The easiest way to get rich

December 13, 2009

Judging by their behavior, most people have an obsession with wealth. Politicians promise to create it, most popular magazines are filled with gossip about those who have it, and the average person spends much of their adult life trying to obtain it. We are creatures obsessed with money, partly for what it can buy, but also as a thing of value in itself.

But most people misunderstand money. They don't really know how to obtain it, or how to hold onto it once they have it.

If you're interested in getting rich, I'm going to give you the simplest formula for doing so. In fact, if you follow it you're virtually guaranteed to build enough wealth to get you into the top 5% of society. As the shampoo advertisement says: "It won't happen overnight, but it will happen".

The hardest way to get rich

Before I go into my formula, let me tell you about hard ways to get rich.

One of the hardest is to be born into it. Of course, if you happen to enter this world as a Hilton, a Gates or a Windsor, then life is sweet. But since 99.9999% of the population aren't that lucky, I'm assuming you didn't win that particular lottery.

And speaking of lotteries, gambling is another very difficult way to get rich. Sure, some people buy a lottery ticket and win big, but most don't. You can gamble your entire life and you'll most likely end up broke rather than wealthy.

When I was younger, I thought the easiest way to get rich was to become famous through some kind of creative act. Stephen King got rich writing horror novels, so why not me?

I'm now much wiser and realize that the vast majority of novelists never even get published. Of those who do, most wallow in obscurity. Only very few make it anywhere near the best-seller list, and only one in a million will achieve any kind of serious wealth.

The same fate awaits the majority of musicians, software company founders, sportspeople and website creator. For every Google that makes its owners billions, there are a million websites that lose money. Creativity is the most fun and rewarding way to get rich, but it's also a very difficult way.

The reason the media raves about and idolizes those who've built wealth through creativity is because they're so rare. You don't hear about the vast majority who wallow in obscurity and poor pay, because they're not interesting. "Young genius makes $1 billion from website" is a great headline "Ten thousand young geniuses make nothing from their hard work" isn't.

I'm not saying you shouldn't keep your dreams alive. It's one of the best parts of life. But this article isn't about the most fun way to try and get rich - it's about the easiest way.

Okay, here's the system.

Step 1: Get a well-paid job

This is a reasonable amount of work, and takes a few years, but it's a virtually guaranteed way to make a good income. If they're willing to put in the work, almost any intelligent person can get a job paying $100,000 or more within the space of a few years. While it's not easy, it is by far the easiest and most likely way to secure a good income. In fact, I've already written an entire article on how to get a job paying more than $100,000 a year for those who wish to pursue this avenue.

Step 2: Get good tax advice

However you make your money, your number one expense is likely to be funding the government. In most developed countries, the average worker pays around 30% of everything they earn straight into the taxman's pocket. If you've taken my job advice, you'll most likely pay even more than that.

While taxation is necessary to fund the good things governments provide, you don't do yourself any favors by paying more than your fair share. If you're serious about building wealth, get a good accountant who understands how to legally minimize your tax bill.

Step 3: Save 20% of everything you ever earn

As soon as you get paid, arrange to have 20% of your income removed into a savings account. Many banks can do this automatically for you. Keep your savings account separate from your spending account, and you'll barely miss this money.

There's a saying in economics "expenses rise to meet income". This means money that's easily available to you is certain to be spent. That's why most people's paychecks disappear before their next payday. They get used to having a certain amount to spend, and habitually run down their bank account.

Have your savings moved somewhere it's a hassle to get them out of to avoid this risk. Many high interest accounts require you to give them a few days notice, which is ideal for this purpose.

Step 4: Conservatively invest the funds that build up in your savings account

Once a month, go into your savings account and divide the money by investing it into the three core conservative assets: shares, property and cash. Open a mutual fund account for shares, a property fund for property, and a money market fund for cash. Look for share and property funds that invest in a broad range of assets and most importantly charge very low fees. An index fund is ideal for the shares. An index of property funds is ideal for property.

Put an equal amount into each account. This will diversify you against risk in any one particular asset. If you're younger, this rule is a little bit flexible, allowing you to take a little more risk and put more into shares and property if you like.

Step 5: Reinvest any income you get from your assets straight back into buying more assets

Mutual funds and property funds pay dividends. Money market accounts pay interest. Don't take this income into your spending account. Instead, select the option to have it reinvested into the fund that generated it.

Step 6: Never touch these funds and do your best to ignore them

The business press, like the mainstream press, loves a crisis. "Shares to skyrocket" or "Property to plummet" headlines will sell many more copies than "Things to continue steadily". All markets go up and down. Every day, some speculation will be published about some crisis or opportunity.

Ignore it all.

Just keep putting the 20% into your assets. Sometimes they'll go up and sometimes they'll go down in value. But over the long term, they'll almost certainly go up.

Step 7: Wait a decade

Do what I've outlined above and in a decade you'll be rich. Sure, you won't be Bill Gates, but you'll almost certainly be in the top 20% of wealth holders. Wait another decade and you'll be in the top 5% or higher.

That's the plan. It's not the most exciting or glamourous way to build wealth, but it's the easiest. Quite simply, this is how most rich people got there.

You too can join them, if you follow it.