In this blog I will list some of my top Quora answers for the last few days, which readers have asked me.
On today’s blog, I include answers to questions on whether students should work full-time, why some millionaires are very frugal and if it is possible to become a millionaire earning $70,000 a year.
If you want me to answer any questions on Quora or YouTube, don’t hesitate to contact me here, or by using the WhatsApp function below.
It is a great question you ask. Now every wealthy person is frugal or “cheap”, but you are right to say plenty are.
There are a number of reasons for this. Firstly, one of the biggest reasons why most people don’t get wealthy in the first place is that they are obsessed with “not losing”.
It is called loss aversion in psychology. It is where a loss is much more painful than a gain is pleasurable:
That explains why even people that know that investing money is (almost for sure) going to be better than saving money, decide not to invest.
“Better safe than sorry” even if the chances of a loss are very slim if you hold the asset long-term.
Likewise, it explains why many people think things like “what’s the point in becoming wealthy. I might die tomorrow”.
In other words, I lost out on all those things and experience the money could buy.
Yet most wealthy people are good at taking calculated risks and delaying gratification.
Everybody has the same human nature, so nobody likes to lose, but wealthy people have (in the main) leaned how to deal with it better.
To come back to your question, these are the main reasons why many wealthy people keep accumulating:
- Declining marginal utility. In the same way that the first cup of water tastes so good if you are incredibly thirsty, the tenth doesn’t taste as good. Therefore, it is often better to focus on the security that wealth brings and giving money to charities once you get very wealthy.
- If you are earning a lot of money, it is possible to live a good life, and still save and invest the lions share of your after-tax income.
- If you are busy in life and business, you don’t have as much time to think about how to spend money.
- Money is a tool. Like any tools, there are effective and ineffective ways to use it. As per Maslow’s Hierarchy of Needs, material needs aren’t unimportant but they come below security (which wealth brings as opposed to come)
5. Spending money on experiences is better than things for happiness. The reason is simple. If you buy 10 Gucci bags, the experience will be almost the same every time. Yet there are only so many experiences you can have.
6. Most millionaires in the majority of countries are now self-made. In other words, they have only gotten wealthy due to good habits. Once good (or bad) habits are set in stone, it is hard to change them. In comparison, many second and third generation rich have bad spending and investing habits, which is one reason they are more likely to spend all the money. As the ancient Chinese expression goes, wealth seldom lasts three generations or more.
7. A conservative buffer. If anybody had a heart attack tomorrow and stopped working, we would need about 5x-10x more for retirement than expected.
8. A lot of pricing is just marketing. That luxury cocktail costing $30 isn’t 10x better than making it at home or buying it at a cheap bar.
9. A lot of over spending is due to peer pressure – that is one reason why InstaGram and even Facebook has gotten so big. People often prefer to play the “big man” than have loads of actual wealth. A lot of wealthy people have stopped caring about what other people think.
As an aside to point number 9, probably the wealthiest person in my network makes Mark Zuckerberg 15 years ago, or even Steve Bannon, look very well groomed!
You tend to care less about spending money on impressing others when you have enough wealth to walk away tomorrow.
It depends on the following factors:
- How long that person invests for – if somebody is willing to invest for 30, 40+ years, then it is much easier to build up a multi-million dollar portfolio compared to doing it for a few years.
- What they invest in – Even if somebody invests for 30–40 years, it isn’t going to earn much if they just invest in bonds or (for most people) stock pick winning stocks. Tracking the market, or having 10% in individual picks if you really want to do that, works for most people.
- How they react to market crashes – When markets crash as they did this year, many people panic. Survey after survey, from firms such as Vanguard, has found that the average investor panics when the markets are lower. Or at the very least, they put less in. Very few people have the patience to keep investing through thick and thin.
- Where they live – If you are living in a developing country or even a low-cost town or city in a developed country, it is easier to invest a lot from a 70k salary. In some of the most expensive cities in the world, 70k is just getting by.
- Is the income after tax or before tax – linked to number 4, 70k doesn’t mean as much if it is before tax, compared to if it is after tax. Now sure, you can still get wealthy in most places on 70k before tax. Yet it makes it harder than if it is after tax, especially in a high cost of living country or city. 70k before tax in London or NYC is very different to 70k after tax in a cheaper place.
