The difference between rich and poor
🔸 Plus: The new King Charles bank notes are here 🔸 UK high street chains are increasingly owned by Americans 🔸 One man’s FIRE plan is derailed by house repairs 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,352.96 ⬆️ 12.86%
FTSE 100: 8,285.34 ⬆️ 7.30%
Bitcoin: $71,097.80 ⬆️ 60.84%
GBP to USD: $1.2787 ⬆️ 0.47%
GBP to EUR: €1.1745 ⬆️ 0.013%
Wealth comes from assets not wages
I didn’t think much about money in my 20s because I didn’t have any. I graduated from Lancaster University right into a recession, and the only jobs I could get were part-time and minimum wage: I packed boxes at a factory in the mornings and worked behind the bar of a local nightclub called The Sugarhouse in the evening. I didn’t make enough money to pay the rent and at one point I ended up on benefits.
There was a particularly grim period of several months where I saved money on food by taking a long bath at lunchtime — the pressure of the water on my stomach stopped me from feeling hungry until it was time for dinner.
I realised that staying in a small town with no jobs wasn’t sustainable, so I moved.
Time passed
I got a proper full-time job. Then I moved to a better-paying job. And then I moved again, to a third job with a salary and a retirement plan.
I was still living paycheck to paycheck so I wasn’t interested in the retirement plan. I needed every penny. I couldn’t afford to have my wages “reduced” by a voluntary savings contribution.
Eventually, one of my colleagues told me to go to a seminar run by the HR department, which explained how the plan worked. “It’s free money,” she said.
At this seminar, I asked how someone who knew nothing about investing (i.e. me) was supposed to pick the right stocks or mutual funds. The host suggested starting with an S&P 500 exchange-traded fund (ETF), which would guarantee you the average performance of the market as a whole. (An S&P 500 ETF buys stock in all of the 500 companies listed in the S&P index, and thus tracks its performance.)
I gave myself a pay rise
I joined the plan. Six percent of my salary went into it, matched by 3% from my employer — which meant that I was saving the equivalent of 9%, and not paying tax on it.
Every quarter, the company running the plan — Fidelity — would send me a statement in the mail, showing how much my savings had gained or lost. For the first few months these statements were not very exciting. My savings were so small they didn’t change much.
But after about a year I opened the envelope and got a shock: The S&P had gone up and my savings had gained £500, all on their own. At the time that was a week’s wages for me.
When the next statement came, my savings had gained another £500.
I was now working 52 weeks of the year but being paid for 54. I had somehow awarded myself a pay rise.
It was as if I was in a darkened room and someone suddenly pulled back the curtains to let in the light. Clearly, as my savings grew, and my investments did their thing, this scheme was going to generate a lot of money.
It was my first “Aha!” money moment:
I was working for money. But my money was now working for me!
Why had no one explained this to me before?!
Fast-forward to 2013. That year, a French Marxist at the London School of Economics published an almost unreadably dense book titled “Capital”, which sought to answer a very simple question: Why are the rich, rich?
Thomas Piketty examined tax records for several major economies going back hundreds of years. In each society, he found, the central division between the rich and the rest of us is that the rich get their wealth from assets — stocks, bonds and property — whereas the rest of us get our wealth from our wages. This split between the people who have assets and the people who depend on wages is the driving force of inequality.
This all sounds blindingly obvious now. But Piketty demonstrated it with actual statistics which, surprisingly, no one had bothered to do before.
Assets > wages
Nonetheless, this is a fundamental insight:
Waiting for your boss to pay you enough money to become rich isn’t a very good way to become rich.
If you need to work for money you ain’t rich, by Piketty’s definition.
But if you own assets they will work for you. When stocks go up in value, you get richer. When bonds make their interest payments, you get richer. When you own a house, you get richer merely by living in it and letting its value rise on the market. Or you could rent it to someone else.
Now, you can’t magically wish for a house or an investment portfolio to fall on your head and move you into the “rich” category. Most of us need to work to pay the bills.
But you can begin to behave the way rich people do: By saving and investing in assets — stocks, bonds, property — that will, eventually, work for you. It may take some time to get there, certainly.
But not doing this will guarantee that you stay poor.
The threshold of financial security
After I opened those Fidelity statements in my 20s I became pretty enthusiastic about my savings. I upped my contribution to 15% of each month’s pay.
Years and years later, that led to another revelation. I checked my statement and realised that the monthly gains on my investments were now greater than my monthly wages. (They go up and down, of course, so there were also months where I lost more than a month’s wages — that took a bit of getting used to!)
I was nowhere near “Lamborghini rich”. But I had crossed a threshold: I was no longer dependent on my employer or the government or anyone else. My assets were earning more than I was.
Financial security is liberating. It gives you freedom and independence and choices.
That’s the goal we’re trying to get you to at Moneyin2.
The Moneyin2 Guide to Wealth can help: It contains all the basic common-sense financial advice you’ll need to get on the path to financial independence.
And for dessert …
See the new King Charles bank notes here. They went into circulation on 5 June.
Property prices in Paris are falling. But only in some areas, away from the centre.
The S&P 500 has been on a tear: “Through the end of May, the S&P 500 has experienced 24 new all-time highs this year alone. Volatility has been relatively low for some time now. We haven’t had a 2% down day on the S&P 500 in well over 300 trading days,” according to Ben Carlson.
Britain’s high street chains are increasingly owned by US private equity firms. Bloomberg thinks this is bad news for Brits.
Tech mogul Mike Lynch has been acquitted of fraud charges in the US relating to the $11 billion sale of Autonomy to HP. He is also a founder of Darktrace.
One man’s plan to reach “financial independence and retire early” is derailed by house repairs. FIRE in theory is different to FIRE in reality.
Eight ether ETFs have been filed. Bitwise, Fidelity, Franklin Templeton, Invesco/Galaxy, iShares, Grayscale, 21 Shares, and VanEck have all applied to US authorities to offer funds that track the Ethereum token, according to Axios.
The European Central Bank has begun cutting interest rates. This will make money cheaper to borrow and easier to get.
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Photo: Drew Saurus via Unsplash.
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