Our education system is designed to produce employees… not leaders, not entrepreneurs… and certainly not millionaires.
Most people believe what they do about money, commerce, income, saving, etc. because that’s what they’ve been taught. As a result, they ignore their own experiences… sometimes for many years. That’s a shame.
My advice for 20-year-olds is simple: live beneath your means, stay out of debt, and work on increasing your income. This is far more important than trying to achieve any particular investment result.
If you borrow $100,000 to go to college, it is very, very unlikely you will be able to earn enough income and save enough money to repay the loan and end up with a million-dollar net worth by the time you are 40. But very few people can avoid the siren song of debt. That’s why I always encourage people to look at the total costs of things – interest included – before they buy. (That’s especially true of college. Don’t forget the opportunity cost.)
Almost all college graduates will find their degree isn’t worth much and it’s certainly not worth what they paid for it.
According to the Library of Economics and Liberty, on average, folks who go to college (but don’t finish) make $743 per week (around $38,000 per year). Folks who finish earn $1,043 per week (around $54,000 per year). Thus… even if you assign all of the difference in income to the degree (instead of to the differences in IQ and other abilities)… a college degree adds up to a whopping income difference of just over $1,000 per month. In other words, a college degree is probably worth about what I pay my yard man each year.
So… what will I tell my children about becoming independently wealthy by the time they’re 40?
I will tell them that there are many more important things in life – like learning for the sake of broadening your mind, traveling, making friends, falling in love, and having children. You don’t need to be rich to live a good, full life. But if they seem to be more interested in money than anything else, I will tell them to do two things…
First, I will tell them to work – hard, and for as long as possible. Second, I will tell them to save and save and save…
Consider this. Let’s say you begin working hard at age 15. That’s when I got my first hard, regular job. I was the kennel boy at the local vet. I got up before school and hosed out dog crap every morning from 5 a.m. to 7 a.m. I repeated the routine every evening. I also mowed lawns and did other odd jobs as often as I could get them.
Let’s say you started working like this when you were 15. When you start out, you’re making almost nothing – $9.50 an hour. Assuming you’re able to work 40-hour weeks, you’ll make $380 per week. Assuming you work 50 weeks a year, your gross take-home pay will be a paltry $19,000 a year. But that’s OK… you’re living at home. You can easily save half your gross pay. What about taxes? Well, like Obama says, you didn’t build that. You gotta pay your taxes too, kid.
In our example, the kid would turn 16 years old with $9,500 in the bank. True, that’s a hardworking kid. But I’ve seen it done. It’s not impossible. Now, let’s assume he piles the money into a diversified portfolio of short-term, investment-grade corporate bonds. Nothing fancy. He earns 5% a year after taxes. Let’s also assume our kid is a hustler. By looking for and taking better jobs and earning bonuses, he’s able to grow his income by 10% a year. That’s not very hard for good workers – especially when they’re starting out at $9.50 per hour.
If our kid keeps this up through when most of his peers have finished college, he’ll have saved $157,000 by the time he turns 25.
This approach doesn’t require any special skills or degrees. It doesn’t require any kind of miracle – other than hard work, discipline, and perseverance. Yes, those traits are very unusual, but they can all be learned. They don’t require a gifted IQ.
He simply has to do a good job. He has to learn skills that are valuable to businesses and other people. He has to be utterly reliable.
By the way, the young people I meet today often have a very unfortunate characteristic: They tie their feelings about their self-worth to their spending, instead of to their net worth (their saving). They’ve badly confused the near-term experiences of living rich with the long-term goals of being rich.
I can only chuckle at this sentiment. What breeds success is smarts, dedication, and a sustained effort to improve. I’ve never seen a man earn a raise or a commission because he was living better. I’ve seen lots of people forgo enjoying themselves today to be better-prepared for work tomorrow.
At some point… maybe 15 years after he starts working, our kid will need to start a side business to continue growing his income every year. That will require a bit more work. But it’s not impossible. That’s when his gross pay finally breaks well past average for a valuable employee (over $70,000 per year). But keep in mind… there’s no windfall payday for our kid. He just keeps plodding along… earning a little bit more every year and faithfully saving like a squirrel in October.
Just doing this… starting at just over minimum wage, working hard, saving, and growing income at a reasonable pace… will make you rich. By the time our boy is 40, he’ll have a nest egg worth $976,000. He’ll have an income over $187,000 per year. He will be rich by any standard.
What variables really matter? Well, if you assume annual investment returns at 15% instead of 5%, his nest egg only goes up to $1 million at 40 – about $25,000 more net worth. Investment results make almost no difference to wealth building. (They make a huge difference to folks who are already wealthy.) What about saving? What if you drop our kid’s savings rate back to a normal 15%? Even with a 15% annual investment return, the size of the nest egg collapses to only around $318,000.
Saving is the single biggest variable.
What about working? What if you assume our guy likes to take a lot of time off. Say he only works 40 weeks a year instead of 50. He goes to Europe or goes surfing… what happens then? Nest egg drops another $100,000 down to $254,000. In other words… even if our guy does well in his career… and does great with his investments… but he only saves like most people do… and he only works as hard as most people do… he’ll end up like most people: without a pot to piss in.
On the other hand, if he can learn to save like most people never will and work harder than just about anyone else… he’s almost certain to be very, very rich by the time he’s 40.[Ed. Note: To hear this and all of Porter’s interviews, arguments, and insights, you can click here to subscribe to the free podcast. You can also download all Stansberry Radio episodes from iTunes here. You probably won’t agree with everything Porter says, but every episode provides investment ideas and a view of the world you won’t hear anywhere else.]