Get Wealthy Slowly

Well, the title isn’t exciting, is it? An exciting title would have been “Get Rich Quick” but I am here to show you that “Get Wealthy Slowly” is a more exciting proposition. I will give some reasons as to why it’s exciting, even though it sounds boring.

We will get into the why before the how.

First question: What is the difference between rich and wealthy?

Most people don’t realize but these are two very different things. Being rich means having good material things in life; like a nice house, great cars and a membership at the country club. One can be rich without being wealthy. A wealthy person, on the other hand, has plenty of assets. She may drive a Honda Civic but she might have a couple of million dollars in assets to her name (it’s not necessary that she drives a Honda Civic but the example was chosen to make the point). Wealth comes from accumulating assets, notwithstanding your income. Feeling rich comes from spending, it doesn’t matter whether you have borrowed that money or are living paycheck to paycheck despite a very high income.

top-1-percent-net-worth-by-age

Table 1: Look at the age and the Top 1% Net Worth column to understand who is considered the top 1% in America at various ages

The First Why? Why do we want to be wealthy?

There are some good reasons for the desire to be wealthy and there are some poor reasons for the same. There are lots of myths about wealth which we can bust along the way.

  1. Good Reasons
    1. You want financial security for yourself and your family.
    2. You enjoy fine things in life in moderation.
    3. You want to leave a meaningful positive impact in the world. This one is tricky because a lot of work we do leaves a negative impact in the world, even though we are working towards a good cause. An example would be to send tons of wheat and rice to Africa in an effort to eliminate hunger while destroying the self-sufficiency of the farmers by depressing the selling price of their crops and driving them out of the market. The positive impact, in this case, could be achieved differently by helping the farmers become more efficient instead and also helping improve the distribution channel. So, you have to think deeply about how you can use your wealth to positively impact the world.
  2. Bad Reasons
    1. You are enamored by the “rich” lifestyle and that’s your prime motivation.
    2. You have a strong sense of FOMO and that drives you to become wealthy. BTW, if baby boomers are reading this, FOMO stands for “Fear Of Missing Out”.
    3. You think that endless material consumption will keep you satisfied or in other words you want to enjoy the fine things in life ALL the time.
    4. You want to mask your other insecurities with wealth.
    5. You are doing it chiefly for social validation or because of envy.

Myth Buster #1: Having a lot of wealth will make you incredibly happy

There is absolutely no doubt about it that wealth can solve a lot of problems. If you don’t have to worry about money for your children’s education and your family’s retirement, your stress level absolutely goes down. But, it has been biologically as well as psychologically proven that we humans adapt hedonically very quickly. This means two things. First, we get used to the good things in life and they do not increase our average happiness beyond a certain point. Second, any additional wealth beyond a certain point does not bring any additional happiness. Our happiness levels actually stay pretty stable for the most part of our lives. This means that acquiring your first million dollars might increase your happiness to a certain level since you are out of major worry zones but going from ten to eleven million in wealth doesn’t do much for us.

BillGates

Bill Gates in 2019

Myth Buster#2: Wealthy people are geniuses or really bad people

While it is true that some wealthy people are geniuses (read my article on geniuses here: Are you a genius? ) and some are rotten apples, while some others are both; these myths are not necessarily true. Yes, you have Bill Gates and Martin Shkreli on two ends of the spectrum while Jeff Epstein straddles both the boundaries; but most wealthy people are of average or above average intelligence and average moral character. The demonization of wealthy is as wrong as the worshipping of them. Just because someone is wealthy doesn’t mean that they have good advice to offer or we should look up to them. Neither should we look down upon them for their wealth. 

The Second Why? Why “Get Wealthy Slowly” and not “Get Rich Quick”

The biggest reason is the scientific research done in this arena tells us that it is more satisfying for ourselves and less detrimental to society and the environment as well. People who consume resources slowly and mindfully tend to enjoy those resources more and have a more satisfying relationship with wealth. Hence, people who invest in assets while consuming a smaller portion of their income, tend to have a more satisfying material experience. And these are the people who are building wealth slowly. On the other hand, in the get rich quick scheme, success is harder but once you succeed in getting rich quick by scoring a windfall or a high-income gig early on and don’t rein in your consumption, you will be trapped on the hedonic treadmill and you might be adversely impacting the environment at a faster pace (Please don’t forget that it’s not ONLY global warming but the overall impact of the human economic activity on ecology has been terrible. Of course, we can never avoid the ecological impact but can keep it in check with better technologies, controlled population, and mindful consumption ). You might also be jeopardizing your health along the way. Keeping these things in mind, I recommend “Get Wealthy Slowly”.

But how?

If you have read Warren Buffet’s biography, you have heard the term “The Snowball Effect”. If you notice the Table 1 above, you might see that with the progress in age, the wealth of the top 1% grows more than linearly. This is the compounding effect as used in the term Snowball. Wealth invested in an asset which grows at 10% in the first year, increases by 11% on the original base in the second year and 12.1% in the third. As a rule of thumb (following the rule of 72), a 10% growth rate doubles the asset’s value in (72/10)~7 years. Hence, a person who is investing $30,000 per year in assets (which is growing at say 12%), starting at age 22 and increasing his investment by 10% each year, would have a net worth of $3.2m by the age 40. Look at the table above, this person is top 1% in America (This person is also at the $1.35m level at age 35). With engineers making 6 figures as starting salaries at age 22, this is very doable. You don’t have to strike it big in a startup or win a lottery to achieve this feat. This is slow and sweet and relatively mindful to the planet. If you are saving $30,000 in the first year of your career, you are certainly not a consumption-driven person.

I hope you enjoyed the post. Let me know if you would like to learn more about the math behind all this magic.

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