To get rich slowly, hang on to your beat-up old sedan.
In a post on EconLog on December 7th, Giorgio Castiglia surprised me with the following story.
At a 10-year high school reunion, the middle school math teacher arrives in a beat-up old sedan, and his old friend arrives in a shiny new convertible and all the trappings of wealth. A math teacher recalls that this friend was hardly talked about in his high school class. “You seem to be doing well,” he said, greeting his friend. “What’s the secret?” my friend replied. “I just follow the 5 percent rule: ‘Buy something for $5 and sell it for $10.’
When I read the first sentence, I thought Giorgio might go in a completely different direction.
There was a famous book published several decades ago called “The Billionaire Next Door”. The author could talk at length about how he came up with the content and title. It’s a fascinating story and a story I want to tell.
But I’ll keep it short. The main insight of this book is that most millionaires don’t buy expensive things. When the authors surveyed billionaires, they found that the majority lived frugal lifestyles. They spent less money on shoes, clothes, and watches, and many bought used cars rather than new ones, and kept them for long periods of time rather than replacing them every three years or so.
Two economist friends, Dwight R. Lee and Richard B. McKenzie, wrote a great book in 1999 about how to get rich slowly. They aptly titled the book, “Getting Rich in America: 8 Simple Rules for Building Wealth and a Satisfied Life.” I highly recommend it to people of all ages, but especially those under 40. The latter will take longer to achieve great results due to the law of compound interest.
In a review of Lee/McKenzie’s book for the Wall Street Journal, I wrote, “‘Getting Rich in America’ is a how-to handbook for becoming the millionaire next door.”
So when I read Giorgio’s story, I thought the middle school math teacher who drives a beat-up sedan was going to get rich. Think about it. If you are a public school teacher in the United States, you earn a good salary and have at least two months off in the summer, one month of which you get to work on a lucrative tutoring job while still getting some well-earned vacation time. You can do that. I have incredibly stable employment and very generous health insurance. Therefore, it is not that difficult to save 10% of your total income and invest it in a market index fund such as Vanguard Total Market Index. In fact, if you work for 35 years or more, you probably don’t need to save 10% to become wealthy, as you can receive a now-rare defined benefit pension. If you save 8% of your gross income and invest it in a market-wide index for 30 years, your net worth, including the present value of your defined benefit pension, will increase at age 60 (as follows: ). With a life expectancy of more than 20 years (once you reach age 60), your net worth will be well over $1 million.
