You’ll never be rich, is something people do not hear enough, although you are doing well by global standards, you’ll still not be rich. The one percent is exactly what it is, 1% of the population. Even if you do everything right by saving regularly, investing properly, binge watch finance channels, or being born in a country with a good degree of social mobility, you’ll still not be rich.
People never want to hear this, it’s possible to binge-watch channels, or read books that promise you’ll become rich if you do this and that. They promise you will be rich if you learn about real estate, turn off your credit card, live within your means. It’s very easy to see the appeal, but, where dreams die is where how many works are.
To kick off this writing, I want you to look at a few reasons why you’ll never be wealthy.
What does rich mean?
After crushing your dreams of becoming rich, you should learn what rich means. The book, The Millionaire Next Door is considered by millionaires to be one of the best financial books ever written. You’ll find that most successful people fall into two categories of wealth. These are the Under Accumulators of Wealth and the Prodigious Accumulators of Wealth. The authors made these distinctions based on a certain formula;
Annual Earnings X Age X 10% <> Net Worth
They multiply each term and compare it to an individual’s net worth. If someone is 50 years old, and he is earning $100,000 annually, multiplied by 10%, he should have $500,000.
50 X $100,000 X 10% = $500,000
If the individual in question had a net worth greater than this, then they were said to be Prodigious Accumulators of Wealth (POW). If he had less, then, the authors labeled them, Under Accumulators of Wealth (UAW). It’s a simple premise but there were a few obvious problems.
What are the obvious problems of being termed rich in this context?
A 22-year-old graduate going into a $50,000 annually shouldn’t expect to have a net worth of $110,000. The authors did point out these shortcomings themselves.
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And they said this distinction was a mere tool. A tool to be used to measure the accumulation of wealth of people in their late careers or early retirement. Well, that’s not the biggest issue.
What is the biggest issues within defining wealth here?
The biggest issue is that this system doesn’t truly reflect what financial success looks like. The message of the Millionaires Next Door is that most millionaires look like regular people who might be living next door to you.
In this book, a millionaire was defined as a person who had a million dollars worth of assets outside of their primary residence. The authors argued that most millionaires got there by being good at saving money instead of being good at earning money.
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The majority of millionaires lived in Blue Collar suburbs, drove regular cars, and avoided spending on vanity items like designers clothes and fast cars. Therefore, it’s easy to see why this book is popular. The idea that a regular person with a regular job can be a millionaire is by its nature widely appealing to most people.
This book can teach you some really important lessons about financial traps that many people fall into. And you’ll never be rich because the book points out that the idea that anyone can be rich if they are financially disciplined isn’t simply true. And that has a lot to do with the way you define rich.
How does the 4% rule apply to being rich?
A one million dollars net worth outside of your primary residence is certainly respectable, and it was even more respectable back in 1996 when the book was first released. However, critics argued that this doesn’t make someone rich. If they need to survive off the passive income from that money then they would need to apply the 4% rule.
The 4% rule is based on the Trinity study which is tested in an investment portfolio. To see how much you could draw from it every year without the value of that portfolio going to Zero. The study concluded that if your portfolio was well invested then 4% was the upper limit of what you can take out without slowly digging into the principle.
Sacrifices are made in any level of financial earnings that you find yourself.
Would you consider an income of $40,000 a year? Maybe not. Assuming you had fully paid off your house, you could probably make yourself comfortable outside a very high cost of living area. Regardless, you are going to have to make certain sacrifices almost anywhere you live.
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Yes, most people can move to low-cost living areas, and then scrimp and save to put a million dollars away for retirement. Frankly, calling them the millionaires next door is a bit misleading, even classifying them as financially secured might be a bit of a push
The reason is that the survey on that book was done during the 1990s when the economy was favorable to a thrifty living individual. Therefore, in our present economy, to become rich, you need to earn a high income.
Why isn’t this said to everyone? It’s because the idea doesn’t sell well, if the message is preached on a finance channel, for instance, it would lose 90% of its viewers. If they said that you’ll become a millionaire if you are making six figures.
Nobody would want to buy an online course on building wealth through a 40-year career in medicine. The dream that anyone can become rich through thrift, is just that, a dream. The millionaire next door is still a great book because as earlier mentioned, it can teach you a lot about the common traps people fall into.
High income, perfect finances
What if you are lucky to be in a high-income career or run a successful business, surely you’ll have your personal finance in check then, right? Wrong.
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Most high-income earners are unfortunately just as financially unstable as their blue-collar peers. And there are a few reasons for this.
As you age and progress in your career, you should hopefully make more money. As you gain more experience and take on more senior roles. It doesn’t always work like that, but for most people, this is the career game plan.
A shared house, a piece of the car, is great when you are a broke college student but once you have a family and a job, things change. You are going to want a house all on your own, with a car that can reliably get you to work and your kids to school.
If you are lucky enough to get promoted, you’ll need nice suits, a bigger house, and an imported car to park in your reserved spot at work. Your partner might choose to stay home with the kids so you could focus on your career-demanding schedule. They do it because they know they’ll go on an overseas vacation with you every year to catch up on lost quality time.
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Many financial personalities make it sound like succumbing to lifestyle inflation is a personal shortcoming. But many of these expenses are far from optional, and it’s getting better these days. If you want to take your career seriously as an investment banker, for instance, you’ll need a lot of things.
Why do people succumb to lifestyle inflation?
A very nice wardrobe, living in a very high cost-of-living city, a stay-at-home partner, or hired help to take care of domestic duties while you are working a 100 hour/week. It’s doesn’t matter what sort of high-income job you are doing, whether it’s investment banking, big tech, medicine, law, or starting your own business, the same financial sacrifices need to be made.
There is also the personal finance spree to consider with these careers. Nobody goes into investment banking or big tech careers because they love corporate consolidations, or stealing people’s data. They go into these competitive and time-demanding careers because these careers pay well. These people want a well-paying job so that they enjoy the finer things in life. This brings the question, are we all destined to be on the precipice of financial ruin for our entire lives?
Well, yeah, sort of, the dream you have been sold of reaching financial independence, and then never having to worry about money again for the rest of your life is never going to come true. The Richest among us spend more time worrying about money than the poorest. So this begs the question, does making more money make you happier? Fortunately, it can.
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