There are three main ways to become wealthy (in a monetary sense):
- Be given it. This is accomplished mainly through inheritance or winning the lottery. Unfortunately we can’t plan for this or make this happen through hard work and dedication. We also can’t choose our parents and pick ones that are financially well-off.
- Entrepreneurship. Of course an entrepreneur’s drive, skill, and work ethic are a determining factor in the success of an entrepreneur, but there are a lot of external factors that go into their success as well. The best business ideas can die if they are started in the wrong economic cycle, are too early to market, or if a large competitor decides to squash them. Additionally, not everyone wants to be an entrepreneur or has the skills and drive (or willingness to learn) to become a successful entrepreneur. An entrepreneur usually gets knocked down many times before they succeed.
- Delaying gratification. Unlike option 1 and 2, this is the only option where the person seeking wealth has the greatest impact on their own success rate in becoming wealthy. This is your millionaire next door story. This is the path that 90% or more of people should take if becoming financially wealthy is one of their goals.
Growing up I thought to become wealthy you needed to start your own business, or you had to become a doctor, lawyer, or stock broker. This is fundamentally incorrect. After reading about the veteran and gas station attendant Ronald Read who left an $8 million estate, we know that a high income or entrepreneurship aren’t requirements on the path to becoming wealthy.
What skill did Mr. Read and other millionaires next door have that allows them to build great financial wealth? They knew how to live below their means and delay gratification. What’s the first thing most people want to do when they receive a hard-earned raise or bonus from work? Spend it! “I’ve earned this, I should treat myself.” Unfortunately this brings folks further away from wealth.
What is “delayed gratification”?
The book definition is “the process that the subject undergoes when the subject resists the temptation of an immediate reward in preference for a later reward.” This comes more naturally to some, than to others. For some, this can be very hard to do.
Delaying gratification isn’t as bad as it might sound. One trick to make it easier to follow through is to visualize your older self and how small actions now will have a positive compounding benefit on older you (and your family).
There are two benefits to delaying gratification: you learn to live with less and compound interest.
The new car is fun for the first two weeks, but then it becomes a car. The big house is fun for a while, but then it becomes a big house that needs to be cleaned and maintained.
The more a person delays gratification, the more money they have to save and invest for their future. Compound interest really starts to shine when you give it time (preferably decades). Ronald Read learned to live with less, delay gratification, and allow compound interest do its thing. His self control turned a modest income into a high seven figure net worth.
Delaying gratification isn’t sexy, but it’s a lot more straightforward path to financial wealth than lucking into it. Entrepreneurship may work for some who are passionate about it, but delaying gratification can work for everyone, if it is done with persistence and self-discipline.