| Issue date: Aug 15, 1999
How to get Rich
in America
8 sane,
sensible steps to wealth
By Dwight R. Lee and Richard B. McKenzie, authors of this year's
Getting Rich in America, out in paperback this fall
Despite pundits'
claims that only a lucky few can get rich,retiring wealthy
is a matter of choice for most Americans. Getting rich requires taking
seriously Ben Franklin's observation, "The way to wealth is as plain
as the way to the market. ... Without industry and frugality, nothing
will do, and with them, everything." In our book, Getting Rich in
America: 8 Simple Rules for Building a Fortune and a Satisfying Life,
we stress that building a fortune is far easier today than in Franklin's
time, because most of us have opportunities that were unavailable
two centuries ago. Our incomes, even after adjusting for inflation,
are far greater today, making it easier to invest. And we can invest
with less risk by diversifying over most of the economy through mutual
funds tied to the Standard & Poor's Index of 500 major firms.
Historically, these index funds have yielded an 8% annual return -
after inflation - routinely beating most managed funds.
How can ordinary Americans get rich by retirement - that is, have
a net worth of more than $1 million in today's purchasing power?
The rules are straightforward, though it takes discipline and patience
to stick with them.
1.Recognize how lucky you are to be an American. America's
vast opportunities are a form of "wealth" that can be converted
into financial wealth. Countless people on this planet would risk
their lives to have the opportunities on your doorstep, even if
your doorstep is in a neglected neighborhood.
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2.Recognize the power of compound interest. Few people
can get rich from their wages alone. But by taking advantage of
compound interest, which means earning interest on your interest
by letting your investment returns accumulate and build on themselves,
almost anyone can get rich. Consider a college graduate who, at
22, begins earning $30,000 a year and gets annual raises of 1% (after
inflation) over her career. If she saved only 10% of her income
and invested the savings in an S&P index fund, she'd have a
net worth of $1.4 million on retirement at age 67, in today's dollars.
And she would have had to save only $169,500.
Even a high school graduate who earns only $18,000 a year (or
$9 an hour) and never gets a raise can be worth more than $1 million
on retirement. How? By working an extra 10 hours a week at the same
wage until age 40 and investing only half the additional income
in an S&P Index fund.
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3. Resist some small temptations today for big payoffs tomorrow.
A popular book tells Americans, "Don't sweat the small stuff." There's
some wisdom in that advice. Americans can do well, however, by pondering
the financial consequences of at least some of the small stuff.
Small temptations - unnecessary expenditures and bad habits - have
a way of adding up to a sizable lost fortune when seen in terms
of lost investment potential. Consider: Buying a cafe latte instead
of a less expensive tall drip every morning at Starbucks for 10
years, from age 22 to age 32, can reduce your net worth at retirement
by close to $90,000. Wagering $200 a year on the state lotto from
age 18 to age 67 can leave you with $115,000 less at retirement.
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4. Realize the fortune to be had by taking care of yourself.
Regular exercise and a good diet can make you healthier and wealthier.
Good health can increase your earnings and lower your medical bills,
which means you can save more. You also can expect to live longer,
which means you can work and save longer and allow your fortune
to compound for a longer time. Exercising an hour a day can add
at least $250,000 to the retirement net worth of the college graduate
we mentioned above. By not smoking, you improve your health and
increase your life expectancy, and, with the saving of a pack a
day, you can increase your net worth at retirement by more than
$700,000.
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5.Get a good education. It pays big dividends in higher
earnings. The average college graduate makes about $30,000 a year
more than the average high school graduate. Get a professional degree
on top of your bachelor's degree and you add $40,000 more. Saving
just 10% of the extra $70,000 a year will add more than $2 million
to your retirement wealth. A good education also opens up windows
on the wonders of the world that will enrich your life no matter
how much money you have.
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6.Consider the financial benefits of marriage. Married
people earn more and have more wealth on average than unmarried
people living separately or together. This is understandable, given
that married people can economize on expenses with one household
and often have the advantage of two incomes. Also, the discipline
of marriage, and the longer time horizon that comes from a shared
future, makes it more likely that married couples will save and
invest. Married people also tend to be healthier, so they can save
the money that would otherwise go to medical bills. And because
married people tend to live longer, they can work, save and invest
longer - and let their wealth compound longer.
Divorce, on the other hand, can devastate your wealth and personal
well-being. Of course, if you're in a bad marriage, it can pay to
cut your losses by giving yourself as much time as possible to recover
physically, emotionally and financially.
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7.Don't try to beat the market. Small investors often dream
of beating the market, of finding those few stocks - Microsoft in
1986, Amazon.com three years ago - that yield much higher rates
of return than the average of all stocks. But small investors face
two daunting problems: They don't have time to do the research necessary
to find those few stocks that will be big-time winners without,
at the same time, picking a few big-time losers. And their funds
are so limited that their portfolios can have only a few stocks.
Small investors run a terrific risk of major losses by picking one
or two stocks that unexpectedly lose big.
Most small investors should not expect to be able to beat the
market for one good reason: 9 in 10 financial gurus did not beat
the market last year. For the ordinary investor, we recommend a
brainless, painless strategy: "Buy the market" by investing in a
mutual fund that buys the Standard and Poor's Index of 500 companies.
Such a strategy offers immediate diversification and provides a
significant rate of return that, over the long run, will allow the
kind of results we have illustrated.
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8. Strive for balance in life. Moderation is an admirable
objective when it comes to alcohol and exercise. It's also a worthy
goal when it comes to saving. There's no point in building a fortune
without regard for enjoying life as it is lived. The true value
of a fortune will, in the end, depend on how it is amassed.
