How to get rich... Slowly

The old joke "The easiest way to end up with a million is to start with 2 million" is of course very true, but it really is easy to become rich(er), it just takes a long time. O.K. It's easy assuming your income more than covers the essential out-goings.

People dream of becoming rich by winning the lottery, getting a fantastically well paid job, having an amazing business idea, marrying someone famous etc. but none of these are easy or likely. Also, getting the money is only a small part of the equation. Investing and spending are also very important considerations. Spending money may be fun, but it doesn't make you rich (it just makes other people think you are rich)

Earning a huge salary is a great idea if you can, but there is a limit to the number of hours in the day and to how much you can earn per hour. There is also a lot of competition for those illusive highly paid jobs. Investing in the latest get rich quick scheme may also not really make you rich, although investing gradually over a long term can be very beneficial. The one thing that really will make you richer is spending less.

Here are some investment ideas:

Some Investment Ideas to beat The Credit Crunch
National Savings Premium Bonds
Preference Shares - low risk, high retrurn
Risk reduction with spread betting

The most damaging expenditure is the small habitual items which are easily ignored such as cups of coffee, bottles of water the occasional taxi, magazine subscriptions and Gym membership, but it is easy not to notice the accumulated cost of these things. Here is a way to really guarantee becoming richer... eventually.

Here's an example: Bob works in The City (i.e. in London) and takes the train/tube to work each day for 35 years. He buys a newspaper, a cup of coffee and a snack and falls asleep on the train. At work he has 4 more cups of coffee two bottles of water (despite both being available free from the water-cooler and coffee machine) Add a £6 lunch and another drink, snack and Evening newspaper on the way home. None of this seems unreasonable for a wealthy banker, and comes to a total of just £20 a day. That's just £100 a week or nearly £5000 ($10,000) a year. Adjusted for inflation giving up these "luxuries" would save £155,000 over 35 years, in today's money. If you were able to get an investment return of just 5% above inflation on the saved money this would equate to an extra £411,000 (almost a million US dollars) at retirement, just by giving up a few habitual treats. If you add on a couple of pints of beer and a £10 taxi ride each day and an investment return of 10% and you've got an extra £2.3 million ($5 million) at retirement. Just cutting one of those cups of expensive coffee a day could save £88,400

Another way to look at this is, if you save just £1 extra each day you could retire a year earlier. Save £10 per day and you could retire young.

If you are happy to work until you are 65 then live off an average salary (currently the median income in the UK) of £20,000 a year, then you won't need very much.

The best annuity rates are about 7% (at time of writing) and the old age pension is a little under £100 per week, so to achieve "average" pay in retirement would need just £200,000 in a personal pension (or an ISA - Individual Savings Account) and to achieve "minimum wage" (a little over £10,000 per annum working full time) you would need just £70,000. Unfortunately most people actually have rather less than that when they retire. Obviously most of us hope to retire on a lot more than minimum wage.

Theoretically you need less money when you give up work than you do while working: you no longer need to pay for transport to and from work, nor for work clothes, expensive coffee, lunches and after-work drinks etc (see above) and your tax bill may also drop (higher personal tax allowance and possibly a marginal lower tax rate) but you also have more free time and more time to spend your money.

But I want to retire early!

If you want to give up work and live off your money, e.g. trading shares, Spread-trading or just actively investing there are some things to consider, to prevent financial disaster:

What are your minimum outgoings? This is the amount that must be covered before taking any risk with your assets: The costs that must be covered such as bills, food etc. In the 1990s many "Day Traders" went bankrupt because they needed to trade just to cover the bills and during a losing streak they ate into their capital and once you have lost it it is difficult to get it back. If you have bills of £1,000 a month that have to be paid this should come from some reliable source. Index linked government bonds are the only guaranteed way of getting inflation-proof return forever, but pay just 1.5% (plus inflation) so you would need £800,000 invested in index-linked gilts just to cover the bills, before even starting trading shares or Spread-trading

Alternatively, taking a little more risk with a balanced portfolio you could have less than £250,000 invested to cover these essential costs. If you are willing to take on some part-time work or can cover some of this amount from blogging or with your Squidoo or other internet earning then this safety margin can be reduced. You then need to decide how much money you want to earn on top of this minimum risk reducing part of your portfolio and adjust the risk of the remaining part of your portfolio accordingly. Remember that if you lose your money you cannot get it back.

For details about how to earn money on the internet and create a suitably engineered portfolio to meet your requirements please see the related articles:

How to Make Money On Line

Financial Engineering