We’ve all heard this story before. It’s one that many of us have dreamed of, at least once in our lives.
Different stories, different people—but the formula is pretty much the same. A poor person, usually drowning in debt or originating from the slums, accidentally strucks the proverbial gold and goes from rags to riches almost overnight.
Maybe he wins the lottery. Maybe he gets some sort of a windfall. Maybe he just gets really lucky. What’s important is that he went from skipping meals to eating caviar and steak in the blink of an eye.
It’s more than just a miracle. It’s like magic.
We play around with this thought in our head over and over and over again. We love thinking about what we’ll do with the money, if we ever had enough to actually start thinking about what to do with it. Rags to riches. Poor to wealthy. It’s something many of us can only dream about.
We hear this story every day, and yet at the same time, it’s always just a story to us. Like another parable, we never actually put what we heard about in action. While it inspires us, it doesn’t make us move. It especially doesn’t make us work harder in order to become wealthy.
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— MoneyLend (@MoneyLendNet) July 17, 2018
What’s the definition of ‘rich’?
The thing is, nowadays, it’s getting harder and harder for the average person to earn enough money in order to become considered wealthy. Financially comfortable, sure. But rich? Hardly.
According to a study by the Modern Wealth Index, the average rich person has a net worth of around $2.4 million. The average financially comfortable person, on the other hand, has around $1.4 million. And this number threshold is getting higher each year.
As you can see, in this time and economy, even a million bucks won’t make you rich, especially if you have debt.
This means that if you’re an average person who wants to become rich, you first have to become one thing: debt-free.
How to get out of debt?
Over 80% of Americans, from millennials to baby boomers, are in debt. This is caused by a combination of student loans, mortgages, auto loans, medical loans, and credit card loans. Millennials tend to have the most mortgage and student loans while baby boomers tend to have the most medical loans.
Regardless of the reasons though, if you want to retire rich, you first have to focus on reducing or completely erasing your debt.
Debt is one of the biggest enemies of low-income to middle-income people who are forced to put a large chunk of their monthly earnings towards their loans and interests. Combined with monthly expenses, it’s easy to see how difficult it could be to accumulate wealth.
- Start budgeting. If you’re an engineer wanting to construct a building, you’re going to need a blueprint to follow in order to make sure that your final work is accurate and free of errors. In the same way, if you’re trying to get out of debt, you’re going to need a budget in order to make sure that you don’t overspend or deviate from your plan. Start budgeting as soon as you can. It doesn’t have to be complex or perfect. You can come up with a simple budget now and refine things along the way.
- Reduce expenses. Once you’ve got a budget down, it’s time to reduce expenses. Find out where you can cut corners without negatively affecting your life. It could be transportation, food, bills, or extra expenses. For example, if you go out thrice a week, see if you can cut it down to just once.
- Pay off your loans. The main reason why people are drowning in debt is literally because all their income, be it present or future, is caught up in all their loans. It doesn’t matter if it’s a mortgage, or an auto loan, or student loans. If you don’t start paying them off now, you’ll only end up having to take out more and more loans to offset the cash required for your debt.
- Do the snowball method. The snowball method can be defined as paying off smaller debts first and then eventually moving on to the larger ones. Have you ever felt the ‘high’ when you cross off items on your to-do list? It works the same way. Basically, if you already have the momentum, it’s much easier to keep on ‘rolling’, so to speak.
- Earn extra cash. The best way to pay off your debts as soon as possible is to have additional cash flow. Look for ways to earn extra cash. It could be a side job or a part-time gig. Some examples are babysitting, tutoring, or freelancing. Once you have enough capital, you can also set up a business to generate some passive income for you.
Is ‘debt to riches’ still possible?
Short answer: yes.
Long answer: yes, but you’re going to have to put in some discipline and effort to get there. There are, of course, some people who have managed to get out of debt after winning the lottery or earning some inheritance, but rarely are they ever successful in keeping their wealth. In fact, studies show that about 70% of lottery winners actually end up going broke later on in their life.
It seems crazy, but it actually makes sense. Some answers point to the lottery winners’ lack of financial literacy, since they’re spending their money to buy lottery tickets after all. And no proper financial educator will teach someone to gamble away their money in the hopes of getting the pot of gold at the end of the rainbow.
In essence, if you’re going to ask, “Is going from debt to riches still possible?” then the answer is yes—if you’re lucky. But if you want to be really wealthy, you can’t just rely on your luck. Put in a little effort and discipline and you’ll be amazed at how far you can go towards financial independence.