There is a well-know cartoonist, who is very intelligent, observant and outspoken. On many occasions, I have seen his writing, in which he talks about financial matters. He generally wraps up with a warning about the foolishness of taking financial advice from a cartoonist. I might suggest similar caution when listening to an embedded software engineer …
Actually, it is not my intention to give advice – not here anyway. I would like to share my concerns about assumptions that people make about how they might find themselves in a better financial position in the future. I am not making judgements, just challenging assumptions and suggesting caution.
So, how can you get rich. I can broadly think of 4 ways:
- The first option is to choose your parents wisely. If they are rich enough when you are born, maybe you will never need to worry about getting rich by your own efforts. This sounds like something that only applies to “upper class” people – multi-millionaires etc. However, among more financially modest people, inheritance can still be significant. I have many friends who, in middle age, suddenly find that they have a few hundred thousand dollars [or pounds] bequeathed to them, on the death of their parents and subsequent sale of a family home. I think that this is much less likely to occur in the future. People are living longer and the latter years of their lives are expensive. More people are simply going to spend what they have on their own wellbeing. Personally, I am OK with this, as I am sure that most people benefit far more from making their own way in life.
- Making money work for you always seems to be a good idea: invest and reap returns. This can be direct investment in businesses, but that can be very risky. Many more companies fail than succeed. Most investors are more cautious and spread the risk, confident that they will win a bit more than they lose, because there is always growth in the global market. But is that a safe assumption? I think not. For growth to continue, the market for products must be growing. In the long term this requires a growing population and Earth is already overcrowded enough. Add to this the finite nature of almost all natural resources and it is clear that growth cannot be sustained. I might even suggest that it should be actively discouraged.
- In many countries, owning your own home is seen as a Good Thing. This is certainly the case in the US and UK. The perception is that a house is a good solid thing, which will continue to have value. This is fine, except that many people think of their houses as investments. They assume that house prices will steadily increase over time. Although an increase in value may persist, anything significantly greater than inflation is unsustainable. It is always assumed that people want to “climb the housing ladder” – start off with a small place and gradually get properties that are bigger/nicer. If your income steadily increases, that is not an unreasonable expectation, but it is often perceived that just owning property is a contributor to this advancement. In reality, it might be, but to really progress in the housing market, you need a combination of luck and good judgement. I have met many people in negative equity [i.e. their house is worth less than the amount of mortgage they owe], so it is clear that it is not guaranteed. The only way to “work” the housing market is to get in and out at the right times, as prices are cyclic. For example, many years ago, I bought a house for £89K. As the market went up, a few years later it was worth more than £200K. I eventually sold it for £90K. This sounds like bad news, but it was not. If I had sold at the top of the market, my next, bigger house, would have cost me something like £300K – £100K more. As it was, that house cost me £115K – only £25K more mortgage, which I could afford. If I could have found a way [and had the confidence] to exit the housing market at the top, I could later have bought my bigger house with no mortgage at all.
- Working for a living has much to commend it. Luck is involved, but many people find that, if they focus and work hard, they can achieve career [and hence financial] progression. For some, that might be spectacular, but for the rest of us it requires some patience. There is always the balance between doing what you like and doing what pays best; if the two coincide, that is a great bonus. Modern businesses foster career progression better than ever. In the past, it was common for staff members – say, engineers – to seek progress by becoming managers. For many, this was not a great prospect, as it was not playing to their strengths. Modern companies often have much flatter structures, resulting in less managerial opportunities, but tend to reward talent and experience. An engineer, for example, can become steadily more senior [i.e. well paid] engineers, doing what they love doing and not encumbered with annoying staff and administration. I strongly believe that this approach is the way forward.
Of course, there is also crime, but this is really just an illegal variant of (4), or there is luck. Maybe gambling can pay off, but that will only work for a lucky few – the only real winners are those who run gambling businesses, like casinos, so we are back at (4).
Perhaps, after all, I have given advice on getting rich: be honest and work hard.