How Not To Get Rich (Newsletter 009)
Greetings friends. James Bellerjeau here.
Please consider the following discussion to be generally hypothetical, but I trust still instructive.
I started my career as a corporate lawyer in one of those New York firms that gets headlines every year for the outrageous salaries they pay starting associates. What junior lawyer is worth $200,000 per year when they know how to do exactly nothing? By the way, those are the current salaries, not what I made when I started!
To the junior lawyers themselves, if they have a shred of self-awareness and humility, they know this is a great scam and there must be some catch. There is a catch, and more than one. To start, those junior lawyers will work hard, really hard. For me, this is when I first became acquainted with what a 100-hour week feels like. For the mathematically-inclined among you, it's more than 14 hours a day, every day, no weekends or days off.
In hindsight, I can be grateful for those initial grueling days. Why? Because no one else's idea of a long week could compare. (Caveat, I don't know too many doctors or nurses, who I believe can relate well, or firefighters or the like who do amazing, long-stretches of work at a time.) When I started working only 60-80 hours a week as in-house counsel, it felt like a breeze. I genuinely considered a 40-hour week to be working part-time. If you recall an earlier newsletter In Case You Are Too Busy To Read This (Newsletter 007), then perhaps you can sympathize now why I felt for quite a while that I had no time for social media or indeed anything outside work.
The other catch is that, outrageous as your starting salary was, the law firm was charging your time out to clients at a much higher rate. Consider: annual billing of 2,000 hours, which when I started would have been considered modest, at an hourly rate of $500, also not at all unusual these days for junior lawyers, means that your law firm is charging clients $1 million for your services.
Yes, your firm has to cover a lot of overhead and they don't bill all your time, etc., but that still leaves a tidy profit. The pyramid is highly-leveraged on the backs of associates. You can assume law firm partners are clever businesspeople in touting those headline salaries, which is why there are more than 80 U.S. law firms with profits per partner in excess of $1 million.
Back to getting rich. You would think that earning a salary of $200,000 per year, let alone $1 million per year, would be a guaranteed path to riches. Alas, for many their salary is no indication of their likelihood to become wealthy.
Why should this be so, you ask? Let's say you are a lawyer in New York City, as I was, a common location for such high-earners. Similar to most big cities, your taxes are high (easily 50% all-in) as is your cost of living (say 30% for housing, and another 15% for living expenses). You might be left with something like 5% of your gross income. Where does it all go? Many possibilities, among them these:
- You have a nanny, perhaps a cleaner;
- You take expensive trips, because after all you work so hard, you deserve to treat yourself on the rare times you take off;
- You have a second home, because even though you are working crazy hours, you can't expect your family to sit around waiting for you in a small city apartment; and
- Those kids will need to go to college.
The far more relevant questions to ask in determining a person's propensity to become wealthy are these: "How much of your income are you able to save?" and "Can you manage to regularly spend less than you earn?" If you can, and you start to invest your savings in low-cost funds that track the broader stock market, you will be on the path to leverage the power of time and compound interest.
Learning what true wealth consists of is the subject of Moral Letter 017 On Wealth. We discuss people who are well on the path to achieving independence. I refer to adherents of the "Financial Independence Retire Early" movement, or FIRE. And we explore a fascinating study from UBS about how successful savers feel about their wealth. Specifically how much more money people at different levels of wealth feel they would need to feel secure.
James Bellerjeau
So the main lesson of Letter 017 is that you do not need wealth as it is traditionally defined (in money) to be happy. One way not to get wealthy is to think that you need a lot of money to be rich. Another way is to mistake your income for wealth and spend more than you earn.
And the secondary lesson is that the keys to wealth, health, happiness, and so much more, are small steps that you take gradually over long periods of time. Spend less than you earn, no matter how much you earn, and you will be on a path to good things. Then it is just a matter of being patient.
The fact that I can write about so many varied topics, and that you can read them and interact with me, is due to our right to Freedom of Speech, which I discuss from several perspectives in one of this week's articles. For much of humankind's history, this right was not recognized. Many people alive today do not enjoy the right to speak what is on their minds. We should not take our freedom of speech for granted. I also recommend to think twice before trying to prevent others from saying things you disagree with.
James Bellerjeau
Be well.
PS - I am aware that I have not published Letter 018 this week. This is because the letter fits better to another time of year, so I am going to simply hold onto it until the time is right. You will understand when I do publish it.
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