I don’t have any secrets about getting rich

June 06th, 2006 - 24 Comments

At one of my recent talks, something interesting happened. Before I started the talk, we were all sitting around, just BSing and getting to know each other. All of a sudden, one of the guys started asking me very direct questions (almost antagonizingly so):

  • “What are your credentials?”
  • “Are you really rich?”
  • “So is this class basically just ‘save more than you spend, and invest?’”

Now I’m happy to answer the questions, and I did, but the last one made me smile. “Is this basically just save and invest” was said almost scornfully, as if it were completely obvious.

My answer: “Yes!”

Let’s be honest. Look at my course syllabus. There’s nothing revolutionary on it. The key isn’t shocking you with some new strategy I discovered. It’s about getting people to get started.

Some people seem to be looking for the secret bullet to making money–the most exotic investment, the sexiest strategy. This is why there are tons of books on making money with different angles (“All debt is bad!” “Buy gold!” etc).

But I think we have to decide between being sexy and being rich. Here’s what I said before:

“When you invest, there’s a difference between being sexy and being rich. When I hear people talking about the stocks they bought/sold/shorted last week, I realize that my investment style sounds pretty boring: ‘Well, I bought a few good stocks 5 years ago and I haven’t done anything. All I did was buy more when the price went down.’ But investment isn’t about being sexy–it’s about making money, and when you look at the investment literature, buy-and-hold investing wins over the long term, every time. Forget what CNBC or the magazines say about the stock-of-the-month. Do a rigorous analysis, make the right decisions up front, and then re-evaluate your investment every 6 months or so. It’s not as cool as those guys in red coats shouting and waving their hands on CNBC, but as an individual investor, you’ll get far greater returns.”

The guy at my class seemed to summarily dismiss the “save and invest” strategy–even though it’s worked for a very, very long time. I guess it’s just not sexy enough.

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24 Comments

 

Comments

  1. Hahaha, my brother just IMd me:

    My brother: did you really quote yourself on iwillteach

  2. I guess that’s the same thing with loosing weight. People don’t get that you just have to eat healthy and do sports. That’s it. No whiz-bang-loose-a-million-pounds in-a-millisecond diet. Somehow people do not want to accept simple things, but instead look for some silver-bullet.

  3. BS!
    This is not a way to be rich, it’s a way to save money for retirement. You will never be rich with those technics.
    Let’s say you start with 1000$ (not much but even that is something almost impossible for many people)
    And add (save additional) 500 per month.
    Let’s invest that money into something that will give us 10% return and compound it annually.
    After 30 years you will have just over a 1 000 000. During that time you would have to contribute 181 000!
    So the net profit is more less – 800k
    Divide that by 30 years it took you to save that money. – that’s little over 26k

    Sounds good right?? WRONG!
    now calculate inflation and taxes (3.1% inflation and 25% Ftax + 8%Stax)
    You are left with $225,442
    NOW divide that by 30 years
    substract how much money you invested and you will notice that this way of “being rich” simply sux.

  4. Personally I stay away from sexy stocks.
    Anything that hits the news is usually at the least fully priced.
    Guess I’m a bargain hunter at heart.
    Gotta find the good deals.
    And those are often situated, hidden out of view, at the back of the store.

  5. Commenter #3 makes a fantastic point: In order to become rich, we must discard foolish strategies such as “save money” and “start investing early” in favor of whatever he’s doing.

    Now, from reading that comment I can’t be exactly sure what he’s doing, but I have a feeling he must really be in a hurry to do it because he didn’t have time to type the “cks” at the end of “sucks” and opted instead for a labor-saving “x.”

    You are a visionary, Commenter #3.

  6. What about earning? Save and invest is great. Earn well, save well, and invest well entails the whole picture.

    I can kinda tell that you’re creating a web presence, a mystique, a persona. Many people are “rich” and some of them want to talk about it. I also give people financial advice. In fact someone just called to ask which mortgage to buy. Mostly I counsel people who run into problems with serious debt. My “credentials” are just success stories. If they don’t want my advice, I won’t give it, but I also don’t have a “I can get you out of debt” web site. I just learned some techniques. I have the rare insight of having been rich, poor, and then rich again.

