But we human beings are born preprogrammed with selfish and greedy tendencies. Tendencies that we’re taught are bad. So often there’s a tension where we view wealth as simultaneously good and bad at the same time. As this CNN Money article, “America’s love/hate relationship with the rich” aptly describes, we love to hate the rich guys but yet we are enamored with the entrepreneur who “makes it” by grit and hard work. Is it wrong to desire to be rich? Or is it noble to pursue wealth?
I think it all depends on your definition of “rich”.
Let’s pretend for a moment. Imagine you’ve never seen the opulent images of “the rich and the famous” as depicted on TV, you’ve never read Forbe’s list of the wealthiest men alive, you’ve never even dreamed of a Lamborghini, and your neighbors are not named “The Joneses”. What would your conception of “rich” be?
The word “rich” is a subjective term in our society, where it almost always applies to someone else but is never ascribed to ourselves. Yet, somehow a lot of people seem to have this insatiable craving to hit the proverbial jackpot of riches. But if there’s no way of determining what “rich” exactly is, how does one know whether he’s attained it? Won’t there ALWAYS be someone with more, therefore rendering us actually “not rich”? Isn’t the never-ending crusade to accrue greater and greater amounts of wealth called greed? We know THAT’S bad, so what does it really mean to “be rich”?
I like simple definitions. Fortunately the definition of rich is very simple. Being rich simply means having enough.
But how much is enough? To put it simply, enough is having what you need. Once you reach that level where all your needs are taken care of, anything else is more than enough. So once you have enough, what more do you need?
I like math so let me summarize this in a very basic mathematical expression:
Rich = Having Enough = What You Need
You might even call this a formula for getting rich!
This equation, as simplistic as it may seem, actually holds a major key in helping us understand how to get rich. Ask yourself, “Which of these three variables can I control: Rich, Enough, and Needs?” Yes, you can control your needs. So if you NEED less, then you can get rich faster. By using this idea, you can relatively easily and quickly put some real numbers to work for you.
Here’s the key point. Being rich is not so much about attaining a certain absolute dollar amount or owning so much stuff, but rather having control over your lifestyle and an attitude of contentment with that lifestyle. I like how this guy puts it.
Wealth consists not in having great possessions, but in having few wants.” – Epictetus
Spend Less vs. Earn More
When discussing the virtues of frugal living with people, every so often someone would scoff, “I don’t need to live frugally. I just work really hard and earn more money. As long as I don’t go into debt, I’ll get ahead faster by earning more than by scrimping and sacrificing.”
This illustrates the classic debate between the virtues of spending less vs. earning more as the means to build wealth. Obviously the best way to get ahead financially is to do both: earn more while also spending less, but this is not always possible. Instead, people often use their large incomes as an excuse to continue inflating their consumerism lifestyle. On the surface there may not seem an obvious advantage between these two viewpoints on building wealth, but I’m here to tell you today that the math is clearly in favor of spending less as the faster way to get rich. And the reason is all because of our simple equation above.
Spending less results in a double win:
- By living on less, you are able to save more IMMEDIATELY.
- By living on less, you decrease the amount you NEED—forever. Which means the total amount you need to save up is PERMANENTLY lower than those who argue that earning more is the better path to building wealth.
Don’t believe me? How about an example?
Saver Sam earns $50,000 a year, lives on $20,000, and invests the remaining $30,000 at 8%. (If this example looks familiar, it’s because Saver Sam is a recent graduate who read one of my previous posts. Check it out here: Retirement: The Best Graduation Gift.) In 10 years, Saver Sam will have saved $500,000, which generates enough of a return so that a 4% rate of withdrawal will be $20,000 annually—exactly how much he needs to live. So what’s the length of time for Saver Sam to reach this threshold of “rich”? 10 years.
Now let’s take a look at Consumer Carl. He thinks that as long as he doesn’t live beyond his means, earning more is the better pathway to getting “rich”. He brings home $100,000 a year, twice the amount of Saver Sam. Being a savvy guy, he even saves a full 20% of his salary (much more than the recommended 10-15% by most popular personal finance gurus today), which is the same $20,000 as Saver Sam. However, this means that he will need a nest egg that can throw off $80,000 annually in order to maintain his current lifestyle. So assuming he gets the same 8% rate of return and uses a 4% withdrawal rate as Saver Sam, how much will he need before he reaches the same level of “richness”? $2,000,000! Yes, that’s TWO MILLION DOLLARS–four times the amount that Saver Sam needs. More importantly, this will take him 28 years to achieve—nearly three times as long as Saver Sam.
We may look at Consumer Carl and think that he’s far richer than Saver Sam because he’s spending $60,000 more every year than Saver Sam (probably living in a big house and driving a financed new car), but in reality, that couldn’t be farther from the truth. Saver Sam is far richer because he NEEDS less and as a result his green soldiers can bring him to the point of having “more than enough” nearly three times quicker than Consumer Carl, leaving Saver Sam that much more time in financial independence.
Now the flipside of course is that Consumer Carl could absolutely blow Saver Sam out of the water if he wanted to since he makes such a huge salary. If he lives on $20,000 and saves $80,000, it’ll only take him 5 years to save $500,000. But even if Consumer Carl simply lives on and saves at the same percentages as Saver Sam ($40,000 and $60,000 respectively), he would still be done in 10 years and will be able to live on $40,000 forever. However you slice it, the math massively favors living on less and saving more.
A Graph for All the Math Nerds
To make it even clearer, here’s another way to look at it. If you live on 90% of your income and save 10%, it’ll take 10 years of saving to equal 1 year of living expenses. If you notch that down to 75% of living expenses and 25% savings, it’ll only take 4 years of saving to equal 1 year of living expenses. Now suppose you live on 50% and save the other half, each year you save up for an ENTIRE year of living expenses. Then it gets incredible. If you live on 25% and save 75%, each year you work you save up for THREE YEARS of expenses. In other words, you can work for one year and not work for three.
Here’s a graph illustrating this in action without including ANY compounding interest. The declining slope of the line shows how increasing savings rates affect the number of years you need to work in order to save up enough to meet living expenses.
The point is this. The rate at which you save has an EXPONENTIAL effect on the time it takes for you to reach financial independence.
You CAN Be Rich!
The definition of rich is NOT a lifestyle of wasteful opulence, it is simply having ENOUGH. Money beyond the level that meets our needs should be viewed as willing soldiers to conquer the world for good. So I hope it has become evident to you that attaining this level of richness is not that complicated. In fact it’s very simple. (Simple may not equal easy, though!) Adjust your lifestyle so you NEED less. It’ll result in a double-win in which you can save more now and the total amount you need will be less as well, meaning you can get there faster.