Do you want to be rich?
I would suspect most people would answer yes to this question. But why is your answer yes?
It’s important to take a step back and think about the motivations behind wanting to build wealth. Being rich for the sake of being rich will not in itself increase your happiness nor solve your problems. Sure, with more money we can buy more stuff, but materialism is not the path to true happiness and self-esteem.
“Rich” to me means financial independence. Financial independence means options, and freedom is the ultimate option. I seek the freedom to occupy my mind with matters which interest me the most, which may be more time spent with the people I love or more time reading. I don’t know what your motivations are, but it is important to think about the why.
Once you figure out if and why, now the question becomes how. So how do I become rich?
Here are 10 ways I can think of:
Short term (under 1 year)
- Win the Lottery (the $1.5 billion Powerball lottery earlier in 2016 sounds pretty nice)
- Gamble ($50k on red)
- Time the stock market consistently (maybe I should be investing in a crystal ball first)
- Inherit Money (Start sweet-talking that rich uncle of yours)
- Do some illegal shit (When to rob a bank?)
Medium Term (1 to 10 years)
- Join or invest in a wildly successful start-up (It would have been nice to invest in Facebook in 2004)
- Start a business (Sure I could invest in the next Facebook, but why don’t I just start the next Facebook?)
- Be extremely successful in business (become the CEO or another highly paid executive of Facebook)
- Real Estate (i.e. rental income & property appreciation)
Long Term (10+ years)
- Personal Finance (spending less than you earn and investing the rest)
As you can see, your short term options are not looking too promising. You either need to be extremely, extremely, extremely lucky (through gambling, winning the lottery or timing the stock market consistently), risk going to jail by doing something illegal, or hope you have a very wealthy relative who you are expecting to croak pretty soon.
The medium term options involve both hard work and luck. Joining or investing in a unicorn startup is highly unlikely. For every extremely successful start-up you hear about, there are 100s of failed start-ups in the graveyard that you have never heard of. This relates to the next point – starting a business is risky. Many people succeed, but many more fail. In addition, there is a chance you can become very successful working for a business (i.e. becoming a CEO or another highly paid executive) if you know the right people and have a strong skill set and experience in a field. However, reaching the top level is extremely competitive and can take a long time to do so. Next, we have real estate investing. I don’t know that much at all about investing in real estate, but in addition to expertise, it also takes time and some initial capital for a down payment.
Last but not least, we have Personal Finance. If you save and invest >10% of your income for 20-30 years, you have a much better chance at building a large nest egg than any of the other options listed above as you reap the benefits of compound interest. In fact, my guess would be that you have a better chance than not of becoming a millionaire following this path with the right investment vehicles and discipline (not letting your emotions get in the way), even with a modest income. But this method does take a long time (and the time-frame really depends on how much you are making and what percentage of that you are saving).Personal Finance is unique in the sense that it is both an option to create wealth and a prerequisite to keep wealth. All of the other options are ways to get wealthy, but not necessarily stay wealthy. Without a foundation in personal finance, you might make some money, but you also have a pretty good chance of losing it too.
What I find most captivating is that personal finance can also be used as a form of insurance. Let me explain. I aspire to start my own business, to become successful in business, or maybe to join a new start up at some point in my life. However, I realize that there is a lot of luck and other forces outside of my control in order to be very successful with these ventures. However, I can still reach financial independence by consistently pursuing personal finance (spending less than I earn and investing the rest) to insure myself against the other methods (i.e. starting a business) not working out as well as I hoped they would.
There’s nothing wrong with aspiring to build wealth with some of the other methods mentioned above (I don’t recommend you do something illegal or bet all your eggs on winning the lottery), but having a foundation in personal finance will help maintain your wealth if you do strike it big and also provide a back-up plan to building wealth in case of bad luck or other misfortunes. I find that comforting.