- How long you make 70k for – if you are making 70k at 28 or 30, it is likely that you will make more in 15 years, making this objective easier.
For most people, the answer to your question is yes, provided they start the investing journey at a young enough age, or get super aggressive with how much they invest if they failed to do that.
Of course, there are certain things that nobody can control, such as if markets will do better or worse than historically has been the case.
Nobody can know or predict that with any degree of certainty though, and we can’t control that, so it is pointless to worry about it.
A caveat to the above is what your objective is. If you define “rich” as becoming “wealthy” (not always the same thing) then it is very realistic.
There are countless millionaires and multi-millionaires who have similar salaries.
If you define rich as earning millions or becoming worth $15,-$20m+, then it isn’t easy on 70k.
When academics have looked at large data sets they have found a big difference between the $1m-$5m range and those worth over $10m.
At the lower end of the wealthy range, there are many 70k salary earners.
It is very difficult for the vast majority of people and doesn’t beat buy and hold investing for over 99% of people.
The main reasons are
- A lot of the things that people try to trade are zero sum games. The Japanese Yen can’t go up against the USD at the same time as the USD goes up against the Yen. Currencies as an asset class don’t go up. Stocks do, but Amazon can’t beat the S&P500 at the same time as the S&P500 beats Amazon.
- We are in an information age. There are millions of traders and magazines. Imagine you dropped your wallet on the floor in a busy city like NYC or London. What’s the chances that somebody will see it? very high. The chances that somebody won’t see a short-term investment opportunity in the world we live in today are small. If an asset is so obviously underpriced with low risk, then why wouldn’t everybody buy it?
3. The more you trade usually = the higher your costs.That makes it harder to get good net returns. So, making money from day trading long-term is even harder than stock picking a small number of positions to beat the market
4. It only takes one or two big mistakes to lower your overall gains.
5. Even if you win for a number of years it gets harder to maintain over-performance forever. That means making a living from day trading for 50 years is more difficult than doing it for a few years.
6. It gets harder to achieve excellent returns with larger amounts of capital.
I am not saying nobody can do this, but I have yet to meet somebody who has significantly beaten the market from day trading.
In comparison, I know countless people who have gotten wealthy, or even very wealthy, relatively slowly from patient investing.
A lot of the people who go into day trading, moreover, don’t have the skills, and have often been mislead by some information online.
If there was an easy way to make 10,000% in a year with low risks than everybody would do it.
Remember the stock market has averaged 10% per year long-term (the S&P500, Dow Jones, Nasdaq and a few other indexes) and even some of the best investors like Buffett have “only” gotten about 20%-25% per year.
It would therefore be possible to become one of the richest people in the world from a small investment if some of the claims made online were true.
It is better to be an investor and not a speculator.
It depends on the person but I have two thoughts on this:
- “Everybody” should do a low paid job they dislike or even hate once in their lives. This is especially important for children of the wealthy, but applies to all young people.
- Despite number one, people shouldn’t work as many hours as possible as a student, just to make more money short-term. People often regret that later on once they are 28, 30 or older.
Let me explain both concepts. In terms of the first comment, many of the wealthy frugal people I know started the habits at a young age.
Being frugal when you are earning minimum wage is a necessity and moreover, you start to link hours worked to consumption.
It is hard to justify that $5 coffee if it constitutes 40 minutes of a job you hate.
I remember when I was 16–17, I did all kinds of jobs I didn’t like, including in restaurants and supermarkets.
It helped install in me a sense that I didn’t want to do it forever, even though I liked a minority of the roles, and forced me to be frugal.
In terms of the second point, I did notice that many of my peers would “chased the bucks” when they were young haven’t done that well.
Often times they started in minimum wage jobs and got offered promotions when they were 16, 17 or 18.
The roles sounded good and paid well……for somebody that age.
I do know many people that took such roles, even though they didn’t like the work and it wasn’t good money if you take a long-term perspective.
People often focus on the soft skills that are learned working part-time like the ability to work in teams, get along with others and so on.
I am not saying those skills are unimportant but often it is the habits and values that are built up which last longer.
I was asked about what my opinions towards eToro are, why you shouldn’t invest in China and what I think are the most important skills to have in business.
I answer all of these questions in the article below, which are taken from my recent Quora answers.