Most Westerners are rich in the opinion of Asian farmers. Yet most Westerners do not think of themselves as rich. They do think of Asian farmers as poor.
Then who is rich? We think: “The guy three rungs up the financial ladder.” So does he.
The richest people on earth are residents of Western semi-capitalist nations. They enjoy a standard of living that kings in 1900 would not have dreamed of.
Think of medical care. Kings lost children to killer diseases that are no longer a statistical threat in the West. Kings did not have high fidelity stereo music at their disposal. They did not have movies. They did not have cell phones. They did not have air conditioning. They did have anesthetics (1844). They were somewhat better off than kings in 1840.
What did they have that you don’t have? They had servants. They had summer palaces. They had yachts. They had mistresses. Would you trade places with any of them?
Yet most Westerners dream of getting rich. By the standards of history, they are indescribably rich. By the standards of rural Asia, they are indescribably rich. The rich do not perceive this.
Rich is a matter of perception. The rural Indian does not dream of becoming American middle-class rich. He dreams of becoming Mumbai middle-class rich.
“I want to go to America,” said a childhood friend of Dinesh D’Sousa in Mumbai. “Why?” D’Sousa asked. “Because in America, poor people are fat.”
BARRIERS TO RICHES
Most people cannot get rich. Most people are just too lazy.
Second, “rich” is a moving target. When the economy grows at 2% per annum, year after year, everyone gets twice as rich in 35 years. This is the law of 70. Divide the annual increase into 70, and that’s the doubling date. But if everyone is twice as rich, the problem of defining “rich” persists.
We measure our personal wealth by those around us. We do not measure it by a rural mother in India who makes extra money as a rag-picker. We also do not measure wealth by Warren Buffett. We do not worry about becoming the former. We do not dream about becoming the latter.
Third, there is the inescapable problem of positional goods. This phenomenon was identified a generation ago by economist Fred Hirsch. There are just so many positional goods available. Think of trophy wives. If every woman were a potential trophy wife, the trophies would be meaningless. Trying to buy positional goods is rather like trying to see a playing field better by standing up in the middle of a game. It’s extra effort, and it will attract opposition. If you block another person’s view, he will stand up. The person behind him will stand up. Pretty soon, everyone is standing up. Then someone stands on his seat. And so forth.
The primary marks of wealth are positional goods: scenic property that the public cannot access, large houses not visible from the road, antiques that people with greater net worth want to buy, and — above all — inherited social position that old money once bought, but new money can’t.
Fourth, there is the inescapable problem of uncertainty, sometimes called risk. It’s not risk that keeps us from getting rich. It’s uncertainty. Risk is the threat of having your house burn down. You can insure against this. It’s part of a widespread threat. There are mathematical formulas that let us hedge against risk.
Uncertainty is different. It is not part of a statistically identifiable class of events. You cannot insure against it.
When you start a business, there is no insurance policy that protects you against failure. If there were, your comparative economic returns on the business venture would be predictable. You would not get richer than anyone else in the industry. Everyone on average would do as well as his competitors. The words “on average” refer to statistical regularity.
Most middle-class people resist taking on additional uncertainty. They are more afraid of losing what they have than they are desirous of accumulating more wealth. This is the mindset of the middle class: “Enough is enough.” It is the desire for security. It is the desire to buy insurance against failure. There is an insurance premium: the surrender of comparative success.
How do most people expect to do attain security? Through politics. They see the state as the great insurer. Textbooks teach this from early grades and extend through grad school. Their teachers — at least until grad school — are living incarnations of this outlook. Teachers are insulated from failure. Also from riches (except in the top grad schools).
The only way you can get rich in business is to bear the responsibility of getting poor — or else getting a government handout. But even here, there is uncertainty. Think “Lehman Brothers.” Goldman Sachs did very well. In the middle was Morgan Stanley. Merrill Lynch got swallowed by Bank of America. And so it went. Big winners, big losers.
On average, common taxpayers will pay more than otherwise because of the bailouts. This will go on until the great default: a government default on either its debt or the dollar. Lots of losers. A few winners. Such is life.
Most people are common taxpayers. They will not get rich. The system is structured against them. They know this from an early age. They decide early to define themselves as winners or losers within a narrow range of taxpaying losers. They see economic success as paying fewer taxes, proportionally, than the others. They see it as getting more out of the government than they pay into it. They see it as milking but not being milked. They see economic success as “Don’t tax you. Don’t tax me. Tax the guy behind the tree.”
Yet, because of invested capital and its product, economic growth, most of us are winners. We get richer. We will never pick rags in India.
I have a peculiar definition of “rich.” It is easy to understand. I know almost no one who has achieved it.
“You are rich when you quit your wage-earning job and pursue your life’s top goal without ever drawing a paycheck again.”
Note: I did not say “when you can afford to quit.” I know lots of people who are rich by that definition. But they don’t quit. This includes me.
