Becoming rich and financially independent is a complicated thing. Many people spend themselves in search of this end result, but most never even get within sight of it.
While I am not yet what you would call “financially independent”, but I am on my way, and likely further along than a lot of my readers. Through trial and error I’ve formulated an answer to the above question, which tees up the way I act around money and finance. In this article I am going to present you with what I feel are the pertinent facts in hopes that you may arrive at similar conclusions. So here it is, the truth about how to become rich.
We need to agree on one thing before we begin, and it is that hard people who want to achieve this measure of financial success realize that hard work is requisite, and as such, for the purposes of this discussion, let us take for granted the assumption that all people who want to become rich do indeed work hard at it.
Nonetheless, since the reality of vastly prevalent failure remains in-spite of hard work, we can reasonably derive that something more than simply hard work is required. The natural question is – what?
The Logic of Getting Rich
Greek philosopher Socrates who lived between 470-369 BC formulated an argument presentation structure he termed Syllogism. A syllogism is a chain of logic that bases itself on two factual components combination of which naturally lead to a logical conclusion.
The factual components in the syllogism are the Major Premise, and the Minor Premise, and the structure is:
Major Premise + Minor Premise = Conclusion
The main idea here is that because both Major and Minor Premises are statements of fact, meaning no one is likely to argue them, the conclusion, therefore, is very logical and unlikely to be argued either. For example, let me give you two pieces of what I deem to be factual information, and we’ll see if you agree and arrive at a conclusion that I want you to arrive at:
Fact 1: All dogs bark
Fact 2: My pet Sladky is a dog
What’s the conclusion?
I would hope that by putting these two facts together you arrived at a conclusion that my dog Sladky barks. If all dogs bark, and Sladky is a dog, then Sladky must bark…very logical. In this case:
All dogs bark is the Major premise – this is a fact that no one is likely to contest. Barking is a natural attribute of the animal, which most reasonable people will not contest. My pet Slady is a dog is my minor premise, and while you might want to try to argue that my 85-pound Lab is an elephant or a cat, most will concede that he is indeed a dog.
Thus, both major and minor premises are factual, and by inserting the minor premise into the major premise I can lead you to arrive at a very natural conclusion.
Much more can be said about this, including the evolution of Syllogism into an Enthymeme with the help of another great Greek named Aristotle. But, this is outside of the scope for now…
Working Smart on Becoming Rich
We started out by agreeing to accept that all people who are truly committed to becoming financially successful are hard-working, and yet we know that most do not succeed. This tells us that working hard is not enough. What’s missing?
Well, what ‘s required for financial success is working hard at working smart!
This is where most people fall short. Defining “working smart” is open to a wide range of interpretation. “Working smart” is like an iceberg with only a tiny cap in plain view above water – this is what everyone sees. Most of the perspective on “working smart” is hidden from view, but that is precisely where the truth lies!
Common Wisdom on How to Become Rich
There are 2 pieces of advice that you will commonly hear relative to achieving financial success:
- Be frugal, live on a budget, and pay off debt.
- Think as the rich think in order to become one of them.
Let’s think these through a bit. First of all, on the surface, who could disagree?! Certainly all reasonable people agree that if you spend more than you make, and over-leverage yourself, you’ll never achieve financial success. Thus frugality and budgeting plays an important role in all of this.
We also agree that success breeds more success, and proverbially speaking, we must fake it ‘til we make it when it comes to being rich. Who could disagree…
On the surface, both statements make sense. However, have you tried to reconcile them against one another? Think about it – don’t these two statements cancel one another out? And if so, how can they both be true?
If we put these two statements together into a syllogism, we arrive at a faulty conclusion. Let me show you:
We start with a syllogism:
If you are frugal, live on a budget, and pay off debt, and if you think like the rich think, then you will be rich…
Where If you are frugal, live on a budget, and pay off debt is the major premise, and if you think like the rich think is the minor premise, and then you will be rich is supposed to be the conclusion…
Here’s the problem:
Ask yourself – how many rich people do you know who worry about being frugal, living on a budget, and paying off debt? The rich people I know, and I happen to know a lot of them, and most of them are business people/real estate investors like me, worry about acquiring assets, and doing so with utilization of leverage/debt. And they sure as hell don’t worry about being frugal! Instead, they concern themselves with having as much abundance in their life as they can possibly have, and they spend their working hours trying to figure out how to get more!
Do Rich People Worry about Being Frugal?
Stay With Me…this is about to get good!
So – there’s a disconnect here. If rich people don’t worry about being frugal, living on a budget, and paying off debt, then by worrying about these things you are by definition not thinking like the rich. There is a huge contradiction here, and the reason most people don’t succeed at becoming rich is precisely because they are not able to recognize this contradiction!
