The people who make $5 million a year and spend it all are not the rich. Because at the end of the year they still have nothing. So, who are these rich people and why?
Older people who have saved and invested have more than younger people. And people who have saved and invested have more than people who have spent it all. The rule of 72 teaches us how long money takes to double when the rate of return is divided into 72. If you earn 2%, it will take 36 years to double. Earning 4% will take 18 years, 8% will take 9 years and 10% will take 7.2 years.
Old people have more ‘doubles’ than young people, so they have more. And the last double is the big one that counts the most. To illustrate: 100, 200, 400, 800, 1600, 3200, 6400, 12800 are doubles. So at age 25, by investing your first $100,000 at 7.2%, you will have $12.8 million to give to your grandchildren.
The Baby Boomer generation has more not just because they are older but also because they were DINKs. DINK means double income, no kids. And during their time as DINKs, baby boomers were able to 1) save and invest more when they were young and 2) be the first generation to double household income quickly by having both people work. And boomers were lucky too. As interest rates dropped, baby boomer’s got to refinance at lower rates, which improved cash flow. Boomers could also take advantage of the added benefit of the rising value of $1,000 a month. $1,000 a month is 12% if divided by $100,000. And $1,000 a month is 3% if divided by $400,000. So $1,000 a month back in 1982 from a real estate rental selling for 12% when the bank is paying 12% makes sense at $100,000. The same place renting for $1,000 a month today (adjusted for inflation) that is selling for $400,000 makes sense today too if you can get the bank to pay you 3%.
What would happen if banks were paying 10%? What would the 3% rental be worth? Baby boomers that saved and invested are wealthy because they are older, worked, benefited from lower rates, and could actually spend more than they made due to refinancing as rates dropped. Boomers control most of America’s $114 Trillion in wealth, which has grown from $71 trillion at the peak of 2007 (pre financial crisis). At some point in time boomer’s will not get any older, work, or benefit from lower rates. The next generation can at least benefit from the first two.
Save and invest over time as much as you can while working so that your money can work for you when you are no longer able to or want to.