    I do think it’s bold and perhaps a little annoying to position yourself as able to teach people to be rich. It’s the sort of boldness that comes from youth. Ok, concrete critique: You don’t talk about earning power much. Three years ago I was poor enough to go to the food bank, and now I make $100k/yr. I definitely employed some tricky techniques to get here. I remember your story about contract negotiations that ended with a smackdown. Not saying you did anything wrong but can say your stories show both the brashness and the naivete of youth. Ok, keep it up. I keep reading, so you must be doing something interesting.

  7. John, that is a good comment–thanks. I agree that earning is a huge part of it. I’ve written before how you really get rich in 2 ways: Earning more money or cutting costs. So I think you’re right on.

    What do you suggest? Should I start writing about jobs and how to negotiate for raises, etc? How to find better jobs? Or are you thinking something else?

  8. I agree with you, Ramit, but I would also have to agree with “M.” This website would be more aptly titled as “http://www.iwillteachyoutoretirecomfortably.com”.

    Either way, however, your advice is ideal for the average person who doesn’t have the common sense to save and invest intelligently in the first place. I work as a stock broker and whenever someone finds this out, they always ask about a good “stock pick.” By this, of course, they mean a stock that they can invest one dollar in and get a million in a few months. Heck, if I knew that I wouldn’t be working right now. It just seems that everyone is looking for the easy way out and it just doesn’t exist.

    Good article, keep up the good work.

  9. You’re right, Victor – everyone is looking for the easy way out. Everyone wants a microwave oven solution – debt consolidation, home equity loans. A crock pot solution will always taste better.

    That was a nice llittle jab there with the “All debt is bad!” statement, Ramit. Here’s an idea – go talk to some rich people. Real rich people. Ones that have been walking around a little longer than you and I. They will tell you time and time again, that avoiding debt is one of the keys. Or just check out the Millionaire Next Door – Dr. Tom Stanley did all the research already.

    Its ok, keep driving that Honda the bank owns. Keep charging on your credit cards. I’m sure you’ll get ahead by going backwards. The fact is: most of America’s millionaires are first-generation rich. And they didn’t get there by way of car payments, credit card brownie points or worshiping the FICO score.

  10. I agree, The Millionaire Next Door is a great book. And yes, millionaires have different habits than most people. But that doesn’t mean they don’t use debt. Reasonable debt can be used as a tool.

    Just because you have small amounts of debt strategically applied doesn’t mean you’re out of control. For example, I’ve said time and time again on this site that credit cards should be paid off in full every month.

    Too many of Dave Ramsey’s converts believe that all debt is bad, and that if someone borrows a little bit, they’ll never ever be smart enough to pay it off. That’s just not true. Sure, lots of people get in trouble with debt. And that’s a problem related to personal responsibility and education. But applying a cookie-cutter solution based on the lowest common denominator–doesn’t that seem foolish?

  11. Debt-free, I’m not sure what point you’re trying to make here…but I must disagree that being rich is about being debt free first.

    Taking risks is often about taking on debts. Money costs money. If someone is smart but doesn’t have money and needs it to accomplish some end, then s/he simply needs to borrow. For a house. For a business. Yes, even for a car. Why is that so bad?

    Business and success are not just about savings–they’re about CASH FLOW. And that may require some debt from time to time. When one is starting out one can’t necessarily be balance sheet wealthy (as in Millionaire Next Door), but one does need to make sure they’re living within their means.

    The moral behind any investment or borrowing strategy is the same–be wise and make sure that there are ways to pay it off through a traditional mean (even if it means a lot of extra work). But there are no solid rights or wrongs on borrowing and investing, just important things to consider; people that fear debt on principle aren’t necessarily any better off than those who take chances.

