Posts Tagged Cliffs Notes

This is Part 1 of my review and chapter summary of Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life by Dwight R. Lee and Richard B. McKenzie.  I won’t turn this into a Cliffs Notes version, but I’ll hit the high points, and provide my take on the rule at the end of each chapter summary.

Rule #1. Think of America as the Land of Choices

The focus is on how ordinary people have “made it”, based on the principles that they were taught as children.  The recurring theme is that hard work pays off.  The people who have succeeded have been able to recognize the opportunities that have been made available to them.  There are no get-rich-quick schemes, but a whole-life approach to building a fortune.  All that’s needed is the adherence to a few rules (the 8 Simple Rules in the book’s subtitle).  The $1 million net worth figure as a benchmark of having “made it” is explained, as fewer than 4 percent of all Americans have a net worth greater than $1 million.  This standard is more easily achievable than most Americans would believe.  While the million would not provide for a luxurious retirement, the interest income would match the median family income.  The traits of the “typical” American millionaire are given as:

• A male that has been married for a long time;
• Became a millionaire in his fifties;
• A median net worth of $1.6 million;
• Built his fortune through running his own business;
• Live a modest, frugal lifestyle;
• 85% of the millionaires still clip coupons;
• Drive older domestic cars;
• Don’t live in upscale neighborhoods;
• Have a median income of $131,000;
• Are first-generation millionaires.

My Take

The first thing that struck me was the income level.  This happens to be an achievable number for me, if I play my cards right.  The other thing that jumps out: these are frugal millionaires, who drive older cars, and even cut coupons! It’s the old spend-less-than-you-earn mentality put into practice.  Well, it looks like it works.

Rule #2. Take the Power of Compound Interest Seriously - and Then Save

Compound interest is no trade secret.  Many immigrants have come to America with nothing, and have amassed small fortunes by working hard and investing their savings.  They’ve followed these three steps:

1. Save and invest something of what you earn persistently.
2. Achieve a reasonable rate of return each year on your investment, which requires that you take some risks.
3. Be patient, allowing your savings and investments to grow for a long stretch of time.

An example shows that a college graduate who invests $2,000 at age 22 can achieve, at a rate of return of 15%, a nest egg of $814,774 at age sixty-five.  Granted, getting your money to earn 15% may seem far fetched these days, but the method holds true.  At a 10% rate of return, the graduate would yield about $120,480 at age sixty-five.  That’s almost $700K less than the 15% return.  Obviously, the amount of risk tolerance is key to future growth of an investment.  Still, growing $2,000 into $120,480 is nothing to sneeze at.

Saving at an early age is the key to building a nice nest egg.  Time is on your side.  Starting at age 40 compared to age 50 will yield twice as much at age 65.  But what do you do if you’ve missed the boat on saving early on?  Several strategies are presented, such as:

• Save more of a percentage of your income.
• Extend the years of work and saving.
• Increase the rate of return.

Life expectancy has risen over the years, allowing people to take more risks for a longer period of time.  So the shift from equities into bonds can take place later, allowing for a greater investment in stocks, and a potentially greater return.

Each chapter has a bullet summary, and also shows the basis of their calculations that you can follow on a Texas Instruments calculator.

My Take

I’m not sure if I would expect a 15% return anymore.  That would require a shift in my risk tolerance.  But the point of investing when you’re young is a valid one.  Time is on your side, so why not get started early?  What I would add is to make the savings automatic - have a fixed amount deducted from each paycheck and don’t touch it!

Click here for Part 2, where I’ll discuss Rules #3 and #4.

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