How do you become rich? Honestly, how does one actually become rich? What does it take? The answer to this question may look different to each individual. However, there are some underlying trends that define what “rich” is.
First, let’s look at what the perfect end-all financial situation is. After all, you can’t know what it takes to get somewhere unless you have a final destination in mind.
A few months ago, a friend asked me, “What’s ‘rich’ to you?” This question seemed so simple at first until I realized how many answers there were. I never knew how many definitions of “rich” existed.
To my friend, rich was buying a brand new $100,000 car. It wasn’t a target salary or a big house on the beach; it was having enough disposable income to go to the dealer and buy that $100,000 luxury car.
To me this concept seemed so foreign. As a student of many financial gurus, I thought it was widely accepted that my view of being rich was the same one everyone had.
This got me thinking. What do people think rich means? Turns out the most accepted definition of rich on Urban Dictionary is, “Someone with a lot more money than you. As such, the definition is elastic depending on one’s economic status. Usually a term applied to others rather than to oneself.” Another definition, “A person who has successfully avoided paying taxes.” Then there was, “One who stacks paper to the ceiling and rolls on 24-inch chrome.” Finally, my favorite, “Not you.”
If you took Urban Dictionary’s definition, one only needs a cheap car with over-sized wheels, and lots of printer paper (for stacking).
Once you have “the car”, do you have enough money to maintain it? How about if you lived in a shack under a bridge somewhere and every single dime you have is invested in some materialistic car? Are you rich then?
The problem I have with these is that they’re focused around what our media drenched culture tells us to believe is rich: material things. They also all have an underlying (and in one case blatant) tone that being rich is something that is unattainable.
After some further reflection, I too had many definitions for the term “rich.” Rich can mean being full of love, one can be rich with happiness, and one can be rich in culture or knowledge. While being rich in culture and happiness is important, that’s not exactly why we are here.
How To Get Rich
My initial thought for “being rich” has been the same for a long time now. To me someone who is rich is someone who doesn’t have to work anymore because they’ve built up enough passive income.
What is my number? How’d I come up with it? Partially by a shot in the dark and partially by adding up the annual cost of all things I personally want for a comfortable life. A house on the beach: $40,000, a new car: $6,000, living expenses: $30,000, “fun” money: $4,000, and travel: $20,000.
Meaning, my grand the grand total I need each year is $100,000. That’s the number for me to be rich. I need to be making $100k+ a year without working in order to consider myself “rich”.
Picture this: you are at home. A nice home. You wake up in the morning, go get the paper, pour yourself a cup of coffee, and literally don’t worry about how you’re going to pay for the house you live in, the paper you’re reading, or the coffee you’re drinking. It’s being 100% made on its own by your savings and investments. THAT’S what I call rich.
What’s Your Number?
Getting there is no easy feat. Just think of how much you make every year on your savings account. You know, that lousy savings account that earns 0.05% interest per year. Maybe you have $5,000 sitting in there. That’s about $2.50 a year in interest.
That means in order for you to make $100,000 of the same savings account, you need $200 million saved up in that account. Ugh! Feels impossible, doesn’t it?
Take heart! I’ve done some research that doesn’t involve $200 million lying around. I know that I can buy a commercial office building or retail shopping center and make a leveraged 8-12% return every year, conservatively.
That means my dividend payment each year is 12 cents for every dollar invested. In the end, I only need to save $833,333 to make $100,000 a year passively. This is a MUCH more palatable number.
Maybe you prefer stocks instead. Remember, we’re looking at passive income here. Income you don’t have to do anything for and that won’t touch your principle. Meaning, we’re looking for dividend payments. Most stocks will only pay out a 3-6% dividend payment.
If your goal is $100,000 passively, and you can make 6% (100,000 ÷ 6%), you will need to save up $1,666,666. This is still better than $200 million and if you start now, it’s doable.
Break it Down into Small Goals
Even if your goal is to save $1.6 million, we first need a game plan. Let’s break it down into small goals to get you there.
For example: Let’s take someone who’s 30. They want to work for a maximum 0 more years, but 20 will be doable. That means, they need to save an average of $80,000 a year ($1,600,000 ÷ 20).
Oh boy. That’s a problem. They only make $75,000 a year and they still need to live. Does this sound familiar? Unfeasible, right? You’ve got it all wrong. Remember the post on Time Value of Money? If you start early enough, you’ll earn interest on interest.
That means if you wanted $1.6 million 20 years from now, and we’re making a conservative 6% interest a year, you’d only have to save $41,555 a year instead of $100,000. This may still seem like a lot since you only make $75,000 a year, but stay with me.
Let’s take the $41,555 and break it down by month. $3,462 a month. WOW. That’s A LOT to save each month. You need to either make more or spend less, or preferably BOTH!
Without a $500 a month car payment, you’re down to $2,962 a month. Maybe you go out to dinner only once a month and save an additional $500.
“How to Get Rich” seems like an easier question to answer doesn’t it?
Now you pick up a side hustle mystery shopping. I love this one because you can make say $500 a month on your lunch breaks and for an hour after work. Further, you pay for FAR less meals and entertainment since you’re reimbursed. Saving you an additional $500 a month.
Suddenly, you’re down to $1,462 a month you need to actually save. This is much better. I’m confident if you budget correctly, spend wisely, and look for ways to make more money on the side, you will get there.
The key here is breaking it down into a palatable bite. Saving $1.6 MILLION seems near impossible, but if broken down, to annual, monthly, weekly, and daily goals, I find even the biggest feats seem doable.
I know some people who break it down further. They will institute the kids discipline tool of the “rubber band method”. In short, they put a bunch of rubber bands on one wrist each morning.
The goal is to move every rubber band onto the other wrist. This is accomplished by doing tasks that will get them towards their financial goals. Overcoming a spending temptation at the vending machine, the automation of a bill, an obtained discount on something already budgeted for, etc.
If $3,462 a month still seems crazy and out of reach, consider working for 25 or 30 years instead of the 20 we showed above. At the same 6% interest rate, 25 years of saving $2,297 a month will get you to $100,000 and if you worked 30 more years you’d only have to save $1,584 a month. After that, you’d not only be ready and prepared for retirement, but you’d retire rich!
I’ll leave you with one last piece of advice on how to get rich, be sure to build in small gifts for the goals attained so that you have something to look forward to.
For example, you get to go out to the movies or for drinks once you save $5,000, or you don’t get a new (used) car until you reach the $50,000 mark in your savings, perhaps even a budget friendly weekend getaway when you reach that $100,000 mark.
It will take diligence and consistency, but when you’re making money from sitting at home, you’ll be real happy about all of those times you said yes to the budget. Happy saving!