Can You Be Affluent If You Earn Only The Median Income

 

Have you heard of Ronald Read?

He was a gas station attendant, and later a part-time janitor. He didn’t make much his entire life. He drove an old car and was often seen wearing tattered clothes.

But Read had a secret. Instead of spending the modest amount of money he made, he invested it. He enjoyed putting his money into dividend producing stocks.

Oh, and he died a multimillionaire at the age of 92.

Want to know Read’s other secret?

While not the norm, his story isn’t impossible.

 

Why?

Because being wealthy isn’t all about how much you make. Nope. It’s all about how much you keep at the end of the day.

I personally know of many doctors, engineers and other high income earning professionals and a good chunk of them aren’t exactly what I would call affluent. this is because they take on a lot of liabilities, thinking of them as assets and not knowing the difference. Also, their high income is probably short-lived because as soon as they lose their job, they liabilities would start eating them alive.

I also know of many people earning only a median income, who are also saving at least 20 or 30% of their income every single month. They are wisely investing in avenues which will surely provide them with a good ROI in the long-term.

 

But you might be asking, isn’t a median income relative?

Yes, you are right.

A median income obviously depends and varies from country to country. For example, the median income in the US is $50,502. In Canada, it’s about $76,550, roughly about $57,235 USD at the time of this publication. In the UK, the median income for a single adult with one child is about £24,700, about $37,127 USD.

 

Compare these numbers to the poverty statistics. A family of 3 is considered to be in poverty if they make less than $18,550 in the US, $27,918 in Canada. In the UK, a single parent with one child would be considered in poverty if their income is £11,484 or less.

While this modest statistic might upset you (since it isn’t exactly possible to save millions of dollars if the median income is only around 50 K), not all is lost.

In fact,  since I talked to many people about money, have come to know that it is mostly people who earn less who are more careful with money and by extension, more prone to making it work for them, allowing them to join the affluent class in the long-term.

 

Here are some tips to get you on your path to being the next millionaire like Ronald Read.

 

Tip #1 Determine your spending

 It’s natural to want to spend the money you make. In fact, the more you make, the more you’re going to want to spend. I get it; it’s tempting. But it can become easy to fall in to the spending trap, justifying purchases because you have the money.

However, it’s important to really think about your money, and how you want to spend your discretionary income. While things like fancy cars, designer clothing and expensive vacations sound fun, these things aren’t going to help you become affluent. In fact, they can easily drag you into debt if you’re not careful. A much better use of your discretionary income? Saving and investing!

Start by creating a budget. Unless you know how much you’re spending, you can’t possibly know how much you can save and invest. Create a list of all your expenses, starting with the pre-determined ones like insurance costs, auto payments and rent or mortgage. Next, figure out an allotted budget for sliding categories like eating out, groceries and other spending money. You can use your credit card statements from the prior months to help you reach a realistic number.

 

Tip #2 Start adding to your savings right away

 Adding to your savings is like buying life insurance, it’s something that you know you have to do but keep putting off because there is always a “better” use for your extra money.

But don’t put this off! The sooner you start saving, the more you stand to making in compounding interest.

The easiest thing to do is start putting aside some of your extra money. You can make an automatic transfer to your savings each month, before you even get a chance to see the money. Or if your company has the option: designate a portion of your paycheck to be directly deposited into a savings account, while the rest goes into your checking for use. Out of sight, out of mind. If you never actually see the money, you can’t be tempted to spend it right?

 

Tip #3 Start a Systematic Investment Plan

 Starting your investment strategy with a Systematic Investment Plan (SIP) can be a good, safe investment vehicle for new investors. Even those with zero investing knowledge or experience can start with a SIP.

Like automatically depositing money into a savings account, a SIP allows you to invest smaller amounts periodically (weekly, monthly, quarterly, etc.) into a dividend-yielding mutual fund. The money will be automatically debited from your bank and invested into a mutual fund.

If this is your first time investing, your best bet is to consult with a trusted advisor. They have years of experience investing and can walk you through the process and answer any question you may have. If you want to get an idea of what kind of return you can expect, use this SIP calculator.

Buyer beware: Mutual funds are a good investment, and SIPs are a great starter investment. But you should keep in mind that mutual funds will take 100% of your money. If there is a gain, you get back 20% and whoever is professionally managing your account will take the rest. Mutual funds are best for middle class earners.

If you do invest in a SIP, try to do so for at least five years. It can help you gain experience and build your passive income. Keep in mind that to truly build your wealth, having one SIP is only the beginning.

 

Tip #4 Invest in stocks

Basically stocks are an investment that represents partial ownership of a company or corporation. You put in the money and invest in their business; it entitles you to a part of their earnings. Win/win for everyone, right?

Not so fast! The key to gaining wealth through stock investments is to know your risks. With any investment, there are going to be risks that could have adverse consequences. The company could go down in value. They could end up not making as much as you anticipated. They could not pay up. Before picking a stock, ask yourself these questions:

  • What does the business do? If you’re going to invest in it, you should understand exactly what they do.
  • Are they profitable? How has the company been doing thus far? What does their earnings history look like?
  • How high is the stock valued? What is the value the market will pay for the stock?
  • Who are their competitors? It’s important to know who the business is competing against to get an idea of where they stand in the industry.

To pick the right stock for you, start by determining what type of investor you are. Are you risk taker, hoping to avoid risks, or are you somewhere in the middle? Like investing in a SIP, you may want to seek the advice of a professional, at least when you are just starting out.

 

Tip #5 Look for value stocks

Value stocks are the stocks that are strong, but priced below their peers. They are a lower investments, that can yield a great return. Unfortunately, these are hard to come by, and not easy to find.

Keep your eyes peeled for a low price-to-earnings ratio or a high dividend yield. You can also wait for the market to collapse. When that happens, almost all stock prices will fall. This is when high priced, strong stocks are likely to be at their lowest.

 

Tip #6 Buy real estate

There is no better investment than real estate, generally speaking.

The value of property appreciates, or increases in value, over time. Whether you live in the home or rent it out, the value will continue to increase. It takes very little effort to continually increase your wealth with real estate.

Now, if you do decide to rent out the property, you have the opportunity to add to your investment portfolio. If you save whatever you profit (after mortgage, taxes, fees, etc.) and keep saving it, soon you will have enough to purchase another property. Rent that one out too and double your profit. And keep going. See how the possibilities can be endless with real estate?

Another option for investing in real estate is to not buy the actual property, but to invest in a real estate investment trust (REIT), which allows you to buy shares of properties. Doing this is closer to buying a stock than buying and renting an actual home, but a REIT can be a good complement to your stock portfolio.

 

So, can you be affluent, even a millionaire, on a modest income? Of course you can! By saving your money and investing wisely, you can increase your wealth over the years. Just look at Robert Read managed to do, while working as a gas-station attendant and a janitor.

 

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