By Dr. Jim Dahle, WCI Founder
This post is not about how to GET rich. That has been covered ad nauseam elsewhere on this blog. In brief, there are four steps involved:
- Make a lot of money.
- Don't spend a lot of money.
- Invest the difference in some reasonable way for 5-30 years.
- Make sure you don't lose your wealth to liability, death, disability, and speculation.
Pretty simple, actually. Lots of people can teach you how to get rich. What you will not find, however, is the same massive number of people out there teaching you how to BE rich. There are a few resources, but they're not all that well-known or even really that well-developed. While I don't know everything about getting rich, I certainly feel like I'm an expert on the subject, particularly when it comes to the financial lives of high-income professionals. I do not feel the same expertise when it comes to teaching people how to be rich.
But that doesn't mean I can't invite you along on my own journey. I have learned a few things—and I'll share most of those today in this post—but there is still a lot out there about being rich that I don't even know what I don't know yet.
Are You Rich?
A surprising number of people don't know what rich looks like. Part of it is that despite wanting to be rich, most people (including the wealthy) still want to think of themselves as “middle class.” I've even had people making $500,000-$1 million a year trying to convince me they are “middle class” because they live in San Francisco or Manhattan. Don't get me wrong, I'm all for adjusting for cost of living, but it's ridiculous to pretend the middle class somehow encompasses 99%+ of a society. In reality, the true measure of wealth is net worth, not income. But even there, people fail to recognize that they (or even someone else) are wealthy. Let me give you a few examples:
This post showed up on the WCI Forum not so long ago:
“I'm 40 and have about $5.2 million in stocks (index funds) and own about $2 million in properties (not including my home). I spend about $120,000 per year. Have I won the game? For some reason, I still feel a need to compete with my peers when it comes to earning and working hard to make more money. Anyone else feel like that?”
Hmmmm . . . $7.2 million plus a home at age 40 and only $120,000 in expenses. Yup, you win. You're officially wealthy.
There was a thread on the Bogleheads forum where a deca-millionaire was advised by multiple people that he didn't have enough money to stop working yet. Really? When you have enough money that you can spend $300,000-$400,000 indexed to inflation indefinitely, you're wealthy. Now, you might want to spend a little more than that (I mean, you can spend $250,000 a year on NetJets alone), but it's certainly not a must. You could cut back 50% to $200,000 and still live a very fun life.
Remember these are folks who don't need to make payments on mortgages, student loans, and car loans. Their tax bills will be much lower (and no payroll taxes). They don't have to save for retirement anymore either. That $200,000 a year goes a long, long way in that situation. You could have a $500 dinner twice a week and it would only use up ¼ of your budget. I don't even know of a restaurant in my state where the two of us could ring up a $500 bill on a single meal. (Probably helps that we don't drink wine.)
There was another Bogleheads forum thread I saw where a single retiree's Social Security and pension covered all of her living expenses—plus she had $1 million sitting around. She decided she wanted to give $200,000 of it away to her family now. Forum members thought she was being taken advantage of by her family or that she could run out of money due to serious healthcare expenses. You've got to try really hard to spend $800,000 on healthcare when you have real health insurance. That's an awful lot of deductibles and c0-pays. Personally, I'm worried that we're never going to spend our $150,000 HSA on healthcare, and people are worried this lady is going to need more than $800,000? The goal is to live a good life, not to be the richest person in the graveyard.
If you don't feel rich (or don't think a deca-millionaire is rich), I would suggest reading this post. It will likely help.
15 Tips for Being Rich
The rest of this post is for those of you who are rich and know it. We're going to talk about how to BE rich. Here are a few tips. Some are financial and some are philosophical, but I hope they're all useful. If you want to read the words of some who might know a lot more than me on this subject, I would suggest the following four books (thanks for buying through the affiliate links below, as they help support WCI):
- From Strength to Strength: Finding Success, Happiness, and Deep Purpose in the Second Half of Life
- What Happens When You Get What You Want?: Success and the Challenge of Choice (reviewed here)
- Die with Zero: Getting All You Can From Your Money and Your Life
- Four Thousand Weeks: Time Management for Mortals
#1 Remember Your Mortality
Money is no longer the limiting factor in your life; time is. Act that way. Stop driving across town to save 10 cents per gallon on gasoline. You only have something like 4,000 weeks in your life, and if you're like me, you've already burned through 2,500 of them. Don't waste the rest doing stuff you don't want to do. There are people who you can pay to buy your groceries, do your laundry, shovel your driveway, mow your lawn, wash your cars, manage your investments, do your charting, file your taxes, and run your business. I assure you they will gladly do it if you pay them enough money. You may have to do a little supervision (more with some of these activities than others), but you can still reduce your time spent on the activity. You are trading money (of which you now essentially have an excess) for time (of which you have a very finite amount). Would you trade places with Warren Buffett? I didn't think so. But I bet he'd trade places with you.
