Originally published at: What’s the secret to getting rich? – Personal Finance Club
This is it. This is how most rich people get rich. They spend less than they make and they invest the difference.
In this example, Amanda becomes a multi-millionaire. Her take home of $4,000 per month is about the median for US households.
And her investment return? Also unremarkable. The US stock market has returned 11.4% for the last 40 years. When you adjust that for inflation, it’s 8.3%. This example assumes a 7% rate of return, which is well below the inflation adjusted historical average. That means all she has to do is buy and hold a broad market index fund and her $2.1M will be spendable as if it were today’s dollars.
So why doesn’t everyone do this? Because “normal” in America is swimming in debt and spending every dollar you bring in. (Not following rule #1). And as Warren Buffett says, “Nobody wants to get rich slowly.” So few invest money every month (Not following rule #2).
There’s no secret. There’s no magic. Optimal investing is simple. Buy and hold low cost index funds. Invest early and often. Ignore the noise. Don’t try to get rich quick. Stay the course. That’s how you get rich.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.