How To Get Rich Slowly Without a High-Paying Job

Today’s topic is how to get rich slowly, with a little help from Google Sheets.

Why write this post? In college I was just starting to save money from my part-time jobs, but I had no idea what to do with my savings. My parents had some savings and property assets, but no positions in the stock market or bonds, and nothing approaching an investment portfolio. I had no advice from them, nor did I know which questions to ask.

At age 21 in 1990 I was lucky enough to end up with an economics professor as a landlord (he worked at the University of Hawaii at Manoa; I was living in Honolulu doing a dolphin cognition internship). When I asked him what to do with my savings, my landlord told me to invest in a growth-oriented Vanguard mutual fund and set up an automatic monthly transfer to that account. For the options available at the time, it was great advice. I did what he recommended. Despite irregular income (I’ve never had a full-time job) and making nearly every investment mistake in the book, I’m financially in good shape today, primarily due to the professor’s advice.

I’m hoping to help people in the same way my Hawaii landlord helped me. Most of the financial and investment advice I see is very “zoomed in,” addressing a single aspect of investing, trading, or personal finance (allocation strategies, rebalancing your portfolio, saving money on banking fees, etc.) but there is a dearth of big picture advice. While it may be overly ambitious to map out anything approaching a universal get-rich-slowly plan (some of my assumptions will be wrong for any particular individual), I’m going to try anyway.

Why Accumulate Money? What is Rich?

Many (perhaps most) people feel deeply ambivalent about accumulating money. Perhaps they feel that is immoral, contributing to income inequality, or slightly dishonest (people who accumulate money don’t want to do “an honest day’s work”), or they associate investing and wealth accumulation with negative impressions of “retirement” (inactivity, lack of engagement, decline, etc.) or a particular social class. Some people simply choose to live with less, or even go so far as to take a vow of poverty.

It’s worth examining and deconstructing these feelings. My own reasons for wanting to accumulate wealth are as follows:

• I have a deep resistance to authority (I like helping and contributing and serving others, but I like to work on a voluntary basis).
• I have many interests and activities that I like to engage in, but most of them don’t generate income (thus the desire for passive income).
• I would prefer to not be a financial burden to anyone when I am past my prime earning years.
• I enjoy living well. Fancy cheese is expensive.
• I enjoy contributing to organizations doing good work in the world.

Rich, in my book, means having enough passive income to support your preferred lifestyle.

The Basics

Nothing new here. The fundamentals of my get-rich-slowly system are boring, tried-and-true, unoriginal. I’ve included the basic advice given in the classic The Richest Man in Babylon, and integrated some ideas from the more recent MONEY Master the Game (the latter I covered in detail in this post). What I’ve done that is a little different is to include a public Google spreadsheet (with copying and downloading enabled) that includes budget examples, savings scenarios, and portfolio allocation and account tracking with live calls to Google Finance and Yahoo Finance.

The basics are as follows:

• allocate 20% of your income to paying off any outstanding debts, especially high-interest debt
• allocate at least 10% of your income to paying yourself first ideally with automatic transfer(s) into your savings and/or investment accounts
• create and implement an asset allocation plan, rebalancing at least once a year (preferably by buying “cheaper” sectors)

So blah-blah-blah what does that even mean, especially the last bit? To demonstrate, I’ve created some public Google Sheets in which I outline several scenarios, and how these strategies might play out over time. In order to be specific I needed to make assumptions, so to some the numbers will look low and to others they’ll look high. Feel free to copy these sheets and adjust the numbers to fit your own situation.

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Why Google Sheets? (sidebar for nerds)

For the budget and savings sheets, any spreadsheet application could work. I like the free OpenOffice product. But for statistics calls to Yahoo Finance and Google Finance (live stock quotes, price-to-earnings ratio, 200-day moving averages, etc.), Google Sheets is unparalleled. After futzing around with Visual Basic functions and waiting for desktop spreadsheet applications take minutes to load (and crashing half the time), learning what Google Sheets could do blew my mind. Now matter how many calls I add to a sheet, loading is near-instantaneous, and I’ve yet to have a crash. Here is the documentation page for the formulas I use.

