed 20% to your investing program. Avoid spending money on frivolous status items like fancy cars, big homes or stuffy prep schools for your preschooler. Mitigate expenses in your investment program. Use no-load index funds or a low turnover value investing program.
Buy Time, Not Toys: From Thomas Stanley's “The Millionaire Mind” – “Millionaires and those that are likely to become wealthy someday are not 'first-cost' sensitive; they are life-cycle-cost sensitive…they are not penny wise and pound foolish.” In other words spend your money on goods and services that allow you to leverage more of your time for the things in your life that matter most.
Take Advantage of Compound Interest: Invest in the stock market through index mutual funds or a value investment program or find a financial advisor to do so on your behalf. Stocks offer the highest potential return of any asset class. This also means avoiding asset classes that do not offer an investor as much in the way of returns as the stock market, including real estate, bonds and cash.
Stall the Taxman. Maximize use of tax favored vehicles like IRA's and pension plans. Participate in your company’s retirement plan. Use tax efficient funds with low turnover in your personal accounts. When you invest, avoid selling too often or too soon as this will certainly trigger tax consequences.
Limit Shocks to Your Finances: Avoid interruptions to your investment program. Do not sell or tap into your investments prematurely. Invest in equities through thick and thin. Keep a long term horizon and ignore the short term noise. Make sure you are properly insured and have an adequate amount of cash on hand for emergencies. Do not stay unemployed for long periods of time even if that means changing careers.
Own Your Job: According to Thomas Stanley's “The Millionaire Next Door”, of the 80% of millionaires that are not retired, two-thirds are self-employed. If you have the inclination and/or opportunity to become self employed, go for it. Your chances of becoming wealthy are greatly enhanced. If you are more comfortable staying in your job, make it your own. Continually develop your skills so that you are an invaluable resource to your employer or any potential employer. Keep track of your contribution and blow your own horn to your boss. Make a habit of asking for the tough assignment, then asking for the raise. Stay abreast of the hiring practices of companies in your field and befriend a corporate headhunter. Send him a birthday card.
Eliminate Excuses: Anyone can invest at any level. If you are a minimum wage earner, you too can find at least a portion of your income to save and put to work for you. Eliminate any and all excuses that only serve to keep you poor. If housing is expensive, find a roommate. If you have to pay for school, apply for a grant. If you need money to eat, go on a diet. Dedicate yourself to becoming financially independent and do not let anything deter you.
Following these simple rules will almost certainly lead you to wealth. But, the trick is to have the discipline to follow the steps without deviation over a long period of time. Yes, you ought to be rich. The question is will you do what it takes?
© Brick Financial Management, LLC, PhatKnot Media, LLC, Benjamin B. Taylor, all rights reserved. No material that appears here can be reproduce without express written permission. However, permission is hereby granted to electronically link to, forward or quote passages as long as source is attributed to "Benjamin B. Taylor, President of Brick Financial Management, http://www.brickfinancial.com."
Although we believe the information and data in this report were obtained from sources considered reliable and correct, we cannot guarantee their accuracy or completeness. Neither this commentary, nor any opinions expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or other investments mentioned herein. This information should not to be construed as investment advice. Persons associated with this firm may own or have an interest in securities or investments mentioned in this presentation. Their positions may change from time to time and they may buy or sell such securities or investments. Past performance is never a guarantee of future performance.
| Brick Financial Management, LLC. All rights reserved. |