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this video is made possible by squarespace check out the link in the video description to save 10 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 so it's time to learn how money works which was made possible today by squarespace the most powerful website building tool for both professionals and amateurs alike squarespace allows anybody to create and host beautiful looking websites but you probably already knew that what you might not know is the utilities available out of the box with squarespace's development tools if you are building a website for your brand squarespace offers incredibly powerful inbuilt analytics tools which can let you track everything from how long they are spending on your site to what menu item people are most interested in these insights can make all the difference to a business trying to figure out what works and what doesn't detailed analytics is just one of many tools at your disposal when building a website with squarespace so make sure to check out squarespace.com for a free trial and see for yourself what kind of website you can put together when you're ready to launch you can use my link to save 10 off your first website or domain.
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 Danko 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, divided by 10, 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 authors labeled them under accumulators of wealth.
It's a simple premise, but there were a few obvious problems. A 22-year-old graduate earning fifty thousand dollars per year shouldn't be expected 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 who 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. 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: you will still never be rich.
Nassim Taleb, 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 Taleb'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 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 on 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 principal. 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, 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 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 them the millionaires next door is a bit misleading. Even calling them financially secure might be a bit of a push.
Nassim Taleb again pointed out that this book was written in 1996 and was based on a survey done throughout the 1990s. The millionaires who 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 percent 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 it, I am a YouTuber now, so I understand the importance of a catchy title.
All right, 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 reserved spot at work. Your partner might choose to stay home with the kids so you can focus on your career's 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 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, sort of. 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. 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 down 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.