To get rich slowly, hang on to that beat-up old sedan.
In an EconLog post on December 7, Giorgio Castiglia surprised me with the following story:
At a 10-year high-school reunion, a middle school math teacher arrives in a beat-up old sedan and an old buddy of his pulls up in a shiny new convertible and all the trappings of wealth. The math teacher recalls that this friend barely squeaked by in his high school classes. “You seem to be doing well”, he says as he greets his friend, “what’s your secret?” The friend replies, “I just follow the 5 per cent rule. Buy something for $5, sell it for $10.”
When I read the first sentence, I thought Giorgio was going to go in a completely different direction.
There was a famous book published decades ago titled The Millionaire Next Door. I could tell the story in length about how the authors came up with the content and the title. It’s a fascinating story and one I love to tell.
But I’ll be brief. The main insight in the book is that most millionaires don’t buy expensive things. When the authors studied millionaires, they found that the vast majority lived modest life styles. They didn’t spent a lot on shoes, clothes, or watches, and many bought used cars rather than new ones and hung on to their cars for a long time rather than trading them in every 3 years or so.
Two economists, who are also friends, Dwight R. Lee and Richard B. McKenzie, wrote a great book in 1999 on how to get rich slowly. They aptly titled it Getting Rich in America: Eight Simple Rules for Building a Fortune and a Satisfying Life. I highly recommend it to people of all ages but especially to people under age 40. The latter have longer for the law of compound interest to yield its wonderful results.
In my Wall Street Journal review of the Lee/McKenzie book, I wrote, “‘Getting Rich in America’ is the how-to handbook for becoming the millionaire next door.”
So when I read Giorgio’s story, I thought the middle school math teacher driving the beat-up sedan would be the one getting rich. Think about it. If you’re a teacher in a government school in America, you’re making pretty decent money, you have over 2 months off in the summer and you could get a nice vacation while still spending one of the months doing lucrative tutoring, you have incredible job security, and you have very generous health insurance. So it shouldn’t be that hard to save 10% of your gross income and invest it in a market index fund such as the Vanguard Total Market Index. Indeed, you probably don’t need to save 10% to get rich because if you last in your job for 35 years or more, you can typically get the now-rare defined benefit pension. If you save even 8% of your gross income and invest it in a total market index and do that for 30 years, then, when you’re 60, your net worth, including the present value of your defined-benefit pension (assuming that your life expectancy conditional on reaching age 60 is 20 years or more), you will have a net worth of well over $1 million.
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