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off your own professional website it's a new year so i want to start this video off on a
positive note you will never be rich i know i have said this before but it's not something
that people hear enough statistically based on the demographics of people who watch my videos
most of you are from advanced countries so you will be doing well by global standards but you
still won't be rich the one percent is exactly that one percent of the population even if you
do everything right even if you save regularly even if you invest wisely even if you binge
watch finance channels and even if you were lucky enough to be born in a country with some degree
of social mobility you probably have a 1 in 10 chance of making it at best so why aren't we
taught this more often well because people don't like to hear it it's much more fun to binge watch
channels or read books that promise that if you do this you will be rich if you learn to manage real
estate you will be rich if you turn credit cards you will be rich if you live below your means
you will be rich it's easy to see the appeal but how many works is where dreams come to die
so to kick off the new year i want to look at a few reasons why you will never be truly wealthy
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the first thing i should probably do after crushing your dreams is to define what rich
actually means the millionaire next door by thomas stanley and william denko is considered by many to
be one of the best books on personal finance ever written the authors surveyed american millionaires
and found that most successful people fall into two broad categories under accumulators of wealth
and prodigious accumulators of wealth they made this distinction based on a simple formula which
multiplied their annual earnings by their age by 10 percent and compared that number to their net
worth if a 50 year old was earning a hundred thousand dollars a year then that income could
be run through this formula to give us an expected net worth of five hundred thousand dollars if the
individual in question had a net worth greater than this amount then they were said to be a
prodigious accumulator of wealth if they had a net worth below this amount then the author labeled
them under accumulators of wealth it's a simple premise but there were a few obvious problems a
22 year old graduate going into fifty thousand dollars per year shouldn't expect to have a net
worth of a hundred and ten thousand dollars the authors did point this shortcoming out themselves
and they said this distinction was more a tool to be used to measure the wealth accumulation
success of people in their late careers or early retirements but that's not the biggest issue
the biggest issue is that this system doesn't truly reflect what financial success looks like
the message of the millionaire next door is that most millionaires look like regular people
who might be living next door to you in this book a millionaire was defined as a person that has a
million dollars worth of assets outside of their primary residence the authors argue that most
millionaires got there by being good at saving money rather than being good at earning money
the majority of millionaires lived in blue collar suburbs drove regular cars and avoided spending
money on vanity items like designer clothes and fast cars it's easy to see why this book
is popular the idea that a regular person with a regular job can be a millionaire is by its nature
broadly appealing to most people and before i go any further i want to stress that i love this book
it can teach you some really important lessons about financial traps that too many people fall
into but i'm sorry to say it again but you will still never be rich naseem talib a finance phd
and former hedge fund manager pointed out that the book had major issues with selection bias
if you survey a group of people then most people are going to live in blue collar suburbs because
most people live in blue collar suburbs if you survey a group of people then the most popular car
is going to be the ford f-150 because the ford f-150 is the most popular car in talib's opinion
the way that stanley and danko conducted their survey on american millionaires was backwards
what would have been more insightful would be a survey of the suburbs that have the
most millionaires the cars that have the highest portion of millionaire ownership and the careers
that produce the most millionaires there are more millionaire plumbers than millionaire surgeons but
that's simply because there are more plumbers if you want to be a millionaire you are much better
off pursuing a career as a surgeon the book's message that anybody can get rich if they are
financially disciplined just simply isn't true and that has a lot to do with the way that you
define rich a one million dollar net worth outside of your primary residence is certainly respectable
it was even more respectable back in 1996 when this book was first released
but critics argue that this doesn't make someone rich if you need to survive off
the passive income from that money then you would need to apply the four percent rule
the four percent rule is based off the trinity study which back-tested an investment portfolio
to see how much you could draw from it every year without the value of that portfolio going to zero
the study concluded that if your portfolio was well invested then four percent was
the upper limit of what you could take out without slowly digging into the principle
my good friend richard over at the plain bagel did a much more detailed video on this last month
so if you're interested in the math behind this four percent rule then go and check that video out
anyway would you consider an income of forty thousand dollars a year rich i know i wouldn't
assuming you had fully paid off your house you could probably make yourself comfortable outside
a very high cost of living areas but you are going to have to make certain sacrifices almost anywhere
you live here in the states yes most people can move to low cost of living areas and then
scrimp and save to put a million dollars away for retirement but calling the millionaires next door
is a bit misleading even calling them financially secure might be a bit of a push nasim talib again
pointed out that this book was written in 1996 and was based on a survey done throughout the 1990s
the millionaires that got there through thrift as opposed to high incomes were heavily assisted by
markets that had been favorable to them for two decades prior had the survey been conducted at
the end of prolonged downturns like 1935 or 1982 it is unlikely that the thrifty millionaires would
be as well represented prolonged downturns push the balance of earning versus savings
in favor of the high earners average workers are more likely to be laid off during these periods
and high income earners will be able to take advantage of cheap asset prices the inconvenient
truth is that if you want to get rich you need a high income why don't you hear this more often
because it doesn't sell well a personal finance channel here on youtube would immediately lose 90
of their audience if they said that this only works if you are making six figures
the millionaire in palo alto is not as intriguing as the millionaire next door and nobody wants to
buy an online course on building wealth through a 40-year career in medicine the dream that anybody
can become rich through thrift is just that a dream the millionaire next door is still a great
book because it can teach you a lot about some very common financial traps that people fall into
but you are best to think of it as the financially comfortable couple next door although i get i am
a youtuber now so i understand the importance of a catchy title alright what if you are lucky
enough to be in a high income career or run a successful business surely you will have your
personal finances in check then right wrong most high income earners are unfortunately
just as financially unstable as their blue-collar peers there are a few reasons for this the first
is lifestyle inflation as you age and progress throughout your career you should hopefully make
more money as you gain more experience and take on more senior roles it doesn't always work out like
that but for most people this is the career game plan a shared house and a piece of car
is great when you are a broke college student but once you have a family and a job you are going to
want a house all on your own with a car that can reliably get you to work and your kids to school
if you are lucky enough to get promoted you are going to need nice suits a bigger house
and an imported car to park in your reserve spot at work your partner might choose to stay home
with the kids so you can focus on your careers demanding schedule they do it because they know
that they will go on an overseas vacation with you every year to catch up on lost quality time
many personal finance personalities make it sound like succumbing to lifestyle inflation
is a personal shortcoming but many of a lot of these expenses are far from optional
it's getting better these days but if you want to take your career seriously as an investment banker
you are going to need a very nice wardrobe you are going to need to live in a very high
cost of living city and you are going to need a stay-at-home partner or hired help to take care
of domestic duties while you are working 100 hour weeks investment banking is where i have personal
experience but the same financial sacrifices need to be made for a career in big tech medicine law
or to start your own business there is also the personal sacrifice to consider with these careers
nobody goes into investment banking or big tech because they love corporate consolidation
or stealing people's data people go into these competitive and demanding careers because they
pay well these people want a well-paying job so that they can enjoy the finer things in life
so are we all just destined to be on the precipice of financial ruin for our entire lives
well yeah sorta the dream you have been sold of reaching financial independence and then
never having to worry about money again for the rest of your life is never going to come
through the richest among us spend more time worrying about money than the poorest
so this begs the question does making more money actually make you happier fortunately you can
find out in my video where i look into two major studies which have actually applied the scientific
method to the old adage that money can buy you happiness so if for some reason you actually
enjoy these videos dedicated to shooting on your dreams make sure you go and check that one out
thanks again to squarespace for making it possible for everybody to keep on learning how money works