Working On Me

Shortly after posting my eight ways of getting rich, I was challenged on whether I had failed to include employment – working for someone else – because I didn't believe it was a way to get rich.>

On the contrary, it is an excellent way to get rich (although only a small minority of employees do ever accumulate significant wealth), and I did include it. I see it as part of the fourth way:

Entertain or exploit some other personal skill or talent

As an employee, you use your personal skill or talent on behalf of another person or organisation, and that for me defines employment – and for that matter, contracting and consultancy too.

Why, though, do so few employees become wealthy compared with – say – entrepreneurs? It may have a little to do with earning levels, although many employees outearn their entrepreneurial peers.

I think, though, it is more to do with perceived security. The employee generally feels secure; after all, they are not taking the risks the entrepreneur does. If they turn up every day and do a good job, they feel they'll be pretty safe in terms of their future income stream. Few entrepreneurs will take this view. The ones who last know all about creating a financial cushion, about making provision for the potentially harder times ahead. They tend to better control and plan their spending because they have more at stake, and in the long term, that's where the wealth takes root and grows.

But there's no reason why an employee could not adopt similar habits, and from even modest employment build substantial wealth.

I recently blogged about the eigth ways of getting rich. The last two of those ways are a little different from the others. They are magnifiers.

When you invest money you have earned you make it work for you. Quite independent of your efforts to earn money, it beavers away making you more. It is as though suddenly you have acquired staff.

And when you control how much of your money you spend and channel additional money instead into investment, there's a further boost to your efforts, another staff member stepping up and making you richer.

There is often a belief that being careful about spending is a bad thing; we think of the miser, Scrooge, and the unpopular colleague who never buys a drink when it's his turn. But these are extreme cases and controlling spending and being fundamentally ungenerous are two very differenet things.

Spending is identified by the experts as the top factor in determining your lasting wealth. It seems that you annual income does little to influence your long term wealth, but how you spend your income, whatever its size, is a good predictor of wealth.

I have a relative who illustrates this perfectly. She arrrived in the UK in the mid 1960s with her new husband. Between them, they owned £5. Although well-educated by the standards of the country of their birth, they could only find menial work in the UK, never earning as much as the equivalent of minimum wage. My relative, now widowed and a pensioner, owns property and other investments worth well over a million.

Last week I wrote about putting yourself at the front of the money line. Before even a year of applying this technique has passed, you will have accumulated a whole extra month’s earnings. Keep it up, and compound interest will mean before long you will have a year’s earnings on deposit, then ten years’ earnings. And if you can manage after a while to put away 12% or 15% through better financial discipline, then you will get there even faster.

Another boost comes when you get a pay rise and decide that half of it will go straight to your savings. After a few rises, you might find that 25% of your earnings go straight into your special account. A few simple sums will show you what a huge impact this can have on your future financial security.

Most people receive their income these days on a monthly basis, but it seems that as soon as the money arrives, everyone is lining up to take a chunk of it. At the front of the queue is the cost of your housing – the mortgage repayment or the rent. Then there are the utility bills, groceries and the general living expenses, and people tend to think of what is left at the end as ‘their’ money. In other words, you stand at the back of the money line and have to be grateful for whatever is left, if anything.

But the money was earned by you, was paid to you. Why should you have the last call on it? What I'm suggesting is that you move yourself to the front of the money line. The first call on your money is the 10% of your income you set aside for yourself. Everything else has to take its turn, because that 10% is yours. Set up an automatic transfer with your bank so that this money is transferred to an interest-bearing account as soon as your monthly earnings arrive at the bank. Then, everyone else can have their chunk afterwards.

Of course, you still need to live within your means, so effectively you are now surviving on only 90% of your income. But you should be able to do it quite easily. In the past, you have been content to just wait your turn and take what is left. If there is an expense that you have to think about, then too often you will have decided there is enough money and just incurred it,. The result has been that you have probably never been able to accumulate significant savings. But by putting yourself first in the money line, you limit your ability to spend on unnecessary (or even frivolous) immediate wants.