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Two Scenarios

I’ve created two budget/debt-payoff spreadsheets — one for a recent college graduate saddled with both student loan and credit card debt, and one for a person of the same age working a service industry job (or jobs, given the unreliable nature of shift work) with credit card debt. Both scenarios assume single, no dependents, regular income (from employment, freelance work, or entrepreneurial sources), and living in the United States.

Both scenarios present some hardship (significant student loan and credit card debt in the former scenario, a lack of higher education and credit card debt in the latter).

I based income in the college grad scenario on 2nd quintile averages from 2007 Congressional Budget Office estimates [PDF] (the latest I could find). In the service industry scenario I used hourly wages of between $15 and $20 an hour ($15 is minimum in much of the Bay Area). Certainly many people make less (and in the former scenario, many graduates have six-figure debt). These are not worst-case scenarios, but rather middle-of-the-road, hopefully realistic scenarios for many young people.

To make the calculations simpler I assumed debt interest payments to be included in the debt amount. So actual starting credit card debt in both scenarios might only be $3000, with $5000 required to pay off that amount including interest. Debt consolidation can often lower interest payments and is a good option as long the consolidator is reputable.

Both scenarios assume no job benefits, but the availability of low-cost health insurance plans (such as those offered via healthcare.gov).

Both scenarios assume no car ownership or lease, but a reliance on public transportation, car sharing/rentals, and driving services.

“Cash savings” is assumed to be 100% spent (on emergencies if necessary, otherwise on big-ticket items like travel, furniture, new computers, music festivals, etc.). “Investment savings” is assumed to be 100% retained.

“Rent” is a big assumption too. Some people can work anywhere as long as they have an internet connection (freelance programming or any 4-Hour Workweek style “muse”), and might choose a nomadic lifestyle based on youth hostels, temporary crash pads, or even camping outdoors. Whatever works! Your budget will definitely vary.

The “Payment Mode” column is my suggestion for how to set up payment for each category. Setting up automatic transfer for savings is the key precept of the “pay yourself first” idea (otherwise you are likely to pay yourself last, or maybe not at all). Putting bills on auto-pay saves time, but you may prefer to pay your bills manually (via bill-pay or check) depending on how much of a cash buffer you can afford to keep in your checking account, and how closely you prefer to audit various bills. Personally I have about half my bills on auto-pay. I have arbitrarily decided that the 25-year-olds are responsible enough to use a credit card and pay it off in full every month (thus avoiding fees and reaping the considerable benefits that some credit cards offer). That said I know plenty of financially responsible young people and financially reckless oldsters. Use your own best judgement!

If you see formula mistakes in either spreadsheet, or estimates that look way off, please point them out — I’ll adjust based on feedback. Here are the consolidated links to the spreadsheets:

• College-debt scenario age 20-25
• Service job scenario age 20-25
• Investment allocation example and scenario age 30-65
• Google Finance and Yahoo Finance call formula documentation

They’re all part of the same document, so you can also just open any of them and then navigate using the bottom tabs. No Google sign-in required.

Insights

Paying off high-interest debt should be a top-priority, but that can make for a tight budget for a year or two. Creating a realistic budget for the lower-income scenario was difficult, even with the assumption of no dependents and reasonable medical costs.

Budgets in both scenarios loosen up considerably once debt is paid off, but living off bottom quintile income is always going to be tight. Even starting with $30K lower (negative) net worth, the college grad ends up with double the net worth at age 25, with much better future savings prospects. This assumes that the college degree actually translates into a job with reasonably good income — not always the case — but budgets on a low or lowish hourly wage (especially with unreliable shift work) are always going to be tight.

Developing these budgets emphasized the point that it’s more effective to increase earnings than it is to be excessively frugal (something that Ramit Sethi discusses in detail on his blog — this article is a good introduction). Frugality has its place — especially in terms of cutting out expensive services that don’t add much value to your life — but increasing income even by 10% can increase expendable income (money available for fancy cheese, dining out, travel, clothes, entertainment, fun times) by 20% or more (because rent, utilities, health insurance, etc. are generally fixed costs).

The good news for the lower-income saver is that as long as they get an early start, they’re in better shape than the big earner who neglects to save and invest until middle age.

First Goal — Get Out of Debt and Start Your Investment “Nut”

Both scenarios demonstrate that it’s possible to pay off a moderate amount of debt relatively quickly, while still saving for both fun times/toys and long-term investments. If you’re fortunate enough to go to college, graduate without debt, and land a good job, you can blow these scenarios out of the water. But even the service worker with a lowish hourly wage can end up in good shape at age 25 if they prioritize payoff off debt and paying themselves first.