#2 Stop Optimizing and Start Satisficing Your Finances
There are two kinds of people in life: optimizers and satisficers. Optimizers try to get the most they can out of something. They do their Backdoor Roth IRAs on January 3 every year. Satisficers go for “good enough.” A satisficer does their Backdoor Roth IRA when they get around to it. Or maybe, if they've got $5 million already, they don't even bother. Guess what? They're still rich. At a certain point, another million isn't going to change how you live your life. Do you think people with $13 million really live differently from people with $12 million? Yet you're stressing over a few hundred dollars. Knock it off.
It's a funny thing producing content for The White Coat Investor. The longer and the better I do it, the more I have and the less need I have to do all of the things that I'm telling you to do on this blog. Quite a catch-22 there. What kind of a readership would I have if I just told you to quit worrying about all this stuff and just live your life? Yet I hope you each get to the point where that's the best advice I can give you.
On multiple occasions, I had the opportunity to interact with a successful retired doctor. My recollection is this doctor in his 70s had a net worth between $5 million-$10 million. Plenty of money. He didn't even spend that much. From his comments, he clearly understood the most important principles of investing. But once or twice a month, he was considering making significant changes to his portfolio. Every time I wanted to scream at him, “What does your written plan say you should do? Do that.” He never seemed to have one. He was a good earner and saver so he's doing fine anyway, but I just imagine how much time, angst, and hassle he could save himself if he would just stick to one reasonable plan.
You are now wealthy. You do not need 10 investing plans; you just need one. And you don't need to be constantly tinkering with it. You've earned the right to no longer have to do that. You no longer have to borrow money to leverage your investments to try to eke out a little more return. You can just pay off your debts and simplify your life.
More information here:
What Real Wealth Looks Like
#3 Learn to Define Yourself Outside of Your Work
The next time you are at a co*cktail party (or a similar social engagement) and meet someone new and they ask you “What do you do?” consider answering with something that has nothing to do with paid work.
“I am the father of four: one adult, two teenagers, and a child.”
“I coach a youth hockey team and enjoy woodworking in my free time.”
“I'm a Christian and spend many of my best hours trying to figure out how to live more like Jesus of Nazareth.”
“I love to travel. Right now I'm working on visiting 50 countries before I turn 50.”
“I'm a Muslim, a wife, a mother, and an American, in that order.”
What kind of reaction will you get from others? What kind of reaction will you get from your own psyche? Try it. You don't have to tie your identity to paid work.
Speaking of work, you're going to need to figure out what to do with it now that you're rich. You might work more, you might work less, and you might not work at all. You might work for free or demand more for your time now that you don't need the money. However, once you no longer need the money, you are likely to work differently and feel differently about your work. There is this idea out there that once someone is financially independent, they should quit doing paid work and go do volunteer work.
For example, one of the causes that Katie and I feel very passionately about is preventing hunger in our local area and supporting the food bank. I could quit doctoring and doing this White Coat Investor thing and go volunteer there for four hours every week, stocking shelves and filling orders for the needy. I could also spend those four hours writing about good money management for high earners, encouraging them to support good charities, and sending the food bank a $10,000 check every year. Which one do you think would further the mission of the food bank the most? Yeah, I came to the same conclusion. So, somebody else is stocking the shelves there with the food that my checks (and yours) purchased.
#4 Do Some Estate Planning
There are three purposes of estate planning:
- Ensure your money, things, and minor children go where you want when you die.
- Minimize the hassle (such as probate) to those left behind.
- Minimize estate and income taxes due at your death.
Being rich means taking care of this stuff. It will also help you remember #1 above!
