The most common response to this quandary is that you need money to make money. Those born with a silver spoon in their mush’s are destined to be wealthy.
Personally I think that is complete tosh. I can even pick a carefully selected piece of research that ‘proves’ it:
In a study by the University of Kentucky of 35,000 lottery winners of Florida’s Fantasy 5 lottery they found that 1,900 went bankrupt within 5 years, that’s a bankruptcy rate of over 5%. This bankruptcy rate was approximately double non lottery average for the state.
This shows that having or acquiring large amounts of money is not necessarily an instant ticket to future riches, in fact it would tend to imply the opposite is more likely.
Sure, give me $1,000,000 today and I’ll guarantee you I’ll be richer than the me without the $1m in thirty years time. However I’ve got numerous examples from my personal array of friends that disprove this theory.
An acquaintance (seemingly a very intelligent chap) from uni that inherited several £m at the tender age of 20 is well on his way to having lost the lot by all accounts. Likewise I have several friends that have become real life rags to riches success stories.
Perhaps the best example is my sister and I. We both grew up in a nice middle class family. Great educations, sensible parents, we never really wanted for anything but at the same time weren’t spoilt and didn’t start out in life with trust funds or massive handouts. Our respective financial positions now (both mid 30s) are very different. While I outstrip her in the earnings front by some margin (jobs can have a big impact on wealth creation), I am almost certain that she outstrips me on the expenses/spending front. When I think about it, that is bonkers and at the crux of the problem.
Education, education, education
I’m a firm believer that most peoples money problems stem from a lack of financial education/awareness/discipline. Quite frankly it amazes me that throughout all of my schooling I don’t remember ever being taught any of the real basics of personal finance.
In maths we never seemed to apply what seemed like abstract theories to real life situations. Surely schools should be teaching us all how mortgages really work (e.g. comparisons of renting versus buying, interest only v repayment etc) or how compound interest can make or break your finances or how expensive and damaging most personal debt really is, particularly when combined with excessive consumption.
It’s only when you understand these concepts that you begin to change the way you think about money. Once you get these things working in your favour, it’s amazing the speed with which you can build wealth. There are numerous examples in blogsphere of people who have done and are doing this but Jason over at Dividend Mantra is a classic case study.
I’ve lost count of the number of times I’ve read of people in the personal finance/financial independence community say that they only changed their approach to wealth building after they read some article/post/blog/forum post. Mine was a random article I read several years ago about the joys of overpaying your mortgage. Sure I was investing already but it was that article that made the compounding penny drop and encouraged me to start optimizing my finances and run my finances like a business.
These ‘lightbulb moments’ can and do have a huge impact on many peoples financial positions. They also prove that it’s not really about how much you earn or what you started off in life with but it’s actually more about your knowledge, mindset and actions.
And with that, in order to pay myself £423 per annum in perpetuity I am off to spend the bank holiday weekend filling in a pond. Enjoy the long weekend!