To get rich slowly, you must hold on to that worn old sedan.
In an Econlog post on December 7, Giorgio Castiglia surprised me with the following story:
In a ten -year high school reunion, a high school mathematics teacher arrives in a worn old sedan and an old friend of him puts in a shiny new convertible with all the attributes of wealth. The math teacher remembers that this friend hardly came by during high school lessons. “You think it’s going well with you,” he says, greeting his friend, “what’s your secret?” The friend answers: ‘I just follow the 5 percent rule. Buy something for $ 5 and sell it for $ 10.
When I read the first sentence, I thought Giorgio would go a very different direction.
A famous book was published decades ago with the title The millionaire next door. I could extensively tell the story about how the authors came to the content and the title. It is a fascinating story that I like to tell.
But I’ll keep it short. The most important insight into the book is that most millionaires do not buy expensive things. When the authors studied millionaires, they discovered that the vast majority led a modest lifestyle. They didn’t spend much on shoes, clothing or watches, and many bought used cars instead of new and held their cars for a long time instead of tradeing them in every three years.
Two economists, who are also friends, Dwight R. Lee and Richard B. McKenzie, wrote a great book in 1999 about how you can slowly get rich. They called it applicable Get rich in America: eight simple rules for building a fortune and a satisfactory life. I can highly recommend it to people of all ages, but especially to people under 40. The latter need more time before the law of the compound interest yields wonderful results.
In mine Wall Street Journal Review of the Lee/McKenzie book I wrote: “” Getting Rich in America “is the handbook to become the billionaire of the neighbors.”
So when I read the story of Giorgio, I thought the high school mathematics teacher who rode in the worn Sedan would be the one who would become rich. Think about it. If you are a teacher at a government school in America, you earn a lot of money, you have more than two months off in the summer and you could get a nice holiday while spending one of the months on lucrative tutoring, then you have incredible job security , and you have a very generous health insurance policy. It should therefore not be that difficult to save and invest 10% of your gross income in a market index fund such as the Vanguard Total Market Index. You probably don’t have to save 10% to get rich, because if you stay in your job for 35 years or more, you can usually get the rare promised pension. If you even save only 8% of your gross income and invest this for 30 years in a total market index, then you will have your net value at the age of 60, including the cash value of your pension (assuming that your life expectancy, depending on reaching The age of 60 years, 20 years or older), then you have a net earth of more than $ 1 million.