#5 Consider Accredited Investments
“Accredited investor” has a very specific legal definition:
- Income of $200,000+ in each of the prior two years ($300,000+ married) or
- Investable assets of $1 million+
I would encourage you to forget that definition and instead use this one:
Someone who can afford to lose their entire investment without it affecting their financial life in a significant way and who can evaluate the merits of an investment without the assistance of an accountant, attorney, and/or a financial advisor.
While investments available only to accredited investors are hardly required, there are some really cool investment opportunities out there that just are not available to people who actually need their money. Mine are almost as boring as the rest of my portfolio, but high returns, low correlation with my stock/bond/REIT portfolio, solid tax advantages, and being paid for illiquidity are awfully nice.
#6 Simplify Your Financial Life
Of course, simplicity is worth a lot, and it may be the very best argument against making your portfolio more complex. How much risk and complexity do you need to reach your goals when you're already rich? Not very much. Thoreau said, “Simplify, simplify, simplify.” Can you cancel half of your credit cards? Close half of your bank accounts? Drop 3-4 asset classes from your portfolio? Combine some retirement accounts? Put your bills on automatic payment?
As a general rule, our financial lives become more complex as we gain wealth. Fight against that trend as best you can.
More information here:
The Majesty of Simplicity
#7 Spend Some Time and Money on Your Health
Some say there are three limited resources in life:
- Money
- Time
- Health
You really want to find the proper balance between all three. If you're wealthy, you can kind of forget about the first one. Having just one of these things is a terrible life. In fact, having two of them isn't all that great either. When you have an abundance of one of them, maybe use it to increase the amount of the other two that you have. Eat well, exercise, and get some preventive care. Yes, you might live longer, but more importantly, your remaining time will be spent in better health. As most docs will tell you, minimizing morbidity matters at least as much as minimizing mortality.
#8 Give Some Extra Thought to Asset Protection
Most doctors are far too paranoid about losing “everything” to an above policy limits judgment in a malpractice case, despite the incredibly low odds of that happening. Once doctors realize that it is nearly impossible to lose personal assets in a lawsuit (perhaps something like 1 in 10,000 years of practice), they buy plenty of liability insurance; do some basic, cheap, effective asset protection strategies to protect the majority of their assets; and move on with life.
However, once you're rich it may be worth doing a little more when it comes to asset protection. At this point, protecting the principal matters more than growing it, so you might be willing to give up some return in exchange for an even lower chance of losing the asset. You might be willing to pay to establish a Domestic Asset Protection Trust, do some equity-stripping from an expensive otherwise unprotected residence, or even (gasp!) buy some whole life insurance even though you're only expecting to make 3%-4% on it after owning it for decades.
#9 Cancel Some of Your Insurance
Speaking of insurance, rich people don't need the same kinds of insurance as people who aren't rich. Term life insurance, disability insurance, long-term care insurance, and collision/comprehensive coverage on vehicles should all be looked at carefully. Do you really still need these? What deductibles can you raise to lower your premiums? Don't forget about the hassle of dealing with an insurance company. When you're self-insuring, you don't have to do that.
#10 Go Travel Until You're Sick of It
One of the most common dreams of people pining for retirement is to travel the world. If you're rich, go travel. I enjoy traveling, but I have had the opportunity to do something that I wish everyone could do. I traveled so much that I wanted nothing more than to be at home. I missed reading to, playing with, and even working with my kids. I missed my hobbies and even my jobs. I missed my comfortable bed, fancy shower, hot tub, big screen TV, and even driving my own car. If you've got the money and you think you'd like to spend the rest of your life traveling, I'd encourage you to go out there and do a bunch of it. While there are certainly some people who love the nomadic life, there is a limit for most of you where it stops being super fun. Go find out where that limit is for you.
More information here:
WCI Travel Club: Meaningful Trips to Half Dome, Thailand, and Alaska
#11 Learn to Give Better
They say that giving anonymously is charity, giving with recognition is philanthropy, and giving where you find out what the recognition is beforehand is a business deal. Giving well is not as easy as it looks. Aristotle said:
“To give away money is an easy matter and in any man’s power. But to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter.”
