Editor’s note: This article was first published in June 2018, but the text seems to date from 2014, when Charlie Munger turned 90 and was described as a respected investor “today”. Munger died in November 2023, aged 99.
If, at 18, a millionaire gave us honest advice on how to get rich and we followed it to the letter, we would no doubt be rich before turning 30. It all starts with work and saving, obviously. That is followed by a broad knowledge of financial education, having a financial plan, not taking on debt early on, and investing that money, either in your own business or by investing whatever amount you can so that your money keeps earning interest until you make your first million.
Every single millionaire agrees that the first million is the hardest to make. In fact, very few people make it. So we have divided this article into two parts: on the one hand, the most obvious advice about the only known ways to become a millionaire, and on the other, the wise advice of Charlie Munger, Warren Buffett’s right-hand man.
How to be rich
1. Work and saving
You will have heard a million times that you should make money work for you, rather than working for money. And that is what millionaires do. But to make money work for you, you first need to have money, and that is where work comes in.
See also: How Bill Gates makes $1 million a day without doing anything
Working will never make you rich, anyone will tell you that. But work will not only give you the capital you need to start putting your money to work for you; it will also give you essential life experience.
If you start at the bottom, one day you will be better able to understand the people below you. That is one of the reasons why the children of millionaires lose their fortunes once their father dies. Quite simply, they had money without making any effort, so they did not know how it works or how much work it takes to earn it.
Once you have work, the next step is saving. You will have heard that many rich people are very stingy, when the truth is that they became rich because they were stingy (they did not waste money).
If you look at the society we live in, we are pushed towards consumerism. Let’s say that, rather than getting rich ourselves by saving, we unconsciously prefer to make the owners of department stores and big shopping centres rich.
We are pushed to look like something we are not, which is why we drive vehicles we struggle to maintain. You will have heard that “appearances are everything”, and I agree, but appearances sometimes cost money that we could be using not to keep up appearances, but to become rich.
2. Financial education and a financial plan
Being a doctor is a profession in which you have to deal with patients and study diseases and treatments. Some people think anyone can be rich or a millionaire, but that is not the case. Even if you won the lottery, you would probably lose your fortune sooner than you think. I know of a young man who won 15 million euros, and 8 years later the bank repossessed his house.
Another case is that of a man who won 40 million euros. In the first year he got divorced, in the second year one of his sons died of a cocaine overdose, and within 5 years his other son was joining his own father at Alcoholics Anonymous. And we still think that everyone would know how to be rich.
Being rich is a profession, like being a doctor: we have to learn financial terms and study how money works, and your best lesson, of course, is working hard to build up your first capital.
Being a millionaire is not a matter of chance. It is a set of choices that a millionaire makes and a set of habits that this person acquires in life.
Beware of banks
You need to understand how banks work. A bank is not your friend, it is not your partner, and it is never there to help you in a recession. It will only lend you money when you show that you hardly need it, or when it can recover it through some property.
An old saying goes:
A bank gives you an umbrella when the sun is shining and takes it away when it starts to rain.
Credit cards don’t give you relief; they strangle you financially
If you start a savings plan and a financial plan, forget about credit cards. Don’t buy anything in instalments if you can pay cash for it, and don’t buy anything with cash if you don’t really need it.
As the first rule of financial education, try to make every euro or dollar that leaves your pocket come back with a return.
Try to do business with the bank only when the bank is in a position to be your financial slave. Let me explain.
If you take on debt with the bank, you are working for the bank and making the bank rich, when it is better for the bank to help you generate extra income, turning it into your worker. In any collaboration between a bank and a customer, one of the two is going to win and the other is going to lose. Which will be which?
Invest or start a business
If you intend to become rich, you will have to prepare for one of these two options, or probably both. There is not a single millionaire who did not make their fortune either with their own business or by investing. There is no other way to build a great fortune, and anyone who says otherwise is lying.
To be rich or a millionaire, you either learn something about investing or you have to find a professional to advise you.
See also: Things to do in your 20s to be rich by 30
Investing in shares is another way to take part in other people’s businesses without starting your own.
