Your brain and your balance sheet

David MoonBlog

A friend recently asked me how dumb people get rich. It’s a great question, some version of which most of us have pondered. The answer is simple. However, the implications of the question are quite complex, revealing common misconceptions about wealth and intellect.

Misconceptions about intellect and wealth abound. If people were paid for being smart, Ivy League professors would have all of the money and the average NFL running back would make less than minimum wage. Some people we think are stupid aren’t. In our society, we tend to inaccurately equate a person’s ability to effectively communicate with his intellect and competence.

It’s also easy to assume someone is rich when he isn’t. There is a difference between affluence and wealth. Cash flow does not equal net worth.

Becoming rich is pretty simple. Spend significantly less than you make. That’s it. I’ve seen people with very modest income slowly become millionaires. I’ve also seen mid-six figure wage-earners with negative net worths.

Spending less than you make doesn’t work below a certain wage amount, but people disagree what that amount is. My experience, both professionally and personally, is that it is easiest to develop a habit of saving when a person is just a step or two above being broke. Most people, however, think it is easier to save if one has a higher-than-average income.

If you want to earn a higher-than-average income, choose an industry that pays its average workers above average wages. Face it; you are probably going to be about average. That’s okay. It is naïve idealism to tell a person who is money motivated to pursue his passion and the money will follow. No matter how hard they try or how perverted our societal priorities may be, the Bureau of Labor Statistics says your kids are almost certainly not going to earn massive income as average pre-school teachers, average writers or average models.

Dumb people can earn a lot of money, usually when they can do something rare and highly valued by society. Actors and outside linebackers often fall into this category. As noted investor Garrett Arms said, “there are riches in niches.” It is uncommon, however, for people in the dumb niche group to accumulate long-term wealth unless they augment their lack of intellect with honest, competent counsel.

In my experience, the most wealthy and highest-earning people fall into two categories. They are either high-level employees at Fortune 500-type companies or they own their own business. Even the high-income public company employees somewhat fall into the ownership category, since the largest part of their compensation is related to stock ownership.

Even choosing the right industry or owning a successful business, however, doesn’t void the first rule of getting rich: spend less than you make.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN)