A man is not rich because he pays largely; but he is able to pay largely because he is rich. It would not be a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbor doing so. It must be clear, that the rich man spends, because he is rich; but never can enrich himself by the act of spending.”
This is from Jean-Baptiste Say, A Treatise on Political Economy, translated from the 4th edition, Book III, Chapter VIII.
In the above quote, Say is pointing out the absurdity of the claim that Great Britain is rich because its taxes are high. (Britain’s taxes were high at the time to pay for the war against Napoleon.)
So while Say is simply making an analogy between the rich country and the rich man, I found myself, while reading this passage, thinking of a really good book by Thomas J. Stanley and William D. Danko titled The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. In it, they show, with ample data, something that is obvious as soon as you think about it: most millionaires got that way, not by spending, but by saving, almost never being extravagant.
READER COMMENTS
Thomas Hutcheson
Nov 15 2020 at 6:42am
Maybe Say’s insights were novel in his day, but I’m underwhelmed by this one.
As for “most millionaires got that way, not by spending, but by saving,” I’d say the real secret to being rich is less the saving than having a high income to save from.
John hare
Nov 15 2020 at 3:21pm
Saving can create the investment capital that creates the high income
Thomas Hutcheson
Nov 16 2020 at 8:06am
Across most people, saving will be more closely correlated with current income than with the integral of savings rates.
Ethan
Nov 16 2020 at 11:07am
But that is exactly the problem. People correlate their income and their expenses. They are two separate items that should have no direct relationship.
Most wealthy people get that way by consistently saving and investing.
Bezos, and Zuckerberg are the exceptions that prove the rule. Sure you can look at billionaires and say they made gobs of money by creating a business.
However, keeping spending consistent regardless of income, and investing the difference is what creates most millionaires. Those that correlate spending with income are doomed to have small wealth accumulation as they age.
Henri Hein
Nov 16 2020 at 2:27pm
It’s been a while since I read the book, but as I recall, they do quantify that personal savings habits were a better predictor of millionaire status than absolute income level. They certainly had plenty of anecdotes.
One way to test your theory is to look at lotto winners. Their lifetime income is staggeringly high, compared to their peers. Yet they pretty consistently end up with nothing.
robc
Nov 18 2020 at 9:59am
I also haven’t read it in a while, the last time I picked it up it felt dated and that was a long while back.
But, you are mostly correct from what I remember. Income does help…there are more millionaires per capita from the group making $200k than the group making $50k. But it isn’t as large of a split as most would expect.
Steve
Nov 15 2020 at 10:17am
Prof Henderson–
This reminds me of something you wrote years ago that stuck with me–something to the extent of, “the fastest get rich quick scheme is to do it slowly and steadily.” I’ve tried to search to get the exact quote, but as you can imagine Google is just full of the more typical get rich quick schemes when I try to search.
Do you remember where you actually wrote this, by chance, or have the actual quote available offhand? I use this whenever friends and family ask me for financial advice but I’d love to make sure I’m quoting you correctly.
David Henderson
Nov 15 2020 at 10:56am
Steve,
I think it was this:
https://www.econlib.org/archives/2012/08/getting_rich_in.html
In my Wall Street Journal review of Lee and McKenzie’s book, I called it “the how-to guide for becoming the millionaire next door.”
Steve
Nov 17 2020 at 7:45am
Yes, that was it. Thanks!!
Steve
Nov 17 2020 at 7:56am
I think the specific quote I was thinking of was from #7:
Anyway, thanks again (for this specifically and for the years of content you’ve provided me that I’ve never paid a penny for).
David Henderson
Nov 17 2020 at 11:17am
You’re every welcome, Steve.
It’s nice to hear from people who don’t necessarily comment much but who enjoy and, more important, learn from the content on this site.
Daniel
Nov 15 2020 at 12:19pm
One gets rich by extracting surplus from value-creating activities, which require spending. But it is that spending which we would call investment (in intermediary goods and services), rather than consumption. Likewise, while saving is often then directed as investment (i.e., spending on appreciating assets), saving alone generally does not increase one’s wealth but at least slows its reduction.
At the individual level, simply telling people to “not spend” their money is a great benefit to wealth retention by helping them avoid spending on depreciating or ephemeral items. But telling people to “save” in this way simply prevents the average from becoming the poor- the “right” spending is needed to become rich.
Phil H
Nov 15 2020 at 8:47pm
If Say’s point is that countries are like people, then he’s wrong. The whole difference between macro and micro is that countries aren’t like people. A person or company cannot get rich by spending lots of money. But a country does get rich(er) if its citizens spend a lot of money.
john hare
Nov 16 2020 at 4:14am
It depends on whether they are spending on appreciating or depreciating assets. It makes a major difference whether the money is spent on industrial plant or cocaine.
Spending is an effect, not a cause.
KevinDC
Nov 16 2020 at 10:58am
This is just false. Citizens spending lots of money does not make a country richer. If it did, the Weimer Republic would be remembered as a resounding economic success story – citizens all over the nation were spending money by the literal barrel. Countries grow richer with greater production, not greater spending, and that wealth is experienced as greater consumption. Greater production raises real wages and enables higher real levels of consumption. But higher levels of consumption and spending are an effect of becoming richer, not a cause. Nations cannot simply spend their way into prosperity. If only it was that simple!
Kent A. Smith
Nov 16 2020 at 6:51pm
Take care of the kopecks, and the rubles will take care of themselves.
David Henderson
Nov 17 2020 at 11:18am
Love it!
Spencer Hill
Nov 17 2020 at 10:43am
One gets wealthy by living below ones means. As a financial advisor for 35 years, I have met many people with everyday jobs get financially more independent than their peers with similar vocations. One couple had a household income of around $90,000 fully funded their 401ks every year. Another couple, two USAF NCOs had saved over $2 million by investing $700 a month each over the last 15 years. It is feasible to do with average income and time. The problem is most people aren’t disciplined to do it.
Another problem is people think living in area with salaries 150% of US average will get them ahead. They forget their living expenses are 200% of national average. Maybe they should just try for above average wages in a low cost area.
I miss Dr. Stanley’s research on wealth in the US. All of his books were very insightful on habits of the affluent is the US.
David Henderson
Nov 17 2020 at 11:28am
Thanks, Spencer. Actually, a couple with a household income of around $90K is above average, but not way above, and probably not much above at all for their demographic.
But your point stands.
I followed those rules for almost 30 years and I am the millionaire next door.
Comments are closed.