Now not everyone believes that there is a rich and prosperous way to earn a lot of money. Sure, NYU tutor Scott Galloway defines wealth as “passive income that exceeds your expenses.”
Galloway spoke with the host on an episode of the podcast “Modern Wisdom” about how young Americans can build wealth. And it’s not about getting a big paycheck anymore.
don’t leave
The tutor claims that a friend of his works at a funding store and makes $3 million through wrongdoing and $14 million through good means. Even though he lives in Connecticut and may pay a surprisingly high tax rate (about 50%), by all accounts he still earns a boatload of cash.
“But between his ex-wife, his alimony, his child support, their house in the Hamptons, his Master of the Universe lifestyle he thinks he needs and wants to signal to his friends, I already know. That doesn’t save a lot of money,” Galloway said.
He is an example of what Galloway calls “the working poor”. No matter how much money a friend makes, his desire to maintain a certain lifestyle is a huge source of stress on him and his marriage.
Galloway’s retired father, on the other hand, has a Royal Army pension and Social Security benefits – plus, he has a few bundled bathing machines in the trailer mud. He makes about $52,000 per move without actually working (as Galloway points out, he enjoys going out to bundle tool quarters). But, he spends around $48,000 every year.
“Their passive income exceeds their expenses,” Galloway said. “That’s the definition of rich.”
Even though their fathers earn less than the average annual source of revenue for a full-time coworker, $59,228, in the first quarter of 2024, according to the Bureau of Exertion Statistics.
Being rich is “freedom from worry,” Galloway said. “You want to be able to live well.”
That way, he says, if you choose to work safely until your blonde age, it’s a decision rather than a responsibility.
Take advantage of the power of compounding
From Galloway’s perspective, part of being rich is that you are bringing in an additional source of revenue from your investments compared to your spending. And it’s much easier to build a passive income source when you start young because you’ll have the benefit of the power of compounding.
For example, when you invest $500 at each pace for 40 years, assuming an 8% annual return, you’re ultimately going to earn more than $1.5 million, due to compounding. How about sitting down with a trusted financial advisor or retirement planning tool to determine how much you’ll need to save, taking inflation into account, to meet your retirement goals? I would have thought.
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Galloway additionally recommends diversifying your funding portfolio, which means investing in a variety of investments. This is helping to spread your opportunity across other asset categories, from traditional stocks and bonds to additional assets like commodities and real property.
“I never put more than 3% of my net worth in any one investment,” Galloway said.
It’s a lesson he claims he realized the brittle way by plunking down his wealth twice,
“Embrace diversification for your own financial well-being, much less your own mental well-being.”
Thus, he says, if the market is disordered, “nothing ever gets serious, much less fatal.”
Be disciplined with your spending
By Galloway’s personal admission, the rich getting rich – leaving it – and becoming rich again, had nothing to do with accumulation. For better or worse, it had to do with the market. And, finally, this is no longer the technique he would recommend. In turn, he says, for this generation you won’t keep an eye on market fluctuations, you’ll keep an eye on how much you spend and what kind of savings you make.
When Galloway was young and working for Morgan Stanley, he was given his first bonus – $28,000 worth of music. He used this cash to buy a $35,000 BMW. (He also hung some swimming goggles on the rearview replica, even though he didn’t swim, thinking it would inspire girls).
However, he admits, if he had instead purchased a far more affordable car and invested the remaining cash, he would actually have made extensive financial savings.
“Be disciplined about putting some money into low-cost ETFs and index funds,” he said.
According to Galloway, building property takes years and various investments – including the potential for compounding.
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