The road to riches is one that is well trodden, but also one that is different for everyone. No one road gets you to the prize, but there are several well followed rules or principles that anyone can follow. If you follow them, then the probability that you will get to your prize dramatically increases .
My own road was heavily populated by the 5 things below, and I do believe anyone can follow these principles. However, you must be committed and must be willing, at certain stages, to ride through some storms and focus on the long-term.
Thinking long term is important for one important reason: Compounding.
As Albert Einstein put it “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe.”
What is compounding interest?
It is the interest on the interest that you get on your original investment.
Say you invest 1000$ and you get a return of 7% per year. After year 1, you will have 1070$ and after year 2, you won’t have 1140$ (70$ + 70$ +1000$ of original investment) but rather 1145$ – you get interest on the year 1 interest. That difference between the two numbers is the magic of compounding.
And compounding gets more powerful the longer you go. That is why long-term is so important.
Let’s look now at how to get rich.
1. Spend Less
This one might make you smile. I just did after I wrote it. It is so obvious that it should make you roll your eyes. Nevertheless, it is of utmost importance, and that is why I put it first.
Spending less is a way of life.
Think of your everyday life and think again of compounding. Imagine instead of that $5 milkshake you rather bought a $1 bottle of water. You would save $4. If you then took that $4 and invested it what would happen? In ten years, compounding at 7%, you would have almost $8. Magically you doubled your money.
This is a simple example, but if you apply this powerful principle to your spending habits, across everything you buy, from your house, to your car, to your lunches, to your clothes, then you will definitely be spending less and that means you can save more.
Saving more is the second most powerful way to get rich.
2. Save more
In the example above, I showed you that by spending less, starting with simple things and moving up to everything you spend money on, you will be able to save more and more.
It stands then to reason, that with the magic of compounding, the more you save, the more you’ll be able to grow your savings.
An example might better illustrate this concept. Let’s look at the difference between starting to save $100/month in your early 20s and then growing to $500/month in your 30s, versus starting at $500/month in your 30s. How much would you have in both cases when you reach 40, assuming a compounding rate of 7%?
Our early starter would have a tidy lump sum of around 124.000$ vs 89.000$ for our late starter. That’s a 40% higher amount saved.
If we look at it another way: the 100$/month saved in the twenties amounted to a total over 10 years of 12.000$, which became, with compounding, a nice sum of around 35.000$ by the time our saver reached 40.
Simple: save more to become rich.
Wait, one thing is missing, although I touched on it in our two previous ways: getting a return or the percentage that your money compounds by : that’s the 7% in our above example and it corresponds to how you invest. Investing wisely is our third way.
3. Invest wisely
You can spend less, and you can then save more, but to make that money grow it needs to be invested in something that brings you a return and makes the compounding magic come to life.
Investing wisely is about investing in things that grow and investing in a way that spreads the risk of things going wrong: that’s called diversification.
To use a time-honored example: if you’re carrying around eggs, and you don’t want them to break if you fall over, you put them in different containers that you carry at different times, so that if ever you do stumble and fall, you just break some of them and not all of them. For further information, check out Portfolio diversification – is it worth it?
Today, the choices we have in what to invest are extremely varied, but generally they amount to stocks and bonds. I won’t get into detail here about what to invest in exactly as that is an article all by itself but investing wisely (diversifying) is a key thing to do as you walk the road to riches.
For me, one of the most important roads to riches has been in investing in a particular asset class and I think it is so important that it is my number 4: Invest in Real Estate.
4. Invest in Real Estate
Specifically, here I refer to tenant financed real estate. Why real estate ? Because of the following 4 reasons:
- It is a long-term investment and long-term is the best way to reap the benefits of compounding
- It is a form of forced savings. You need to pay that mortgage every month and saving more is our number 2 way to get rich
- It is partly or sometimes fully tenant financed. Of course you have a mortgage and maintenance costs but you also have a form of dividend that covers part or all of those costs
- Mortgages can be set to be fixed over time whereas rents go up and so the amount you need to cover as you pay off the debt, could go down over time
Like any asset you need to invest wisely. Location is important, re-sale is important and tenant demand and rental rates are important. For more information, check out The furnished rental property.
Another great point is that your own salary will probably go up over time. I bet most of you are earning more now than you did 10-15 years ago. That also helps when it comes to covering mortgage payments, maintenance costs and the like and is actually also our number 5 way to getting rich : Make more money.
5. Make more money
Making more money can come in many forms, from a side hustle to growth in one’s own career of choice. I’m going to focus on the latter one as if you want to make more money in your career you need to work at it.
Many things can help you make more money.
- Being more focused on your career, your tasks and your Leadership and get better at all of them, which could lead to a promotion. Check out my articles on Leadership : The Tao of Leadership and Emotional Intelligence at work or Leading in Adversity
- You may want to improve the way you look – your leadership persona – and make sure you look the part of a role that is higher up the organizational ladder and / or better paid. Check out Stretching to Wealth.
- You might want to change jobs and go after another role in another company that pays more. Check out The rules to follow when you change jobs and Disruptive change.
- You may move internally to another role (whether lateral or a promotion). Check out Evaluating that internal move or Competencies versus Experience.
- You may want to ask for a raise or promotion with a real argument to back up your demand, as after all if you don’t ask you won’t get. Check out my article on The Art of Negotiation and The Importance of Storytelling.
The above are the things I have found work best and helped me increase my remuneration over 10x in a period of 8 years.
Making more money, while applying the other ways to riches, helped me exponentially increase my wealth over a relatively short time period.