Why is it that some people get rich and others don't? Obviously there are a multitude of reasons but a slight variation of the question is perhaps more revealing…
Why doesn't everybody get rich?
This question surprisingly is perhaps easier to answer. While some people get rich thanks to luck, a brilliant idea, or hard work, there is one way in which almost everyone can get rich – through saving a portion of their salary and earning a compound return on those savings.
Here's an example:
Imagine you're in a job earning a salary of $50,000 per annum. If you could set aside 4.8% of your salary – the equivalent of $200 per month – you could be on the road to riches.
Assuming you could remain disciplined and continuously save $200 per month for 40 years and assuming you could earn a compound return on your money of 10%, then after 40 years you'll have $1.26 million!
But wait, how do you earn a 10% return?
While it certainly shouldn't be dismissed as easy – practice and careful analysis are required – there have been a number of stocks which have safely provided double-digit returns over the past decade. Woolworths Limited (ASX: WOW) has produced a total shareholder return (TSR) of 14%, Origin Energy Ltd (ASX: ORG) has provided a TSR of 13.8% and Amcor Limited (ASX: AMC) has a TSR of 11.6%.
Long-term investment horizon
The key to getting rich is long-term thinking. If you only focus on today, rather than building something for 'tomorrow' it's hard to ever begin the path to wealth creation. The same goes for picking investments which will earn you a 10% return in the future. While Woolworths, Origin Energy and Amcor have helped in the past that doesn't mean they will help in the future.