Second Goal — Build a Diverse, Low-Risk, Low-Fee Portfolio and Maintain Allocation Targets

This spreadsheet is a snapshot of a possible portfolio for someone with middle-class monthly earnings ($5K/mo. post-tax) at age 30, roughly corresponding to middle-quintile CBO averages. The budget includes an aggressive 20% investment savings rate, but is not stingy. The starting net worth of $60K is an extrapolation of the college-grad scenario (who at age 25 had a $24K net worth and was investing $540/mo.).

Our hypothetical investor has a low-cost brokerage account (perhaps Schwab or Vanguard), has chosen to manage their own investments (maybe they are a monkey investor, like myself), and has taken positions in low-cost exchange-traded funds (ETFs), as well as US Treasury bonds purchased directly via treasurydirect.gov. So what does their portfolio include?

• SPY (a low-fee ETF that tracks the S&P 500)
• IJR (a low-fee ETF that tracks the S&P Small Cap 600)
• VNQ (a low-fee Vanguard Real Estate Investment Trust ETF)
• TLT (a low-fee ETF that holds various long-term US treasury bonds)
• IEF (a low-fee ETF that holds various medium-term US treasury bonds)
• GLD (a low-fee ETF that tracks the price of gold)
• US Treasury long-term bonds (held directly)
• US Treasury medium-term bonds (held directly)

These are just examples — there are dozens of low-expense ETFs to choose from, and some investors might prefer to own individual stocks. However no mutual funds are included, because mutual funds usually don’t beat the S&P 500, and are generally laden with exorbitant fees, many of them hidden.

The example investor has both a Traditional IRA account (which presents immediate tax savings) and a Roth IRA (which allows tax-free withdrawals) and also a regular brokerage account. The non-IRA account is necessary because the $12K annual savings exceeds the combined IRA limit imposed to the IRS (current $5,500 per individual). For this example I’ve placed the equities holdings in the Roth IRA because they’re likely to appreciate the most over time.

Allocation sectors are weighted towards bonds, because equities (stocks) are typically three times more volatile than bonds. Incredibly successful investors such as Ray Dalio recommend even heavier weighting towards bonds, but for a 30-year old investor the example allocation is reasonable. “Your age in bonds” (as a percentage) is an oft-recommended rule of thumb, and this portfolio is even more conservative.

The portfolio includes both directly held bonds and bond funds because the latter may fluctuate significantly, and is riskier. For example if interest rates go up, TLT will lose value (bonds purchased at lower rates become less valuable). However you will never lose principal on a directly held bond (provided you are willing to hold onto it). It might even make sense to separate directly held bonds and bond funds into separate asset classes with their own target allocation percentages, though I haven’t done so in this case.

Most importantly, sectors are chosen that typically do not all move together in tandem (aka “fake diversification” — see mistake #2).

What Actions are Required to Maintain an Allocated Portfolio?

Once the Google Sheet is set up (note that the market price and dividend/yield columns make live calls to Google Finance and Yahoo Finance respectively), maintaining your portfolio should take about one hour a quarter (every three months) — something even an ostrich can handle. Here are the steps:

1. Login to various accounts (including brokerage) and update the Quantity Held column. Current market value will then update automatically.
2. Note in which sectors the Actual Allocation is below the Target Allocation.
3. Note how much cash you hold over your cash threshold (in this scenario the investor prefers to have a minimum of three times their monthly income in cash).
4. Buy in with available cash to whatever holding or holdings will bring your lowest sector actual allocation percentage closer to the target allocation percentage. In other words if your target for the large cap equity sector (big company stocks) is 30%, and your actual allocation is 25%, you could use excess cash (any amount over your minimum cash threshold) to purchase additional shares of SPY or another low-fee large-cap equity ETF.

Selling is optional. If a particular sector has rocketed up in price and you find yourself with an actual percentage well above your target percentage, it makes sense to sell part of your position and take some profits. This especially makes sense for metals and commodities, which don’t pay dividends. But there’s nothing wrong with ignoring selling altogether and simply “buying low” all the time (this will happen automatically as you buy in to your lowest actual percentage sectors). Remember there is a capital gains tax hit every time you sell, especially if you’ve held the position for less than a year.