We recommend striving to live a principled life of integrity and
responsibility; it adds value beyond the buying power of dollars
that are accumulated.
At the same time, principled behavior pays. Temptations to cheat
and shirk abound at work. Employers want to work with, and pay premiums
to, people who can be counted on to do what they say they will do.
A reputation for integrity can contribute to your wealth by raising
your pay, which can increase your saving.
There's no big secret to becoming wealthy. All you have to do
is remember Ben Franklin's advice and make responsible choices.
Be willing to work hard, get a college education, save 10% of your
income as a matter of course and deny yourself a few nice but unnecessary
things. This doesn't mean you have to live like a monk or that money
should be your only goal. Building a fortune is consistent with
building a satisfying life of discipline, responsibility and service
to your community and those you love.
Dwight Lee and Richard McKenzie are the authors of Getting
Rich in America (HarperBusiness, $25). Lee is a professor in
the University of Georgia's Terry College of Business; McKenzie,
in the Graduate School of Management at the University of California,
Irvine.
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Case study:
Make my money work harder
Jean Sherman Chatzky, USA WEEKEND's contributing editor for Personal
Finance, advises a U.S. Navy enlistee. 
Q: I want
to become a millionaire. I'm 23, on active duty in the greatest navy
in the world. I save $400 a month: $150 in mutual funds, $200 in a
savings account and $50 to an investment product that is also a $100,000
life insurance policy. I take home about $2,000 a month and have only
$800 in bills (I use the rest to take care of my mom). Still, I feel
I'm not doing enough. What can I do to make my money work harder for
me?
Theresa Sweeny
Dear Theresa,
You're on the right track. I haven't heard from many 23-year-olds
(or, for that matter, 30-year-olds) who are socking away as much
as you are. But you're right: You could do better - not just by
saving more, but by investing what you're saving more aggressively.
Let's leave your life insurance policy out of the equation (my guess
is that you feel you need it for your mother, in case anything should
happen to you). If you kept saving and investing as you now are
- I'm assuming an annual return of 11% (after inflation, 8%) on
your mutual funds and a 2.5% return on your savings account - you'd
rack up $52,026 over the next 10 years, $135,044 over the next 20.
That's not terrible. But it's not stellar, either.
- Let's assume that because you've been saving awhile you have
a sizable emergency cushion in the bank in case you lose a job
or are unable to work. That plus your youth gives you the freedom
to be more aggressive with your investments. Look at what changes
like these would accomplish:Instead of just putting $150 a month
directly into mutual funds, put $2,000 a year (about $165 a month)
into a Roth IRA, then invest that money in the mutual funds of
your choice. They can be the same mutual funds you're buying now
if you're happy with them, but by organizing your money this way
you gain a huge tax advantage. You use money that's already been
taxed to make the investment, and when you take it out at retirement
(beginning at age 59), you pay no taxes.
- Next, take $100 each month and put that money in the market,
also through mutual funds. (You want to build a diversified portfolio
that mixes large-company stocks with small-company stocks and
international stocks.)
- Put the remainder in a lower-risk investment, such as an intermediate-term
bond fund.
I've assumed the same 11% return for the assets in stocks, plus
a conservative 6% on the bond fund. In 10 years, you'd have $65,561;
in 20 years, $225,797; in 30, $643,049. And that's without increasing
your contributions at all over three decades. Do that, and you could
probably hit $1 million before you hit the big 5-0.
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Simple (but
important) Do's & Don'ts
DON'T indulge in wasteful habits. Buying a tall drip instead of a latte
every morning saves about $1 a day. Put that money in a mutual fund
for 10 years, starting at age 22, and you could have $90,000 more
at retirement.
DON'T gamble away your future. Statistically, you're much
more likely to be struck by lightning than to win the state lotto.
DO stay healthy. A 22-year-old who exercises an hour a
day could be worth an additional $250,000 at retirement, thanks
to lower medical bills and a longer career.
DO reconsider that luxury car. If you buy a used Honda
just out of college instead of a flashy Audi TT, then take the $25,000
you save and invest it at 8%, you'll have an extra $800,000 at retirement.
DO get married. Married people earn more and have more
wealth on average than couples living together.
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The Internet
boom: Weighing your chances
By Jonathan Lesser
In 1849, there was the gold rush; at the turn of the 20th century,
the oil boom. Today is an equally heady time, with even wilder fortunes
being made on the Internet. Thousands of Americans have earned millions
on the Net, but is this course for real, or as phony as a $5 Elvis
autograph bought on eBay?
There are three ways to get rich via the Net: Start your own Web
company, buy stock in such companies or work for a start-up that
offers stock options and wait for it to go public. But before you
trade in your steady paycheck or S&P 500 portfolio for such
opportunities, know that these young companies
are still unproven. "Not everyone out here is making a lot of money,"
says Elizabeth Corcoran, Forbes magazine's bureau chief in California's
high-tech-heavy Silicon Valley. "For every Amazon.com, there are
many companies that never get to the vaunted IPO [initial public
offering] stage."
Still, statistics show the Net is the place to be. According to
CommScan, an investment banking research firm, the stocks of the
126 Internet companies that have gone public so far this year have
performed four times better than their 113 non-Internet counterparts,
with an average return of 120%.
"It used to take monopolies to make fortunes," says Steve Jurvetson
of Draper Fisher Jurvetson in Redwood City, Calif., one of the first
venture capital firms
to invest in Web companies. "The Carnegies, the Rockefellers - it
happened two times in a generation. Now it happens every other week."
Indeed, Internet companies appear today to be as good as gold
(or as good as gold once was), yielding lottery-like payoffs. But
when will this outrageous rate of growth reverse direction, and
how fast? The answer is unpredictable,
as will be your returns on an Internet investment.
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