Winning isn’t everything; it’s the only thing.”
–Vince Lombardi
How do you win in the money realm if you are just average?
This post is about succeeding, even if you are not hyper-talented, are not a Wall Street hedge fund guru, and have an ordinary job. Think of it as a guide for the other 99 percent.
Some actions will drastically increase your results regardless of your talent level or income.
CONFESSIONS OF A NON-ONE PERCENTER
Like most people, I was above average at many things but not exceptionally talented in any one area. While I have some strong talents, I have NEVER been in the top one percent at anything. And being well-rounded did not translate into riches either.
For instance, at our earning peak, our family income was about 130 percent of the median family income in my county. It was better than most but not outstanding because my spouse worked part-time throughout her career. That restricted our income to fairly average levels.
So, when you look at our accumulated net worth today, we should be slightly above average.
But that has not been the way it has worked out. After earning average incomes, we are sitting firmly in the top two percent of family net worth nationwide. Not the one percent, but close.
We achieved that without a head start in the form of family money. In later years, we got an inheritance of about 15% of our net worth, but there was nothing like that in our early years.
What follows is a description of the steps we took.
BUT FIRST, DESTROYING THE SELF-MADE MYTH: THE AVERAGE ARE AT A HUGE DISADVANTAGE
Before going on, I want to be realistic about this subject.
I was reminded of the problem of the unexceptional money prospects of many people from a recent online article. You can read that here.
The gist is that many more people who have money made it because of family connections and wealth than are self-made.
I was not surprised but still discouraged by these results. I have always believed that we have control over our financial lives—even people with average ability or circumstances. That belief spurred my confidence in the self-made path. I knew I was at a disadvantage compared to many others, but felt it was ok.
It turns out that I was naive.
However, there are some strategies that help to even your odds.
WHAT THE JANITOR KNEW—SOME OLD-SCHOOL WISDOM
Ronald Read passed away in 2015. He had been a gas station attendant and janitor. When he died, his community in Vermont learned he was worth $8 million and was donating most of his money to the local hospital and library.
And yes, he was a janitor. And no, he did not inherit his money or win the lottery.
He did not have a lifestyle you would associate with a wealthy person, either.
Read chopped his own wood. He used safety pins to hold his clothing together instead of replacing some of his ratty shirts. (Frugality is good, but this is a little extreme).
Those frugal habits allowed him to save a lot of his own money. That was step one.
He then invested it in the stock market with limited trading costs to dilute his returns. That was step two. He also continuously invested with few interruptions over his lifetime.
Step 3 was to hold investments for a long time.
He followed the basic steps to earn long-term wealth.
STEP 1: SAVE EARLY
The principle.
One way to make extra money is to have savings that earn interest or generate appreciation. Think of saving as having the same effect as a second job.
Savings matter. Because of compounding, the earlier you have savings, the better. Savings can be invested to make more money.
My Story
I saved early. I had summer jobs during high school and afterward.
But one incident stuck out in my pattern of saving that I think is instructive.
Before my last semester of graduate school, I saw that the job market was terrible, and I started to look around early for work. And, to my surprise, I was able to get a job immediately.
So, I decided to work full-time and attend school until the semester ended.
It was exhausting. But that allowed me to help pay for all my expenses the last semester and take some financial pressure off my long-suffering parents. I even saved a little.
When you add that to the savings from previous summer jobs, it was a help toward eventually funding a down payment for purchasing our first house. At that time, interest rates on house purchases were about 13-14%, so a large down payment was needed.
A more famous example of saving
Warren Buffett also saved money from his very early business ventures—pinball machines, newspaper distribution, and the sale of sundries. He saved so much that he actually owned a farm while still a teenager. He had become a millionaire by the time he was 30.
STEP 2: GENERAL: DON’T EXPECT TO GET RICH QUICKLY: RELY ON A LONG HOLDING PERIOD AND COMPOUNDING
The principle.
It is not enough to save. You must reinvest. That allows compounding to occur. But it takes time and is not a get-rich-quick strategy.
Compounding is one of the most powerful tools for creating wealth. It was the strategy that Ronald Read used. His approach was to take his small savings, invest regularly, and wait. He knew that if you kept at it and allowed compounding to work over a long period, you would eventually have a fortune.
My Story
I was primarily interested in investing in real estate at first. That is not a get-rich-quick scheme either. Being a landlord requires a lot of work to manage property, do repairs, etc. But real estate has proven a way to increase wealth steadily.
There was a second reason for that approach. In our case, we had very heavy family expenses. It was sometimes helpful to borrow against our real estate investments to help fund those. So, we monetized property appreciation to help make our extra expenses for family members.