When you buy, make sure to select the option to automatically reinvest dividends. This will allow you to increase your positions automatically over time without paying additional commissions.

Compound Returns

There is a doozy of a formula in the bottom section of this sheet that estimates net worth after Y number of years based on P starting portfolio value, c annual contribution, and r annual rate of return, compounded. Looking at the three examples, it’s easy to see that Y is very important. The low-income saver ends up richer than the laggard who starts ten years later, even if the late saver invests twice as much per month.

P(1 + r)Y + c[ ((1 + r)Y + 1 – (1 + r)) / r ]

Even so, things look rosy for all three of our hypothetical investors. 6% growth a year is a reasonable expectation for a well-allocated portfolio (some years will be much better, some much worse, but our hypothetical investor will always be buying low). Our middle-income investor who had their allocated portfolio going before age 30 has a net worth of nearly two million dollars at age 65, which could easily generate over $6000/mo. in passive investment income (from interest and dividends). Combined with Social Security benefits, that amount could support a comfortable lifestyle. Any kind of pension, 401(k) or 403(b) plan, and/or passive income from other sources (rental properties, side businesses, royalties, etc.) could make life downright cushy. There is a very good chance (depending on lifestyle preferences and inflation) that our hypothetical investor is rich according to my definition above.

Of course there’s no guarantee that any particular individual will live to age 65 or much beyond. If possible we should be living the good life all the time, not deferring gratification until we’re too old to fully enjoy it. But the beauty of paying yourself first is that as long as your budget isn’t too stingy, you don’t even miss the money you save for investment purposes. You just make a habit of saving and investing, and end up rich. This is especially true if you invest some energy, time, and attention into earning a bit more (rather than living extremely frugally, or giving up your time and money too easily to the demands of others, or spending so much time pursuing leisure activities that they cease to be deeply enjoyable).

Third Goal — Convert a Portfolio into Income for Life

The classic strategy is to tweak your allocation percentages towards less volatile asset classes (bonds, certificates of deposit, high-interest savings, etc.) as you get older. That’s why I use 4% instead of 6% in the rough passive income calculations here. If your portfolio is mostly bonds and CDs, it’s going to grow at a lower rate.

Tony Robbins discusses some other strategies such as purchasing fixed-index annuities in MONEY Master the Game. The main idea is that you don’t want to be 80% in stocks when you want to retire and the stock market happens to crash. At a certain age you want to start locking in some of your returns.

If I’m still blogging in ten year at age 56, I’ll revisit this topic in detail!

Additional Considerations

Some readers will face hurdles not addressed by this post, such as unemployment, poor employment prospects due to disability or local economic conditions or legal issues (immigration, criminal record), no savings and large debt burden in mid life or older, additional expenses and time constraints from caring for dependents, and so on. As mentioned above, your spreadsheet will vary. If you’re just not a spreadsheet person, the core principles still apply. Clear debts. Pay yourself first. Invest wisely. If you’re not the DIY type, work with a reputable fiduciary (someone who does not receive trading commissions). Wealthfront is an intriguing new option, though I haven’t researched the service enough to recommend it.

A certain amount of “vim and vigor” is required to even start thinking about ways to increase earnings and long-term wealth. Sometimes addressing depression or underlying health issues or even sleep deprivation is a prerequisite to undertaking a wealth-building plan. On the other hand, creating and implementing a long-term wealth-building plan presents its own neurological rewards, and may have a mood-lifting and motivating effect.

In my next finance post I’ll discuss how I evaluate individual sectors for value, and one way to approach investing a lump sum. What’s the best strategy if you suddenly find yourself in possession of a large chunk of cash, perhaps from an inheritance or sale of a major asset? Should you immediately buy in to your various sector allocation targets, all at once? Or should you buy in gradually, looking for “deals”? If you choose the latter strategy, does that mean you’re committing the great investing sin of “trying to time the market“? At this particular moment in time global markets are highly volatile, many asset classes seem overpriced, and some sectors are plunging in value — so these are important considerations for the cash-rich.

I hope you find this post helpful. I’ve covered a lot of ground, so please point out any mistakes or formula errors you notice, and feel free to share your opinions and/or stories.