Getting Rich Isn’t Just About Your Salary
By: John Pa
Tags: Self Improvement, Life, Money, Life Lessons, Money Management

Getting Rich Isn’t Just About Your Salary

Photo by Precondo CA on Unsplash

I believe anyone can be rich.

Yes, that means you. You don’t have to be a world class entrepreneur, like Jeff Bezos or Elon Musk, to be rich — no. You just have to make a decision to be rich by doing what the rich do.

That means practicing simple habits that help you accumulate wealth and grow it.

Is it easy? No. It’s not. Otherwise everyone would be doing it.

But, anyone can do it. It just takes managing your money better.

You see, you don’t get rich just by making more money, getting raises, snagging bigger bonuses. No, it takes more than that.

There are plenty of people who make a good salary but aren’t rich. You probably know some. Here’s what it looks like.

Let’s say you just started your career and you’re making $50K. But, you’re also spending $55K annually, which means you’re not getting richer. In fact, you’re getting poorer.

A lot of people do that. Maybe you are, too. That’s why so many people have more debt than they have assets. They owe more to the credit card companies than they possess in their own accounts.

And, just because they get a raise doesn’t mean that it will improve their situation.

Making More But Staying Poor

For instance, let’s say you were promoted and your compensation got bumped to $100K. That’s great; it’s amazing. But there’s only one problem: You’re also upgrading.

We tend to upgrade our stuff with our upgraded compensation: the apartment, car, clothes, vacations, food, etc. Then, at the end of the year, we tend to find that we spent more than our earnings, like we did when we made less money. So even if you make $100K but spend $105K, that still puts you in the same position as you were when you were making $50K. You’re still $5K deeper in debt.

Earning more doesn’t make you richer.

Even if you make a boatload of money, you can still remain poor. I’ve heard of people making a seven-figure salary, and, believe it or not, they found ways to spend more than they made.

Spending makes you look rich, but it keeps you poor. The rich know that. That’s why even Jeff Bezo famously kept on driving an Honda Accord even after he became a billionaire and Warren Buffet never moved from the first house he bought. I’m not saying you shouldn’t have nice things. You can. But if you want to get rich. You need to control your spending.

That means managing your money better.

Saving Is a Start

Now, what if you looked at your money differently and started handling it with a different mindset, like driving-a-Honda-even-after-you-became-a-billionaire different?

What if you decided to save your money instead of spend it?

Let’s say you got a promotion and landed a job that paid you $100K, but, instead of playing the upgrade game, you kept all of your old stuff and maintained your $55K lifestyle. You didn’t upgrade or downgrade. You same-graded. By doing that, you would be saving $45K at the end of the year. (I’m not counting taxes and all of that for simplicity’s sake).

That’s right. Your net worth, after a year, wouldn’t be in the negatives. You would be cash positive. And that’s all just by making one simple decision — not changing the way you live so you can have more money.

Instead of looking rich you decided to become rich by forgoing the short-term benefits of your compensation to reap the long-term rewards of wise money management. By living poorer, you’ll build your net worth day by day until you reach financial freedom. Same-grading yields incredible results.

But, there is still more you can do. It’s about doing what the rich do. And they don’t just save their money, they invest it.

Investing Is Critical

See, when money is well managed, it will make more money. You don’t “work” for it. When it’s invested, it just grows. That’s what the rich know.

They understand that to get rich and stay rich, you must invest.

Investing is exposing your money to calculated risks through accumulating or building assets to gain a reward. That means putting your money in the stock market, or buying and holding real estate, or starting a side hustle, etc. For the sake of time, I’m going to focus on investing in the stock market.

Did you know 80% of the stock market is in the hands of 10% of the population? And they aren’t just any group of people. They’re the wealthiest part of humanity, the top of the financial pyramid, the rich. They invest in stocks because they understand that investing in the market isn’t about gambling, or some scam, where you lose money — no.

They know that buying stocks is about owning companies. It’s about buying and holding bits of ownership in corporations that make money year in and year out and increase in value. And if you buy and hold them, your investments won’t just make money.

They will compound.

The Magic of Compounding

This is how compounding works.

Let’s say you invest $45K into the stock market, and in five years, that amount invested appreciates to $90K. Now, let’s say the next five years, it doubles again. But guess what? It’s not doubling off of your initial investment of $45K. It’s doubling the $90K. So now you have $180K. That’s compounding.