In other words, if you are one of the masses of people who are trying to make the above syllogism work, then by definition you are destined to fail since you are exerting energy in to polar-opposite directions at the same time, which cancel each other out leaving you in the end exactly where you started…
Instead, you should realize that the things you think are important are not the things that rich people think are important, and then you need to ask – WHY?!
Reconciling Being Frugal, Living on a Budget, and Being Rich
I just finished proving to you why that the syllogism if you are frugal, live on a budget, and pay off debt, and if you think like the rich think, then you will be rich…is completely false. I had to present this argument to you in the way that I did in order to prepare you for the next thing, which is to tell you that the reason this syllogism is wrong is not because it is a contradiction, but because our definitions are wrong which makes it into a contradiction.
In other words, there is a way to conceive of this very syllogism which makes it absolutely true!
The distinction here is in how we define “frugality”. The rich don’t define it as you do, and it is your definition that screws everything up for you. Let me explain:
How the rich define “frugality”
After everything that’s been said you may be surprised to know that the rich are indeed very concerned with being frugal, just not in the same way that you are.
Disclaimer: I am not talking about generational wealth here. I don’t associate or know anything about people whose wealth is a function of name and blood. Rich, for the purposes of this discussion, are those people who’ve built something out of nothing…just like we are all trying to do.
Having done the above disclaimer, you need to understand that the rich are very pragmatic about what really matters, and they seek out good advise. You’ve no doubt heard of Pareto’s 80/20 rule which teaches us that having honestly analyzed your circumstances we’ll inevitably arrive at the conclusion that 20% of your actions result in 80% of the intended consequence. And know this should lead you to ask the question:
If 20% of the things I do in order to become rich are responsible for 80% of the progress I achieve, then why in the hell am I doing the rest of the 80% of the things I do…?!
Well, no surprise, the rich ask themselves this very question, just as you do (or should). But, unlike you, once they identify the 20% responsible for most of the output, they make themselves stop doing the rest, which is how they are able to be infinitely more productive than you!
Guess what – Pareto’s 80/20 rule definitely applies to the concept of frugality. And guess what else – all of the things that you do thinking that you’re being frugal are actually among the 80% of things that make only a marginal 20% difference . It’s the other 20% of the things that you could do but are not doing that are responsible for most of the potential impact.
What is Most Important to be Frugal About? Taxes!
When we talk about income, we often juxtapose gross income vs. take-home pay. For instance, if you are single and earn $55,000 of W2 salary, you may only bring home about $3,400. Notice, if you divide your earnings of $55,000 into 12 months you arrive at monthly gross income of $4,583, and I’m saying that in reality you only take home $3,500, or so, of spendable cash – that’s a loss of almost $1,000, which represents 26% of your gross!
Why, you ask? Well – taxes!
I could spend another 5,000 words on this, but I think you should talk to your CPA instead. However, I will tell you that it matters not how frugal you are about the clothes you wear, cars you drive, and food you eat, if you don’t control the biggest expense you’ve got – taxes! All the rest of the items commonly found on your budget only add up to perhaps 2%-3% downside exposure. While taxes can cost you 25% – 50% of what you earn!
Being frugal, by definition, is an exercise of controlling expenses. Why is it that most people, which more than likely include you, completely skip over the thing that does the most damage to your bottom line?! Why is it that you budget to go over the dollars to get to the cents?
Look – I am a big critic of senseless consumption and consumerism, specifically when you can’t afford it. And I think it is very important for all of us to practice patience and restraint. However, I need you to understand that the rich get to be rich because they work very hard to ensure that the drag of taxes impacts them as little as possible, not because they ride a bicycle to work since it’s less expensive than putting gas into a car, wear cloths with wholes in them, and rent rooms out in their houses to off-set the mortgage…
The rich understand that you cannot succeed financially if you lose 25% – 50% of what you earn to taxes before you ever get going. The rich understand that the savings from budgeting are very marginal in comparison to the savings from tax planning. The rich understand that if you get the tax situation wrong, no amount of budgeting and frugality will solve your problem. The rich know that any debt is too much debt if your tax situation is all wrong!!!
Can You Control Your Taxes on W2 Income?
This may spoil your day, but in order to be of any use to you I must be honest and tell you the following:
You must know that unfortunately there are very few legal ways to control your exposure to taxation if you are an employee and you’re taxed on W2 income. It’s just the way the tax code is written. It is what it is…
This explains why the rich (and those who want to be rich some day) avoid W2 income like the plague, and instead operate in the sphere of passive and business income. This also means that if you ever want to get there, you’ll have to find a way to escape W2 income, which will require a lot of intestinal fortitude since you’re probably pretty used to those timely paychecks and a benefits package.
But, it is what it is, and now you know 🙂
Much more can and should be said here, and I suppose if you want I can take a crack at it. But, if you really want to know more, the thing to do is to seek advice of a good CPA. The only thing is – you have to know which questions to ask…
Hope you found this article both informational and educational. Feel free to leave a comment below…