See also: Andrew Carnegie’s 10 rules for getting rich
Charlie Munger’s 5 steps to getting rich
Charlie Munger is known as the number 2 at Berkshire Hathaway and Warren Buffett’s right-hand man. He is a 90-year-old billionaire investor who started from nothing. What is more, his life in general has been no bed of roses: he went broke when he divorced his wife, who left him with nothing but the clothes on his back; he lost his son to an illness; and he himself had serious problems with his eyesight, to the point of losing all vision in one eye.
After these blows, Charlie Munger applied his philosophy of life:
“Once you have discovered that life is very hard, ask yourself whether you will be able to bear it. If your answer is YES, then smile and carry on.”
And that is what he did. Today he is one of the most efficient and respected investors on Wall Street, so when he gives us advice on our financial education, it is worth getting out pen and paper. Even if what he tells us is nothing new, since we have said it on other occasions, perhaps hearing it from him is what confirms that there is no other way to manage our money when we are pursuing that longed-for wealth or financial freedom.
1. There are no secrets to getting rich. It all starts with saving
You have to spend less than you earn, and whenever you save something, put it in an account that pays interest on your money (interest-bearing accounts, deposits, savings accounts…). With time and constant saving, our money grows. That much is obvious.
2. Even a terrible investment beats not investing
Because investing our savings (whether in fixed income or equities) keeps us from spending that money, even a terrible investment that barely earns us any interest is always better than not investing and spending the money. At least we start educating ourselves financially.
WATCH OUT: When Munger talks about a terrible investment, he does not mean going crazy with our money, because we know that some people’s capacity for self-sabotage when it comes to investing can be enormous. For Munger, a terrible investment might be one whose annual return is below inflation.
3. Debt is hell
Once you take on debt, getting out of it is absolute hell, especially credit card debt. Nobody can achieve financial stability while paying interest of 13% or 21%. If you want to be rich, credit card debt will stack the odds against you.
See also: What leads you to poverty, according to T. Harv Eker, author of Secrets of the Millionaire Mind
Even if we get annual returns of around 10% on our investments (not bad at all), we will not make money if we have to pay 15% on our credit cards. That is why, before putting money into investments, you should use your savings to clear any debt with abusive interest rates. That will be the most profitable move you can make.
4. Choose carefully where we invest
Charlie Munger belongs to the old school of investing, the school that keeps outperforming today’s so-called “gurus”, so his investment advice is identical to Warren Buffett’s advice. Look for shares with a competitive advantage at undervalued prices. Set a very long-term investment horizon and reinvest profits and dividends. (See also: The best investors in history and their returns)
Munger is aware that retail investors do not have access to many of the investment opportunities or share-price discounts that are constantly offered to him and Buffett, so he advises analysing certain capital increases very carefully as a way to take positions at a discount to the share price.
5. Patience while we keep doing the same thing
People’s biggest problem, according to Munger, is a lack of patience. Everyone wants to make money fast. Nobody wants to wait 10 years to see results. Yet many of these people are even worse off 10 years later, and then regret not having followed a “calmer” strategy over the past decade.
The secret to getting rich is letting your money mature
Our investments generate a return that we add to the initial capital, while we keep saving and investing the new money we save.
Compound interest is magic, but you don’t see the magic in the first year, and probably not in the second either. From the fifth year on, though, we will notice how much more money we have. In 15 years, if you have saved and invested intelligently without taking on toxic debt, you could say you already have a notable investment portfolio that gives you both financial stability and peace of mind.
Munger once again gave an example that is well known in the world of mathematics when it comes to compound interest:
“If Christopher Columbus had put 1 cent into an account at 6% interest, with instructions to withdraw the earnings as they were generated, 513 years later that account would hold 31 cents.
If, on the other hand, he had left that cent at 6% in an interest-bearing account where the earnings are added to the principal, the result after 513 years would be a gain of more than 95 billion.”
Mathematically proven.
See also: Why you don’t have money, according to Jordan Belfort (The Wolf of Wall Street)
Featured image: Self Scanned, Public domain, via Wikimedia Commons.
