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Eight steps to a rich life in America

By Pamela Yip
The Dallas Morning News

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But trying to give yourself a financially healthy life, as well as a satisfying one, involves more than that. It means making some overarching moves in your life to lay the foundation for prosperity.

Dwight R. Lee and Richard B. McKenzie address the issue in their book "Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life."

"Getting rich in this country is no big deal," said McKenzie, professor of economics and management at the University of California at Irvine. "It's within the grasp of virtually everyone in this country. Poor people will have a greater struggle, but it's doable, and it's far simpler than most people have made it out to be.

"It's really a lot of common sense."

From establishing certain mind-sets to considering physical and emotional needs, Lee and McKenzie described eight things you can do to give yourself an edge financially:

More rules to live by Spend less than you earn: "If you can do this, your chances are very good that you will succeed," said Lance Alston, a certified financial planner at JWA Financial Group in Dallas. Avoid excessive debt: "Excessive debt is a sign of poor money management," said Viktor Szucs, a certified financial planner at Quest Capital Management in Dallas. "It is costly and it can be extremely stressful." Zero in on what gives you earning power: "What unique talent do you have that you can leverage to make money, while adding value to the lives of others?" said Derrick Kinney, senior financial adviser at American Express Financial Advisors in Arlington, Texas. "Determine if you're working in a job that exploits your unique talents." Do something you love: "Life is too short to be doing something you don't like to do," Szucs says. "Collecting a 'playcheck,' rather than a paycheck, is an essential component of fulfillment." Give back: "By giving to others, you can reach a level of happiness that is beyond dollar signs," Szucs says.

1

"You really do have a lot of opportunity in this country," said Lee, an economics professor at the University of Georgia. "The sheer wealth of the country and the opportunities it affords to make a good income just makes it that much easier to save."

2

Albert Einstein is said to have called compound interest "the greatest mathematical discovery of all time."

Compound interest is your principal, plus interest that was earned earlier, plus the interest on the interest.

For example, if you deposited $100 in a bank account at a 10 percent annual percentage yield, the bank will credit you $110 at the end of the first year and $121 at the end of the second year.

That extra $1, which you earned on the $10 interest from the first year, is the compound interest.

Left alone, that initial $100 would grow to $1,744.94 after 30 years.

"It's very tough to get rich just by brains and brawn," McKenzie said. "You can get a degree in physics, indicating you've got lots of brains, but if you go to work as a teacher, you can end up not as well off at retirement time if you don't take advantage of the compound interest."

3

That is, stay strong against urges for instant gratification at the expense of your future financial well-being.

"The trouble with instant gratification is that it's not very gratifying, certainly in the long run," Lee said. "Weigh the cost and benefits of some of the decisions we make and don't try to have it all now."

What's more gratifying is having a sense of control over your life because you've saved extra resources, he said.

4

This is a key rule.

More and more, it's become crystal-clear that it pays to go to school and stay in school.

"There's a bigger downside to leaving high school," said Paul Harrington, a labor economist and associate director of the Center for Labor Market Studies at Northeastern University in Boston. "High-school dropouts are increasingly finding themselves farther and farther behind."

He cited figures from the 2000 U.S. Census that showed that a high school dropout can expect to earn an average of $624,000 over his or her lifetime, compared with an average of $1.9 million for a person with a bachelor's degree.

When you look at figures from years back, it's clear that the earnings gap is widening for those without a college degree.

In 1979, a high-school dropout was expected to earn an average of $710,000 over his or her lifetime (in 1999 dollars), while a person with a bachelor's degree was expected to earn an average $1.7 million, Harrington said.

The earnings of high-school dropouts and graduates have plunged, he said. "They've fallen precipitously." The fast pace of technology has fueled the growing earnings gap, Harrington said.

"The payoff for having strong reading, writing and math skills is bigger," he said. "This is an economy that demands increasingly specific occupational skills."

5

Not to dismiss the emotional and spiritual benefits of marriage, but from an economic perspective, it's a financial contract between two people that benefits the family unit.

"When we're married, we have an economy of scale in terms of living," said Craig Depken, associate professor of economics at the University of Texas at Arlington. "We only have one house payment, two cars, but we get some gains by living together."

Divorce can have severe financial effects.

"It's devastating from the point of view that you've planned for two people to live on one income or two incomes," said Maggie Tolbert, a certified financial planner in Dallas, who specializes in divorce cases. "Now you've got two separate households to support."

Not to mention the legal bills accompanying a divorce.

"It certainly lowers the standard of living," Tolbert said.

6

The bottom line is, if you're sick, you can't earn money.

"If we were to rewrite this book, we would spend more time on the health issue," McKenzie said. "Smoking shortens your life, so it shortens your potential working career."

If you become disabled, not only will you not be able to earn your salary, but you will also have additional costs associated with living as a disabled person.

7

A lot of people feel, "I can't be a good investor. I don't know how to get rich."

The point is, you don't have to be perfect.

"There are some risks — for example, where the market will head in the short term — that we can't do anything about," Lee and McKenzie wrote in their book. "Then there are risks that we can minimize — for example, through the types and breadth of our investments."

They advocate buying mutual funds that invest in a broad range of stocks.

"Beating the market is tough for the best of investment strategists," they wrote.

8

Watch out for overkill in your efforts.

"In writing a book, it's tempting to say the way to get rich is to only be frugal, to be a miser," McKenzie said. "Clearly you can get rich that way, but if all you do is set aside income, then much of the joy of life can go out the window.

"Don't try to save 50 percent of your income. If you do, it becomes too much of a burden and you end up not saving at all."

And there you have them: Eight simple, practical rules. However, following them might be harder than you think, and there's the rub.

"It's giving up current satisfaction for future benefits, and a lot of people have a hard time doing that," Lee said.

Copyright © 2004 The Seattle Times Company

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