The proof of the pudding is in the eating. The proof of riches is to unlock the golden handcuffs, hand them back to their owner, and walk away.
But what if you love your job? It pays a lot, you say, but you would be willing to do it for free.
Then do it for free.
To get rid of the golden handcuffs. Do not depend on them.
Over 30 years ago, I counseled people who subscribed to “The Ruff Times.” I got a call from someone who said she worked for Lily Tomlin. Maybe she did. She asked how Miss Tomlin could earn a lot of money and also support her causes without paying any taxes. I told her that Miss Tomlin could set up a charitable foundation, contract her performances through the foundation, and give away every dime without paying the government.
Any rich person could do this. They don’t. They keep piling up the money. They cannot bring themselves to remove the golden handcuffs.
Why do I define “rich” this way? Because of this Bible verse:
The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away (Psalm 90:10).
Warren Buffett is 78. You will never attain the balance sheet of Warren Buffett. Forget about it. It’s over.
Would you trade places with him? Not if you’re 30. Would he trade places with you? In a heartbeat — which is the correct metaphor. He has fewer of them remaining. The marginal value of each remaining heartbeat keeps rising.
I know what economics teaches. We cannot make interpersonal comparisons of subjective utility. I am not sure, as an economist, that if an exchange were possible, the total monetary value of your remaining heartbeats is greater to him than the total monetary value of his is to you. Also, I am not a betting man. But I would bet that no exchange would be forthcoming if you are under age 50.
I could be wrong. Maybe his billions would let you finance your dream. Maybe you would sacrifice your heartbeats for his money. Maybe.
Would you? Ask yourself this:
“At what annual investments-generated passive income level would I take off the golden handcuffs and spend all of my newly attained time on my dream?”
Heartbeats-wise, you are making the Buffett trade-off every time you go to work. You are trading your heartbeats for wages.
I do the same. But I am not rich. Rich is as rich does.
Buffett is rich only in this sense: he sees his highest contribution in life to increase his net worth financially. Now that he is giving away his money to the Bill and Melinda Gates Foundation, he is probably correct, given his atheism. Melinda Gates is using most of the money to reduce the death rate of poverty-stricken children. She has adopted a cost-benefit strategy: the most lives saved for the money spent. This is sensible. I hope she and her advisors become ever-more efficient.
If Buffett sees his task in life as saving poor children, with his entrepreneurial skills as the means, then he is a rich man. His handcuffs are worn for the sake of those children. But if he is wears them to prove that he can beat the market, he has a problem. He is not rich. The richer he gets in dollars (or foreign currencies), the poorer he gets in heartbeats. He will lose.
The central issue of wealth is this: “What is my expected net value for my remaining heartbeats, and why?”
Not many people see things this way. This is why not many people will ever get rich.
You don’t know how much money you can accumulate. You do know how much time you can accumulate: none. It’s really quite simple.
We don’t accumulate time. We spend it.
You may not believe in Peak Oil. You had better believe in Peak Time.
People say they need to accumulate money for their old age. They see that Peak Time is behind them. Time is visibly running out. Some day, it may be drooling out. So, they keep on the golden handcuffs.
Was Mother Teresa poor or rich? Rich. She ran a huge operation from a little building in India, using a manual typewriter. I know this for a fact. I once received a letter from her. She did not trade her heartbeats for a salary. She wore no golden handcuffs.
PLANNING TO BE RICH
Is there anything you can do to get rich? For most people, the answer is to start a business, work 12 hours a day, six days a week, and then, when it goes bankrupt (statistically, it will), start another one.
That is stage one. Stage two is to sell it to someone who wants to make money rather than be rich. Your asking price should be enough passive income to finance the rest of your life.
Will you spend your life playing golf? Then I suggest starting a business related to golfing.
I am saying that the first step in getting rich is to identify precisely what you will do with your money after you quit working to accumulate money.
When I say “precisely,” I mean precisely enough to create a budget for it. This budget must contain two elements: income/outflow of money, and income/outflow of time.
How do you increase your inflow of time? Mostly by lifestyle. Adopt a lifestyle that extends life expectancy. Don’t count on doing this by more than 20%. Even that would be statistically abnormal.
Once you have this budget set, you must plan your life to achieve this level of accumulated wealth. When you reach it, take off the golden handcuffs. You will find this even more difficult than losing weight and keeping it off, which few people can do.
If you think this goal is unattainable, then try to find a trade-off between wages and time. It takes a self-conscious effort to cut back on wage-earning time in order to buy dream-attaining time.
When men reach middle age, they face a decision point: success vs. significance.
If a man defines success as being different from significance, this decision point is a big one. Mid-life crisis is associated with it.
If he regards success as significance, he may have to make a career change. Most men’s careers are not geared to significance.
The larger your allocation of time to significance, the better. The earlier you begin, the better. The justification for focusing on money rather than significance is that you need to accumulate a lot of money to finance your significance. When you reach your goal, turn in the golden handcuffs.