Making more income is the best way to build wealth. So long as you don’t spend it as fast as you make it.
In other words, the shortcut secret to getting wealthy quickly and efficiently is to:
- Increase your net investable income.
- Save the lion’s share of that extra income.
What do I mean by “the lion’s share?” Between 70% and 90%, depending on how close you are to your Magic Number.
Net investable wealth is my term for what you have after you deduct two asset classes from your net worth. One includes the money you have set aside in your “start-over fund” (cash, coins, etc.). Another includes the value of your house and any other tangible assets (such as jewellery or family heirlooms) that you want to keep for the rest of your life.
Your Magic Number is the amount of money you need to have saved and invested in order to quit work and enjoy retirement. That is, a lump sum of money that can provide enough interest income to live off of.
Most people don’t do this. As their income rises, so too does their spending. Some actually spend more than the extra money they make.
Why? Because having extra things — a bigger house, a newer car, and assorted luxury toys — is what we’ve all been told wealth is about. We work hard to buy this stuff. And then we are happy. The more stuff we buy, the happier we are.
That’s true in Hollywood-land, but real life is very different. Spending more on “happy” stuff is a junkie’s habit: to get the same thrill (in this case, ego thrill) you need to take bigger hits.
I wrote an essay on this subject for the new Foundations of Wealth series in the Wealth Builders Club. I used Mike Tyson as an example. I noted that he had career earnings of over $400 million. And yet, amazingly to me at the time, he ended up tens of millions of dollars in debt.
He accomplished this miraculous financial feat by spending his money on $2 million dollar bathtubs, $3.4 million worth of clothes and jewelry, and two Bengal tigers that cost more than $10,000 per month to feed, train, and insure. Iron Mike also made some bad “investments” and ran up a multimillion-dollar bill with the IRS.
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