The one thing all rich people buy

A smart secretary can retire richer than a high-earning doctor - if they make the right purchases.

Rich people buy nice things – fancy cars, big TVs, a collection of watches – but they didn't get rich by buying nice things. Almost always, the rich have bought something else first … productive assets.

Not all assets are created equal, which is why we specify productive assets. Buying fine art, gold or a classic car, for example, won't cut it. These assets don't throw off cash while you own them, so by ‘investing' in them, you are really just hoping that someone else will pay a higher price than you bought it for. Maybe that will work out, but it's still a gamble. 

Productive assets, on the other hand – shares and property being the two major asset classes in this category – throw off cash in the form of dividends or rent, and can grow in value as the Australian economy grows. It's then possible to take this income and re-invest it in yet more productive assets. The magic of compounding takes care of the rest. 

Even for high-income earners, it's hard to push into the top 1% of households without buying productive assets. Very rarely do the rich get rich by their salaries alone. 

Cash is a depreciating asset and the interest most banks pay on cash accounts is rarely any better than inflation. Over the last 30 years, the dollar has lost almost 60% of its value. At that rate, even a doctor earning $200,000 a year and saving a quarter of his or her after-tax income would have less than $1.2m at retirement. That's not the poverty line, but it's still a wasted opportunity. 

Simple equation

Let's do a little maths. Over the past 30 years, the Australian share market has returned 9.1% a year. If we deduct the average inflation rate of 3.0% over that period, we get a ‘real' return of 6.1%, which is a reasonable assumption for long-term returns.

With a real return of 6.1%, how much do you suppose a 30-year-old would need to save each week to retire with $1.2m? The answer is $203, or $10,540 a year. If you start as a 20-year-old, you would get away with saving just $105 a week throughout your working life. 

That isn't spare change for most people, but when you consider that the average weekly earnings for full-time workers is $1,628, it isn't an unachievable goal either. After tax, we're talking about putting aside and investing just 9–16% of the average worker's take-home income to retire with $1.2m. 

In other words, a savvy 30-year-old secretary with an average income could retire richer than the high-flying doctor who puts aside three times as much in annual savings – all because the former was buying productive assets and the latter was putting their money under the mattress. What's more, had the doctor followed the secretary's investing philosophy, they would have around $3.8m instead of $1.2m.

To get rich, the equation is simple: consistently spend less than your income, avoid high-interest debt, use your savings to buy productive assets, and don't overcomplicate things by investing in stuff you don't understand or by trying to time the market. 

Buying a diverse group of high-quality stocks when they're undervalued and holding them for the long term isn't a get-rich-quick scheme – but it is a foolproof approach to getting rich slowly. The more productive assets you buy today, the more fancy cars you'll have tomorrow. 

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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