Understanding money and investment
I haven't ever read one of those "get rich" books. But I suspect that any reputable one would have a graph or chart or something that looks something like the above.
The difference between wealthy people and non-wealthy people is the above. Wealthy people build assets, non-wealthy-people don't. If you're not using your company's 401K plan or investing in your IRA, then you won't ever be wealthy. If your excuse is "I can't afford to invest" then you are choosing to never be wealthy (or you don't have very strong math skills or both).
What inspired me to write this was that I saw people on JoeUser.com suggesting that wealthy people are just the people who work really hard year after year missing out on a lifetime of experience "life". I've seen this portrayed on television and in movies as well. "Wealthy people" are really just workaholics who waste their lives greedily trying to get money and missing out on the lives of their children, neglecting their spouses and ultimately regretting not "stopping and smelling the roses". That is a description of a workaholic but has nothing to do with wealthy people other than the reality that workaholics are more likely to be wealthy.
In reality, wealthy people build assets and let the income from those assets compound year after year. Let's say, for instance I save $20 a week. That's a pretty trivial amount. If 20 bucks is the difference between you eating or not then it's probably time to re-evaluate your spending priorities. In 10 years you'll have amassed $16,000. At 20 years it'll be worth over $50,000.
How we normal people can be "wealthy"
So let's work this out in real life. If you start at the age of 25 saving $20 each week, then by the time you hit 65 you will have $305,000. And that's assuming a return of only 8% each year. And most investors expect at least a 10% return over long term. The average "diversified stock portfolio" has averaged a 12.9% in the past few decades. So an 8% return would be a pretty conservative return.
Now, imagine if you can manage to save on average $200 per week instead of $20. That's quite a bit for most people I concede. That's around $10,000 per year in investment. But if you can manage to do that, now you have over $3 million saved up by the time you're 65.
With the current tax code, you can put in up to $4,000 per year into an IRA and it's tax deductible. Your spouse can do the same thing. That's up to $8,000 per year -- pretty close to the multi-millionaire result (around $2.5 million by the time you retire).
Early retirement for "the rich"
But what if you want to retire "young". Say you want to retire at 45 or 55? Look at the chart above. What you have to do is build up your assets so that they return as much as annual income as your job does.
For our example, let's say that Bob and Sally are 35 years old. Between the two of them, they have an annual income of $120,000 and decide they want to retire at 55. They've already saved $50,000 between the two of them in IRAs and 401Ks (which is actually not very impressive -- less than $5k per year since they were 21).
When they hit 55, they will have over $1.2 million assuming a decent return.
Some personal thoughts on investment
I've always been a statistics nut. My friends have seen me graph and measure all kinds of weird things. So it wouldn't surprise them that I always saved the maximum into any IRA or 401K. While I have a successful company today, it wasn't that way for a long while. My average personal yearly income lagged behind that of my friends until a few years ago. That is, from 1993 (when I incorporated my company) to nearly 2003, my accumulated personal income was less than that of most of my friends. But despite that, I had always maxed my IRAs, invested as much as I could either in the company or in stocks.
But most people don't invest their income. They go to work, come home and after they've paid their house payment, car payment, grocery bill, etc. They then go out to eat or buy DVDs or some other consumable that they could have invested. And what they don't realize is that it takes a very small amount of investment to generate huge returns over time.
My investments have averaged around 11% since I started investing back in 1994 (not counting my company). Even had I invested just $5,000 per year back then and stayed at that level forever, I'd have millions when I hit 65.
But most people won't do that. I've talked to friends and acquaintances and it never ceases to amaze me how much money people will piss away eating out (seriously, I've known people who make less than $35k per year who still spend $100 per week eating out each week). The beauty with investments is that if you are willing to aggressively invest early on, your compounding returns will soon be so much more that you'll be able to "live it up" long before you retire.
Investment isn't about squirreling away your nuts as you toil in a job for the day of retirement. Investment is about building assets. And having those assets generating income in various forms that eventually far exceeds what your job could bring in. That 21 year old saving $5,000 per year would have $76,000 10 year years. That's $26,000 back. They'd have $250,000 on their 41st birthday (despite only putting in $100,000 -- they'd have gotten more than twice as much back). You could throw one heck of a party or go on some pretty lavish vacations as you neared your 20 year reunion without putting a real dent into your retirement.
So don't squander your chance to be financially independent. Being "wealthy" is just a matter of having some sense of delayed gratification. Max out your IRAs and 401Ks and the rest will tend to itself.