    Smart debt is an investment in yourself and your future. That’s not such a bad idea.

  12. Now this might sound stupid… But, I’m at the beginning of an MBA, so far in the beginning that I had to take a 1 credit module in Finance because I had no background. Now, I was taught that money today is worth more than money next year. This is because inflation generally kills the value… or so it contended… yet if properly invested.. then does that value get lost? to an extent yes, but what option do we have? there seems to be nothing unaffected by inflation that gains in value…. I think the point I’m trying to make is… yes Stocks make a difference.. because their general return is greater than inflation but… still the principle seems to state that money today is better than money next year…. in that way, debt seems to be less important, because the money you pay, for say a mortgage (which I would argue is perhaps the best debt, because of tax advantage, increase in equity/investment and such)… may or may not be “less” in today’s dollars, when factoring in inflation.

  13. I think one of the debatable points is a definition of ‘rich’. Rich is a sexy term because it has no concrete definition. (Hell, I even admit to being on this site b/c ‘rich’ is sexy.)

    I think most people just don’t want to be tied down to their job. So how can I get enough money to live my life style from sources that don’t ‘tie’ me down.

    Hell most people’s lifestyles would be simpler if they didn’t HAVE to work. I wouldn’t need that plasma TV to relax in front of because I wasn’t being stressed at work.

    So I encourage you to write on finding a ‘fulfilling’ job, find innovative ways to curb one’s lifestyle and promote modes of passive income. Best of luck!

  14. Ramit, you never answered his first two questions. I know the answers though.

    1) You don’t have any credentials. You’re not licensed to give any of this advice and that could get you in trouble. Know that.

    2) You’re not rich. You just like to pretend like you’re somebody by telling everyone that you’ll be speaking at various events about stuff that you read in books.

  15. Debt is a sign of sloppy, lazy money habits. You convince yourself that a little is ok. Then the little is more and more. Millionaires got to where they are *because* they had different habit than Joe Average, not the other way around.

    Whats foolish is paying out all of your paycheck to people you don’t like. And Jared – if you can pay for it, then you’re not ready to own it. Plain and simple. And if you want CASH FLOW, then save up some CASH and pay for thngs in CASH (you’ll spend less by doing it that way also). I have no payments other than my house (and Dave doesn’t even get mad about that one, so do your research). You know what I can do? Anything I want. I have control over my income, something you can’t claim with car payments and small business loans and student loans and so an and so on.

    You can take out loans for your business, but its just an unneccessary risk. Especially when buying equipment and other things that go down in value faster than you pay them off (take your car for example). Its a bad situation every single time.

    Saying that debt is an investment is just about the dumbest thing I’ve ever heard. there are enough myths out there, quit trying to make your own.

    If you need “solid rights or wrongs on borrowing and investing” then go pick up your bible. Proverbs 23:7 “the rich rules over the poor and the borrower is slave to the lender”. Your grandparents thought debt was evil, and they were right.

    Now you guys can go on kidding yourselves about being ‘responsible’ and ‘sophisticated’ and ‘strategic’ with your debt. Statistics show otherwise. The savings rate in America is negetive (as opposed to Japan which was around 18% not so long ago). Debt owed on credit cards is somewhere around $600 Billion (ie – out of control). Studies conducted by fast food chains show that you’ll spend 12-18% more per transaction if you use your credit card – no surprise that they all started taking CCs a few years back, so go ahead and supersize it. Bankruptcy filing rates are higher now than during the great depression. Forclosures are out of control as is the lending industry in general – can you say 50-year mortgage? Stop kidding yourselves. You cannot go forward by taking steps backward. It just doesn’t work.

  16. Aww, I think I might cry. Pardon me if I don’t jump at a defensive answer about how rich I am.

    You mean you aren’t satisfied with this site–which you get for free? You mean you think that my credentials aren’t up to par for motivating people to get started?