As a general rule, it is better to give with warm hands (during your life) than with cold hands (in your will). You get to see the good your money is doing, and you can adjust your strategy as you go. This is true of both giving to charity and to heirs. There are five money activities to master:
- Earning
- Saving
- Investing
- Spending
- Giving
You are surely exceptionally talented at the first three. But how good are you at the last two? Probably not as good as you could be. Why not work on it a bit?
#12 Learn to Enjoy Spending Money
You knew this one was coming, didn't you? Many wealthy people, like me, suck at spending money. Shopping is not among our favorite activities. We'd rather go without things than go shopping for them. Shopping for me is like a hunting trip, and we're talking about hunting for food, not a trophy. I want to go find the beast as quickly as I can, kill it, and drag it home. Why would I want to go to two stores, much less three? Even better if I could buy it on Amazon and have it delivered to the house. And would it be possible for the Amazon driver to unwrap it and put it where it goes in the garage? Wishful thinking.
Many retirees have this vague sense that they need to be careful with their money for 1) to make sure they don't run out and 2) to leave as much to their kids as possible. They never consider the fact that only 1 out of 7 wealthy retirees spends any principal at all and that most die with far more money than they retired with. Even the 4% rule studies show that after 30 years of withdrawing money, people, on average, still have 2.7X more than what they started with in retirement. Plus, their kids are doing even better than they were thanks to the natural progress society is making, the head start the kids got, and your great teaching and example.
What are the kids going to do with the money when they're even wealthier than you are now? You should fly first class or your heirs will. Your kids aren't going to use that money to keep the wolf from the door. They're going to use it on a Mediterranean cruise. Why don't you go on the Mediterranean cruise, or, better yet, take the kids (and maybe their families) with you on the cruise?
There are things you can spend money on that will make your life and the lives of those around you better. If you're a natural saver, it's going to take some work to figure out what they are, to buy them, and to put them into service.
More information here:
How Much This FI Physician Family Actually Spends in a Year
Justifying and Cash-Flowing a ‘Selective Extravagance’
#13 Learn Where Lasting Happiness Comes From
There are a lot of happiness seekers out there. Many of them are trying to buy happiness—a nicer car, fancy clothes, and that new house. When they realize that those things don't bring happiness, they start looking elsewhere. They read that experiences (especially experiences shared with those you care about) are far more likely to bring you joy than stuff. They try that for a while, and they're still not as happy as they thought they would be. I'm not surprised. Some of the happiest moments of my life were when I was pretty darn close to broke and really wasn't having any “fun experiences” with my loved ones.
Ironically, the only way to really make yourself happy is to quit thinking about yourself at all. Serving and helping other people is the key to lasting happiness. Build meaningful, deep relationships. The happiness literature is quite clear on this subject, but most of us eventually learn it from our own experiences.
#14 Build Faith
Arthur Brooks, author of Strength to Strength, found that most people become more religious and spiritual in the third quarter of life. Perhaps their mid-life crisis causes them to start pondering the big questions:
- Where did we come from?
- Why are we here?
- Why would a loving higher power allow so much suffering?
- What happens when we die?
These are not science questions. A hypothesis can't be formed and tested. They're religious and spiritual questions. Spend some time meditating, praying, and reading religious and philosophical works just like you spend time working out to maintain health. It is likely to lead to a happier, more fulfilling life. It can be particularly hard for wealthy, successful people to take time away from what made them wealthy and successful and put it into what will make them happy in the next portion of their lives. Yet what got you here won't take you there. It's time to figure out what will.
#15 Teach and Mentor
Professional decline begins far earlier than most of us think. While we know that athletes are pretty much washed up by their late 30s, we assume that isn't true for the rest of us. It turns out your decline begins well before your earnings peak. Most great works of art, scientific insights, best-selling books, athletic accomplishments, and other “successes” do not occur to people in their 50s and 60s. But you know what people in the second half of their careers excel at? Teaching and mentoring others. Their minds may not be as quick, but they possess far more wisdom and experience. Find ways to transition your career in that direction as you age, and you will likely find that success and fulfillment last a lot longer that way.
While it beats the alternative, being rich is not easy. Plenty of people can show you how to get rich, but there are not so many teachers when it comes to being rich. Like everything else in life, being good at being rich is going to take some time, learning, and effort.
What do you think? What is your best tip for how to BE rich, whether from you or someone you respect? Comment below!
