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Thursday, May 11, 2017

Getting Rich in America, David Henderson | EconLog | Library of Economics and Liberty


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This is just a solid list. It follows the get/stay educated, get/stay employed, get/stay married model that I keep trying to promote. It's just practical and pragmatic, if not sexy and exciting (although it could be if done correctly).

Getting Rich in America, David Henderson | EconLog | Library of Economics and Liberty

Sometimes, when the person beside me on an airplane finds out that I'm an economist, he/she will ask, "What's going to happen to the economy?" I answer, "I don't know." If the person is somewhat more sophisticated, he will ask "What's going to happen to interest rates?" I used to answer, "I don't know." I now answer: "They'll fluctuate."
Sometimes the person will ask, "How do I get rich?" I used to answer, "I don't know." But now that I've seen a lot and seen the basic mistakes so many people make, I realize that, compared to a large majority of Americans, I do know. I know how to get rich--slowly.

In 1999, two economists, Dwight R. Lee and Richard B. McKenzie, wrote a book, Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life. In my review of the book for the Wall Street Journal, I called it the "how-to guide for becoming the millionaire next door." I realized when reading it that I had been following all 8 rules without ever having written them down.
          Here they are:
1. Think of America as a land of choices.
One great quote is from a small successful businessman who said, "If you want your prayers answered, get off your knees and hustle." They point out, "You must do something that will be seen to be of value for others."

Note: When I talk about these rules in class, if I have students from poor countries I give them rule 0: Move to America.

2. Take the power of compound interest seriously--and then save.
Albert Einstein is reputed to have answered, when asked what is the greatest force in nature, "Compound interest." (I don't believe it but it's a great story and makes the point.)
When a friend who had studied saving behavior of various ethnic groups was visiting me almost 20 years ago, I told him that I saved about 20% of my pre-tax income. His eyes widened and he said, "You're Korean." How did I do that? Every time I got a raise, even just an inflation adjustment, I raised my saving rate by 1 or 2 percentage points. Starting from 10% in the mid-1980s, I was at about 20% by 1993.

3. Resist temptation.
This is the hardest rule for most people to follow. I'm really good at it. My wine of choice is two-buck Chuck, I virtually never order alcohol when I eat out, and when I buy cars, I try to hold on to them for at least 10 years. I spend little on clothes. One Starbuck's tall mocha a week is a treat.

4. Get a good education.
"Take professors, not courses," write Lee and McKenzie. I thought this was mine. It wasn't.

5. Get married and stay married.
When I teach this, I point out the following: "50% of American men, when they leave their houses, kiss their wives good-bye. 93% of American men, when they leave their wives, kiss their houses good-bye."
Dwight Lee explained to me that if you follow the other 7 rules, there's no need to get married. But what they have observed--and I've observed it also--is that when you don't get married, you tend not to follow some of the other rules.

6. Take care of yourself.
Don't smoke, do drink moderately, and do exercise. Sickness is expensive and shortens your life, reducing the time over which you can build your fortune.

7. Take prudent risks.
Don't put all your money in what you think will be the next Microsoft. It could just as easily be the next Enron. I invest in Vanguard and much of that is in their total stock market index. The expense ratio is under 0.2%. I also diversify internationally.
Lee and McKenzie write, "Remember, the surest way to get rich in the stock market is slowly--which paradoxically is (unless you are unusually lucky) also the fastest way."

8. Strive for balance.
Have some component of volunteer activity in your life. (This is part of the "satisfying life" part of the sub-title.) The authors recommending "giving back." Most of what people call giving back is not giving back at all. Nor need it be. It's simply giving. And there's nothing wrong with that.



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