It’s the appreciation of not just your initial investment, it’s on your entire amount of your investment including the appreciated amount. This isn’t arithmetic, like savings. Compounding makes your investment grow exponentially. It’s growth, multiplied.

The example above isn’t exact math; it’s simplified to keep things simple. But it doesn’t make this concept any less profound. If you’re paying attention, this should blow your mind.

Compound interest is what makes rich people richer. It’s magical. And it can help you join them in their ranks. If you want a more precise calculator for compound interest check out this site.

Now, picking up the thread from our example above, let’s assume you’ve saved only one year’s worth of non-upgraded life savings, or $45K. But, what if you saved that amount every year over five years? That would put your net worth at $225K. That’s good. But, again, saving is about arithematic. With compounding, your account value can be so much higher. It can grow exponentially.

If you take the savings of $45K each year for five years and invest it into an index fund that tracks the S&P 500 (which, by the way, many people consider a conservative investment), you will see something amazing happen. This assumes that the S&P 500 will appreciate 10% every year (which it has done if you average it’s growth since it started in 1926).

Here’s what this looks like over five years.

1) $4,500+$45,000=$94,500

2) $9,450+$94,500+$45,000=$148,950

3) $14,895+$148,950+$45,000=$208,845

4) $20,884.50+$208,845+$45,000=$274,729.50

5) $27,472.95+$274,729.50+$45,000=$347,202.45

(Note: The first number on line 5 is the 10% appreciation from the previous year ($27,472.95), the second ($274,729.50), the total balance amount of the prior year, the third ($45,000), the savings of that year, and the final ($347,202.45), the sum of your hypothetical investment balance for that fifth year.)

Staying Invested Pays Off

After five years of saving and investing, that would give you an extra $122,202.45 of compounded interest for practically doing nothing but sitting around scratching you buttock, and not selling your investment. The way I reached that number was by subtracting $225K, the amount saved but not invested over five years, from the total of the scenario where you invested the savings. So it would look like this in action, $347,202.45–$225,000=$122,202.45. That’s more than a 50% return on your money.

That’s what a compound cake looks like when you stay invested. And it’s deliciously good, if you ask me.

It’s important to note that, in some years, the S&P goes up far more than 10% (like last year, which was up 29%). And, it’s true, in other years, it does go negative. But that happens far less than when it goes positive. History shows that the market goes up far more than it goes down. And, over time, it has always gone up. That means, with patience, your net worth, if you stay invested, can’t help but go up.

Here’s a chart of the S&P’s entire history.

Source: Bloomberg

Let’s try something slightly different now to show the power of staying invested, shall we?

Maybe your life circumstances change and you can’t keep saving because you get married or have kids, etc., and that increases your expenses, as a family does. So after those five years you decide to stop saving that $45K per year and put it towards buying diapers, paying a mortgage, you know — life.

But, you don’t touch your investment account and keep it just as it is. You stay invested.

Here’s what it will look like after another five years of appreciation at a 10% rate.

6) $34,720.25+$347,202.45=$381,922.70

7) $38,192.27+$381,922.70=$420,114.97

8) $42,011.50+$420,114.97=$462,126.47

9) $46,212.65+$462,126.47=$508,339.12

10) $50,833.91+$508,339.12=$559,173.03

After another five years, in this scenario, even if you stopped saving, you would have over half a million dollars. You may not have Jeff Bezos money, but you would be rich. And with almost each passing year, you’ll get richer.

That’s what compounding does. It lifts you up. But you need to stay in the market to experience the magic. The only thing you have to do is…not sell.

And it doesn’t take a genius to figure this out.

You just have to be disciplined.

The Genius of Discipline

This is about discipline. It’s about making decisions to stop the self-sabotaging patterns of keeping up with the Joneses. And instead, you shift your mindset to aim for something better — financial freedom.

As I said in the beginning, this isn’t easy. Being disciplined is extremely hard. Saying no to yourself, not buying that thing you really want, that car, house, clothes, etc. is not for the faint of heart.

But you can do it.

You’ve got to replace your desire for those things for something greater. Once you forgo your short-term desires for long-term decisions, you’ll start to make incredible headway. It won’t be flashy. At times, it will feel awful not doing what your peers are doing.

You see, managing your money is about managing yourself.

That’s what saving money and investing is. It’s less about how much money you make and more about what you make of the money you have. And that’s all about self management. If you manage yourself better by becoming more disciplined, you will compound your wealth.

Yes, at first, you’ll look poor; but, over time, you’ll see life-changing gains.

Eventually, you’ll be rich.