How can you define a rich person? What should be the criteria? I think the definition depends on the person, the place, the surroundings, and the economic condition.
I’d like to think a rich person is someone who is not worried about his family’s financial health if he is to lose his regular income right now.
We migrated from India, been living working and saving in the USA for the last 15 years. We now have enough money to live retired life back in India. So, if we go back to India now, we will be called rich.
But we do not have enough savings yet to retire in the USA.
By this definition of being rich, let’s start today’s blog.
You can be rich in various ways, by winning the lottery, by working hard at multiple jobs, by virtue of a marriage with a rich person, inheriting an estate, etc.
But the best way and the sure-shot way is to grow your wealth over time. Time and discipline alone will make you rich one day.
The discipline part is the habit of saving a part of your income. The discipline is to constantly work towards earning more income and investing in better assets over time.
Saving one Hour Per Day
You can be rich by just saving 1 hour of your wage every day. Spend the rest of the income as per your wish. I want to thank David Bach for guiding me towards this simple calculation.
The average hourly wage in America is $18.5 and by all means, I will assume your hourly wage is more than $20. For calculation’s sake, I will assume your wage to be $20 per hour.
$20 per day by you+ $20 per day by your spouse = $40 per day of saving
1 year saving is $40 * 365 = $14,600
Now use a compound interest calculator.
A compound interest calculator determines the value of your future wealth. Compound interest is described as ‘interest over interest’, calculated using A = P(1+r/n)(nt), where ‘A’ refers to the formula for compound interest. ‘P’ refers to the amount of principal investment; ‘r’ refers to the interest rate (decimal); n pertains to how many times the interest is compounded per period.
By using a compound interest calculator, you can plan an appropriate saving strategy. In this way, you can maximize your wealth. The compound interest concept adds the accumulated interest back to its principal sum, the interest earned over that interest.
You are millionaires in 25 years. (7% is a historical gain in stock index per year).
There is more fun to it, if you get a 2% yearly increment of wage, you can be a millionaire in 22 years.
Wait, there’s more to it if you invest this money in a 401(k) plan (retirement saving) and your company matches only 2% of your contribution. You can be a millionaire in just 17 years!
Set automatic withdrawal from checking account
Now, before you start finding ways to save $40 per day from household income, set the automatic withdrawal of $600 each month from yours and your spouse’s checking accounts.
Get it deposited in to pre-tax (401 k) plan. If you exhaust the limit and still have money left to invest, but it in IRA/Roth IRA.
I was thanking David for the guide below, to make you understand what you need to do to save 1 hour of your wage.
He talked about saving 10% of your income by setting up auto-withdrawal so that as soon as it comes to your bank account, it goes beyond your reach.
The moral of the story is it’s not hard to become rich, a disciplined life, coupled with restraint spending, will make you rich one day. How soon it will happen depends on how hard you want it.
Alternatively, if saving an hour of wage is not possible to accomplish every day, you may think of extending work hours by an hour or taking up a side job for a couple of hours.
You can start a home-based business as well. There are various ways of earning extra through online businesses. You can start a home-based business as well.
How to derive at the starting figure
The big challenge is, if you do not know your billing rate, then how can you determine what’s exactly your hourly wage.
The easiest is to divide your gross pay by 2080 if you work 40 hours a week. That is 40X 52.
If you work less or more hours (sometimes overtime is paid to the employees), you can multiple your weekly hours with 52 and determine the yearly hours.
If you make $100,000 a year, your hourly wage rate is $100,000/2080= $48
So you should save 48X30= $1,442 a month.
Finding Ways so save that much money
As we discussed above, automatic investment from your checking account is the best option.
Mentally adjust yourself that your pay is reduced and you have to live by the residual income. You need to also have buy-in from your family members.
The discussion will be tough, no doubt. Always remember the result of it all.
Other ways are to get involved in a second job or taking up some gigs in your otherwise ‘free’ time.
Extra income from a side hustle can add wiggle room in your budget.