Only later did I begin to invest in the stock market and toward classic retirement goals using Roth IRAs and 401k accounts. I also used Health Savings Accounts to pay for some of the major medical expenses that came later.
A more famous example of compounding
Warren Buffett bought three shares of stock when he was just a kid in 1942. He paid $114.75.
Buffett calculated what his $114.75 would be worth today to make a point about compounding. He assumed he placed the money in a zero-fee S&P 500 index fund. Then, he also assumed all dividends from his investment had all its dividends reinvested.
His stake would be worth (pre-tax) $606,811 in 2021.
It is important to note that index funds were not available until 1975. But still, you get the point. A long holding period and compounding of assets will eventually create a fortune.
STEP 3: GET RID OF DEBT
The principle.
Debt is the enemy of savings because it involves using some of your money now instead of saving it. It is also the enemy of compounding because you save less and have less money that can compound if you are using your resources to pay off debt.
My Story
My college education was not expensive. And so I did not graduate with student debt. Staying out of debt was a significant consideration for me–and my depression-era parents.
Instead of going to a four-year college, I went to junior college for the first two years and lived at home to save money. I only took classes that could be transferred to State schools. Classes were cheap at Junior College, and living at home saved rent costs.
Then, I transferred to an inexpensive State university and continued to work summers. Finally, I went to a private university tuition-free because of a scholarship for graduate school. My parents paid for anything I did not cover. I am grateful to them.
That allowed me to graduate debt-free.
A more famous example of debt
I avoided debt for good reason. Student debt is a major problem for many people.
You can read my post about student debt here. The point is that student debt can set people up for success. But, at the same time, it is essential to keep debt to a minimum because debt prevents saving and investing.
STEP 4: WORK MORE THAN OTHERS OR SACRIFICE MORE:
The principle.
Whether you are an entrepreneur working 80-90 hours per week or a parent who works multiple jobs to help provide a better future for your kids, a sacrifice or extra commitment is usually involved that distinguishes you from the average. The effort to expend more effort and time makes the difference.
My Story
I worked full-time while also being a father and a landlord after graduation.
Being a landlord was a bit like having a second job. The times I would have to manage, repair, and work with property were unpredictable but necessary to gain a long-term financial advantage on an ordinary income.
A more famous example of extra work and sacrifice
Entrepreneurs work long hours, especially when starting a business. One pundit says to expect 18-hour days the first year.
So, when famous entrepreneurs talk about running their businesses, it is often an all-consuming activity, far beyond what most people do. Famous entrepreneurs in the top 10 on the Forbes list are Bezos, Musk, and Zuckerberg. They all spent an extraordinary amount of time managing their businesses, especially at first.
STEP 5: TAKE MEASURED RISK
The principle.
At some point, you cannot play it safe. But the risk you take must be carefully considered and well thought through. See here. In addition to carefully researching opportunities, many successful people also restrict their risk-taking to subjects and investments they know well.
My Story
The risk that vaulted me forward was to retain ownership of my first house and then purchase a new home while renting the old one out. That involved taking on the responsibility of paying back a second loan–and eventually a third one. It also meant doing maintenance, managing tenants, and being on call.
A more famous example of a measured risk
Amazon is a behemoth today. But when the company was first established, it was anything but a sure thing. Not only was the field of internet sales in its infancy, but Jeff Bezos, the founder, also borrowed from his parent’s savings to start the company. It was a considerable sum at the time and was a risk.
However, it was a risk Bezos took, and it made him the wealthiest man in the world at one point.
A FEW OTHER THINGS
- Be consistent. Savings should be made year in and year out to achieve the best results in investing. Layoffs, job changes, and family expenses can derail you and are not your fault. But consistency is an important goal. Control what you can.
- Understand what you spend and know the difference between good and bad expenditures. For more, see here.
- Avoid expensive habits, hobbies, and other activities that take you off track. Once you begin to make money, spending more is the easiest thing in the world. For one person’s opinion about that, see here.
- Make a wise choice of spouse. It is important that you work together and have the same views about money.
YOU MAY BE WONDERING: HAS THE WORLD CHANGED SO MUCH THAT THIS BASIC APPROACH STILL WORKS?
It is harder now.
Things have changed dramatically in the past few years. On the plus side, home interest rates are not the 13 percent we had to pay on our first house. On the other hand, the costs of college, real estate, and a whole host of other items are far higher. That circumstance has clobbered Millennials and Generations X and Y.
For instance, the average person spends over 30 percent of their income on rent for the first time in history. That makes it brutally hard for younger people to make ends meet.
I will discuss what has changed and how you can adapt to achieve the best possible results. That will be in a future post.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Grant Wood
License: Public Domain