How to Get Rich Long

Good luck on getting rich quick. I gave up on that dream long ago. But getting rich (not super duper rich, but relatively compared to the rest of the U.S. population rich) is within reach for everyone. It really comes down to making more than you spend, spending less than you earn, earnings as much as possible when you’re as young as possible and investing that as quickly as possible into index funds.

Yes, it’s that simple.

If I could do it all over again, I’d get a job at the youngest age I legally could and start contributing as much as I could to a ROTH IRA each year. The best time to contribute to a ROTH IRA is when you’re making next to nothing. Why? ROTH IRAs are taxed up front, meaning if you’re making $10k a year you are not paying a whole lot in taxes but you’re still eligible to max out the ROTH IRA. Even the NY Times agrees with me.

Unfortunately, when I was 14 I had no idea what a ROTH IRA was, nor did I understand the magic of compound interest in terms of how it applies to personal finance over the years.

Let’s say a 14 year old contributes the maximum to her ROTH IRA (just $5500 a year) from age 14 through retirement. This smart gal wants to retire at 75. If she begins investing $5500 a year at 14 for 50 years, she will have $1,272,055 in retirement. That’s a lot, and should be enough to inspire kids to start saving young. But that’s with 5% ROI compounding annually. What if the stock market performs even better? Say, over 50 years the stock market is up 10% YoY on average? That same investment will be worth $7,687,296 at retirement.

Forget about inheritances, there is nothing more helpful for your children then to support them in maxing out their Roth IRA from the youngest possible legal age.

While it’s not possible for every family, offering your teenager a match on their earnings as long as they commit to putting what they actually earned into a Roth IRA, up to $5500, is a good way to start. If not possible to do a full match, think about what you can afford to match (50%?) to encourage them to save. Also, create charts which show them how much their dollar today will be worth in 50 years. While teens want to spend now more than later and aren’t thinking about their golden years yet, letting them know that your help could turn them into a millionaire in retirement by saving just $5500 a year will go a long way.

I wish the government would offer this program for youth — you earn $5500 and we’ll match it by putting $5500 into your retirement account. I guess that’s social security, but it’s not a 1 for 1 match. This should be a program for people under the age of 21 to teach them about the value of savings and give everyone a head start for retirement. I don’t know how that would work, but it would certainly help out families that cannot afford to match their children’s contributions.

Even if your kids can put away just $1000 per year in a Vanguard STAR fund, this will go a long way in retirement (though I recommend maxing out the Roth IRA every year from age 14 on.)

So you didn’t start a Roth IRA at 14?

Investing ASAP, whenever that is, will help you get to wealth. For better or worse our economy is set up where riches only come with some risk. If you don’t take risks, you may very well lead a comfortable life, but it’s unlikely you’ll be rich (unless you have a trust fund.)

If you give yourself 40 years until retirement at a 5% YoY return rate, you’ll have $736k when you retire at 65 (and start investing at 25.) A 10% YoY return rate will give you a nice $2.9M in retirement. Given that today people should try to reach $2M before retiring, starting investing at 25 at the latest is an ideal move.

Ultimately, if you wait longer to invest, you have to invest more per year in order to catch up. That can be very hard when you’re not earning a lot in your 20s and then if/when you have kids and find it harder to save in your 30s. Starting early when you are supported by your parents but can still earn and invest the best way to prepare for retirement, so you don’t even have to think about it beyond the $5.5k annual contribution throughout your life. You can also start to max out your 401k if you have access to one ($17.5k) at some point, but there will be less pressure on doing this and you can enjoy your money when you’re still young enough to travel and have a very active life.

Rich, IMO, is not about the $ amount you have in the bank, but about the financial security you have so you feel comfortable spending money NOW to enjoy life. This is not the same as wasting money on frivolous luxury items (though if this makes you happy and you have saved for retirement and your other basic needs, then go for it) but this means being able to afford a house, a car, family vacations, dining out every once in a while, and the lifestyle YOU want. That’s what “rich” is. Working towards reasonably hitting $2M in retirement (which again, is very possible if you start at age 14 – 20), will make you rich.

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5 comments

  1. anonymous says:

    “but this means being able to afford a house, a car, family vacations, dining out every once in a while, and the lifestyle YOU want. That’s what “rich” is”

    Most people in U.S. are already rich by your definition. You live in a very rich area, so you may not feel it, but average house in U.S is around 200k and many middle class families in ordinary jobs can afford to go on vacation and dine out.

    1. Joy ( User Karma: 0 ) says:

      You’re missing the part here that says that you also already need enough in investments to comfortably hit $2M when you plan to retire, based on a conservative annual growth. The faster you can save money, the longer you have for it to compound. The goal one should have to get rich is to get to the amount of savings needed ASAP that can grow and compound at 3% YoY to hit $2M at age 60, 65 or 70 (whenever you want to retire.) Then on top of that you need enough for the basic lifestyle you want.

      I do agree with you that cost of living where I am is very high so I don’t necessarily feel as well off as I theoretically am.

  2. Jerry says:

    Hi Joy, I have been reading your blog for a while, and really enjoy it.

    I’m curious how do you manage risk?

    You last post assumes 5%-10% return YoY by investing in index funds. However given the volatility in the markets and the risk of another financial collapse make these fairly aggressive.

    It is great to get those returns by staying invested, however all gains can be easily wiped out (and then some…) by any crisis which has been pretty consistent every 6-8 years.

    Thoughts?

    1. Joy ( User Karma: 0 ) says:

      I Figure after 30 years… or 40 years…I’ll get to 5% YoY. Maybe that’s crazy, but I think with time it should even out, or we have bigger problems.

  3. The Roamer says:

    I think your idea of getting kids to save in a Roth IRA as soon as they start working is a great idea.

    I don’t like when people find ways of how something won’t work And instead think of ways it can, but I still kept thinking how would that play out if they want to go to college. I think those formulas weigh heavier on the kids assets then they do on the parents. So just a thought that popped into my head.

    Also the max contribution is aggressive enough but not impossible so a good starting point for someone young but I wouldn’t say that should be their goal later. They should absolutely move up to maxing out 401k in their 20s I don’t believe that that is too difficult.

    I don’t believe people need 2 mil but it sure would help get you there faster if you maxed the 401k too

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