Getting Rich on a Small Salary

Once every month or two, I’ll come across a story like this one that describes how someone on a small salary managed to slowly amass an impressive wealth. This particular story describes how a janitor managed to accumulate $8 million. From the article:

Ronald Read, a Vermont gas station attendant who worked in retail later in life, was a frugal man.

He died a multimillionaire at 92.

Read had stock holdings and property valued at almost $8 million, most of which was left to Brattleboro Memorial Hospital and Brooks Memorial Library in Brattleboro, Vt., Howard Weiss-Tisman reported in the Brattleboro Reformer.

“Not only did he refuse to flaunt his wealth; his estate included a 2007 Toyota Yaris valued at $5,000, but his closest friends and family members did not know he had even a tiny sliver of the fortune he left behind,” Weiss-Tisman wrote.

How did he do it?

CNBC’s Michelle Fox explains how a man earning a modest income could amass such a fortune. Fox says one expert said, “Investors would have to invest about $300 a month at an 8 percent interest rate over 65 years.”

Mr. Read was never a high wage earner. He didn’t earn a ton of money each year. Instead, he lived simply, saved some of his money each year, and wound up with a lot of it late in life.

At that point, he had no financial worries whatsoever, yet he still didn’t change his lifestyle. He drove an eight-year-old car and lived a lifestyle that never gave anyone any indication that he was wealthy… yet he was wealthy.

One thing I’ve always noticed about stories like this is that the comments and responses tend to fall into two groups. One group marvels at how a small income was able to be turned into wealth. The other group grumbles about how this person must have had a “miserable” life.

I tend to fall into a third camp. Given my own experience over the past several years, my feeling is that he probably lived a pretty wonderful life in most regards. I can’t comment on any personal challenges the man might have faced, but my feeling is that anyone who can save a significant amount of their income like this gets to both have their cake and eat it, too.

Here are some of my thoughts that lead to that conclusion.

First of all, simply having an income – no matter how big or small it is – doesn’t mean you need to spend all of it. Whenever people experience a rise in income, they often also feel a need to spend that additional income on things that they didn’t necessarily have before. This is called “lifestyle inflation” and it’s a trap in many ways. The biggest result of lifestyle inflation is a lack of savings. The spending that you add when you start inflating your lifestyle is almost always less important spending, which leads right into the next point.

Second, whenyou only spend 90% or 80% or 70% (or less) of your income, the only spending you’re cutting is the silliest and most wasteful of your spending. There’s a certain surprisingly small amount that people need to cover their necessities in life. Above that, people spend their money on “upgrades” and progressively less important things.

For example, when I cut back on my spending, one of the things that I cut was my nearly-nightly walk to the convenience store near our apartment. When I went there, I’d usually buy a bottle of overpriced Gatorade and sometimes a small salty snack. What I started doing instead is either buying Gatorade in bulk to keep at the apartment (so I could have a much cheaper bottle in the evenings) or instead just drinking lemon water, as I started keeping a pitcher of water in the fridge that had several lemon slices and a drop or two of honey mixed in. I still had my evening “treat” and cut out a few dollars in truly frivolous spending.

Housing provides a great example of this, too. A huge McMansion is going to cost you more than a smaller, reasonably-priced home, which is going to cost you more than a reasonable apartment. The more space you have, the less of it you’ll actually use for anything more than storing all of your stuff, which inherently makes it easier to accumulate stuff.

Cars are another great example. It doesn’t take much to afford a car that gets you from point A to point B. Everything above that is an unnecessary feature. Automatic windows cost more. Leather seats? More. A highly stylized exterior? More.

Think of your cell phone. A very basic plan with voice and some texting might be just $20 a month and the phone is free. When you add on data, a snazzy smart phone, unlimited texting, more data, additional lines… it can add up to hundreds a month.

In almost every aspect of life, the core features you actually need aren’t all that expensive. It’s all of the extras – which are progressively less and less important – that gobble up all of your money.

Third, having money in the bank is the best stress reliever that there is. Back in my big spending days, I would often come home from work with a ton of stress on my plate. I’d sit down on the couch and “decompress” for an hour or two by playing video games or channel surfing. I’d spend weekend time “decompressing,” too. I was often irritable and I had trouble sleeping, too, because the worries of our finances were constantly present in my life.

Over time, as we turned around our finances, I came to realize that my stress level was dropping through the floor. My irritability drastically reduced and I started sleeping better. I didn’t feel the need to “decompress” when I got home from work and actually started using that newfound time to launch side businesses (one of which became The Simple Dollar) and enjoy my family.

The period of 2005 and 2006 was easily the most stressful period of my life. It was also the period where our finances were in the worst position mostly due to our poor spending practices. That’s not a coincidence.

Fourth, life is absolutely loaded with enjoyable free things and extremely low-cost things that we often overlook. If I listed the ways I enjoyed spending my time in 2005 – things like golf and collecting vintage baseball cards and collecting DVDs – I mostly would have been listing ways to spend a lot of money. Sure, I enjoyed those activities, but they also contributed to our overspending.

If I listed my favorite ways to spend my free time right now, I’d list geocaching, playing board games with friends, going on walks, reading books, playing with my kids, and participating in community groups. These activities basically don’t cost anything at all.

What changed? All I can say is this: in 2005, I would have simply said “no” to those other activities without even really thinking about it. I wouldn’t have even seriously considered trying them, let alone actually try them.

Today? I’ll try almost any activity that’s free or very cheap. If someone suggests trying out this great backyard sport that’s like a mix of cricket, jai alai, and pinochle, I’ll say “Sure!” Because, in the end, why not? It might turn out to be really enjoyable, but the worst case scenario isn’t really that bad – it’s time spent with friends doing something so laughably bad that you remember it for the disaster. At the very least, you end up learning something new about a particular activity.

Try doing new things. Try lots of them, especially free or cheap things. You’ve never been to a meeting of a community group? Why not? Ever been to your local library and actually checked out a book? Ever tried out a book club? Ever volunteered to coach youth soccer? Ever walked the trails at any and all state and national parks within, say, fifty miles of you? Ever made a loaf of homemade bread from scratch in your kitchen? I can keep listing options like this over and over again.

The recipe for saving for the future on a small salary actually turns out to be a pretty simple one. Cut back on your most frivolous spending. Don’t upgrade all the time, especially when you don’t really know what it will really add to your life. Live in a smaller place. Drive a used car. Try lots of free activities instead of engaging in expensive ones. Try doing things for yourself. Cut back on every bill that you can.

Those changes are going to drastically cut how much you’re spending each month. All you have to do is start saving that difference and stick with the changes. That’s the entire secret to how you can end up saving a lot of money on any salary, even a small one.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.