Dollar-signGetting rich in the Western world, especially the United States, is so easy it boggles the mind why so many are poor. There is no excuse why everyone should not have a tidy sum of wealth invested, producing a steady stream of passive income. It is so easy yet people keep searching for the answer to quick riches, which are not so easy.

The lottery keeps bringing in money when the odds a gazillion to one you hit the jackpot. The lottery is the ultimate stupid tax. The only time I gamble is when I have the advantage, as in card counting and I haven’t done that in a while either. If I’m not having fun doing it I do something else. (Casino smoke bothers me so I don’t card count anymore, but I love playing cards.)

Saving and investing is easier than at any time in history. And safer. The first modern mutual started in 1924; the first index fund on December 31, 1975. As unfair as many claim the system is, it is more regulated to protect investors from scams than ever before. Diversification reduces risks due to funny accounting and con men and diversification is so easy and automatic. (Think payroll retirement plan withholding/matching and auto investing available at all mutual fund houses.)

Show Me the Money

Whenever I give this spiel to a group a few nod their heads in acknowledgement while the rest shift uneasy in their chair getting angrier by the second. How dare this prick, ah, accountant tell us we are poor because we want to be, as if it is our fault. It is your fault! Your income is not the problem, your spending is! When Mrs. Accountant and I first got married we lived on less than $9,000 per year. We had more money, but did not know what to spend it on. The mortgage (tax and insurance included) was $515 per month. That left less than $3,000 in spending for all other expenses: utilities, car, vacations, food, supplies, and stupid stuff. Utilities and groceries after the mortgage were the biggest expense. I worked out of the home back in 1988 so the car rarely moved.

I hear some moans. I hope that is sex you are having rather than complaining about things being more expensive today. There is no doubt I spend more now than in 1988. I have Netflix, for example. In 1988 I did not indulge in such luxuries. Housing costs are higher, much higher in certain parts of the country. However, I was spending fast and wild owning my own home back then; I could have rented for $300 a month.

Living close to work so you can walk or bike is like a tax-free $10,000 raise. I can live a year on that! The average American drives around 15,000 miles (24,000 kilometers) per year. Where the heck you going! If you biked or walked you would choose your trips a bit more carefully. It’s your spending that is the problem. I just put $10,000 a year in your pocket tax-free by dumping the gas-guzzling SUV and I haven’t even warmed up yet. Drop that extra ten grand in your pocket into a nice retirement account and the IRS will send you another $3,000 tax-free. Where you going to get a better deal than that?

Erna Buck

Meet my friend, Erna Buck. She is an old school girl living on her own, a twenty-something, in the big bad world where every employer is a prick who underpays her. She makes $10 an hour at a job she hates. At least she has a job! Right?

Let’s take a look at how Erna can balance the books. Her annual income is $10 per hour times 40 hours per week for 50 weeks (the boss doesn’t offer holiday or vacation pay) a year; a total of $20,000. A $20,000 income will qualify you for multiple tax credits on the federal and state levels. We will not consider tax credits granted to low income taxpayers in our calculations. We will, however, subtract 20% for FICA and income taxes, leaving $16,000 available for Erna to spend each year.

The first expense to consider is housing. By far this is the most expensive personal expense Erna has. Since she only earns $10 an hour she may as well live close to work. If she lives at home with her parents she will have a really low rent, but let’s make Erna’s live a bit more complex. Dad caught her smoking weed so he kicked her out. Now, Erna could buy a home, but let’s face it, she is not in any position to buy a home just yet. Apartments run around $800 per month for a two bedroom. Erna learned her lesson after dad caught her lighting up some bud so she found a clean girlfriend to share the apartment with, cutting her share of the rent in half. Housing is now covered for $4,800 per year.

The next expense to slay is transportation. Erna decided living close to work was the way to go. She can walk/bike to work each day. For longer trips she uses public transportation, a friend, or calls Uber. Annual transportation costs amount to $500 for the year.

Groceries for one person are $200 per month. Don’t argue! Some meals will be rice with spaghetti sauce (Mrs. Account makes this dish often and calls it Spanish rice), other meals will have beans or lentils. You can eat healthy and like royalty for under $200 a month if you do your own cooking. Erna has 168 hours in a week, same as you. She works 40 of those hours. What the hell is she going to do with the other 128 hours if she does not cook her own meals?

Utilities are another $100 a month. $300 in clothing a year is more than I ever spent in a year in my life on clothes so Erna will have to suck it up and dress less trendy. Her cell phone is $100 a year for a pre-paid plan. No yacking on the phone all day. (My Friday night card playing buddy uses this exact plan, paying $100 a year for 1000 minutes pre-paid). There are not many things left to spend on. Erna needs a life so she can drop a thousand a year on stupid stuff. Let’s see how Erna is stacking up:

                $20,000 annual income

-$4,000 taxes

-$4,800 rent

-$2,400 groceries

-$1,200 utilities

-$500 transportation

-$300 clothing allowance

-$100 phone

-$1,000 mad money

$5,700 for investing

Erna has $5,700 to invest in year one, a 28.5% savings rate on gross income. Her passive income will be around 2% for dividends and 5% for appreciation. I know index funds don’t go straight up, but the dividend is regular and the stock market will eventually revert to the mean after a down year or three. At the minimum, Erna will have $114 in dividends before she ever gets out of bed even if the boss refuses to give her a raise. The $114 immediately goes to work earning more dividends. Housing costs and taxes could be lower, adding to her investment account if she makes the spending reductions; same applies to mad money.

Before you poke holes in my game, let me remind you things like health care are free when you only make $20,000 per year. Either the Affordable Care Act or Medicaid will cover your medical needs.

I know it is not possible to do what I outlined above, but let me introduce you to Les (his real name), a client of mine. He has an annual income of $21,000 per year, lives alone, pays child support, and still manages to max out his IRA each year. Okay, maybe it is possible.

Learning to Keep It

The title of this post indicates it is harder to keep it than earn it. It is. Making money is easy. Even Erna will earn ($20,000 x 40 years) $800,000 over her lifetime without a pay raise ever or considering any inheritance from parents (dad forgave her for the one weed smoking incident), investment gains, or Social Security income in old age. If Erna lives to an average age she will pull over $1 million in her lifetime.

Most Americans will have a lifetime income well into the millions. With all this money coming in, what is their net worth? Yeah. See what I mean. It is easier to get it than to keep it. Ask sports stars and lottery winners; many end up broke in a few short years. Almost every American wins the lottery over their lifetime in earnings and blows every damn dime of it. It really is simple; spend less than you earn and invest the difference in an index fund. Automatic millionaire. It is as easy as that. If you save half your income in 17 years you can retire. Actually, retirement is cheaper than working so you are ready to lock and load in 15 years or less.

It is so easy today to be rich in the Western world, especially the United States; it boggles my mind why so many are poor.