    I’m ok if you don’t like the site. Nobody’s forcing you to read iwillteachyoutoberich.com, so if you’re “not convinced” I won’t be hurt.

  17. ramit, i think you’re awesome. this site brings new light to my life, seriously. as a college student, i think i’ll get by just fine in the future just by reading your articles. so keep up the good work! and thank you!

  18. I think this site is a great site because even though the advices may look common in the eyes of educated investors, you will be surprised about how many people on this world who would popped their eye out upon hearing about these advices.

    I hope readers would aware that this site is http://www.iwillteachyoutoberich.com NOT http://www.iwillteachyoutoberichprettydamnquick.com

    Keep up the good work Ramit.

  19. I agree with most of what you say about starting early and taking advantage of 401k’s and Roth IRA’s. I have done that and have done reasonably well. I am not rich yet, but on my way to being comfortable in retirement. I view this as painfully obvious information, yet you are providing a service to society by educating those who are slow to learn the basics.

    One thing I have always had an issue with is the buy and hold strategy when it comes to investing outside of retirement accounts in individual stocks. Your average investor doesn’t have alot of money to invest and less knowledge about stocks. If they invest 1000 dollars in your typical large cap stock, they are not going to have many shares and the stock will typically be well past any meaningful growth stage. The money will be stagnating for possibly years. I have tried this method and been very underwhelmed by my results.

    I have had much better luck in buying lower cap, lower price stocks where I can control many more shares and the stocks ,while much more volatile, will provide a much better opportunity for profit. There is more risk, yet it beats the slow death of watching my 100 shares of IBM drift up and down 10 points over the course of 5 years.

  20. Hi, Ramit.

    Yes, I do suggest writing about income issues. I have a small business with low income but very low maintenance and overhead. Over time, it adds up!

    People should find ways to determine the top market rate for their labor. So many people take the rate they’re offered. I’m at a rate now where most employers walk away, but some don’t. Asking top rate can also help you find more perfect fits for your unique skills and experience. So I know my top market rate.

    Finally, the right training (even self-training) can be so valuable. So can interest evaluations and labor market trend analysis.

    It’s easier to focus on cutting costs than raising income. But missed income opportunities are the same as wasteful expenses. I try to stay conscious of both.

    John

  21. What’s all this talk about stocks? No-load stock market indexes are cheaper (no fee to purchase) to buy and own, and you remove the risk of the particular company you bought having lousy management and going under.

    If you only have a little to invest, go for the Vanguard 500 or Schwab 1000. If you can take more risk (and hold for longer), then look for a growth mid-cap or small-cap mutual fund. These have higher annual fees, but not much higher. Dividends should be less because growth stocks reinvest in the business instead of issuing dividends, but sometimes you have payments in capital gains because of stupid people churning their mutual fund accounts. There are some funds that strongly discourage this–maybe something to look into.

    I’ve personally bought a few stocks that appealed to me, but I lost 2% right off the bat through broker fees. That sucks. I lose the advantages of dollar cost averaging because I’m trying to avoid transaction fees. Thus, index funds with an automatic investment plan make MUCH more sense at my asset level.

  22. I like how we are obsessed with money and the idea of being “rich”. If you all have forgotten, money is a means of exchange, that, after the end of the Gold Standard, has no real value. I hate to say it, but the “richest” people I have met and, are my friends, do not have monetary wealth. They have life experiences that you can’t buy. And if you want to read some good quotes about luck and life and hard work, look up Vince Lombardi.

  23. my child is 16 she has a job is it true that if i put 1000 dollars in a roth ira for her she will have a million dollars when shes 59 even we dont add or take out any of the 1000 ever

  24. Saving is one strategy, but no-one has never saved themselves to riches. Saving is only part of wealth creation.

    However, these are still excellent strategies which would work in Australia too. Keep up the good work, because if anything your helping others activate their mind. Our mind is the weapon we have to be able to grow tremendous wealth.