Get rich by being boring!

They say that slow and steady wins the race. This rule also works for money, so here's a route to get rich slowly.

"To make a million, start with $900,000."

(Morton Shulman, politician)

A few years ago, I presented a money-management seminar to a group of employees in their workplace. The goal of the workshop is simple: to give people the tools they need to gain mastery over their money. It starts with a guide to budgeting, spending and insurance, then moves on to discuss borrowing and saving, and ends with a tour of investing and pensions.

However, as with previous sessions, I could see that a few people weren't bothered about learning the basics of budgeting, good money-saving habits and so on. They were eager to get to the exciting bit: learning how to strike it rich by 'playing' the stock market. At this point, I explained that I wasn't suggesting a 'get rich quick' scheme, but something far less dangerous and much more reliable: a 'get rich slowly' plan, if you like!

Indeed, in recent years, I've discovered something quite interesting. When I've tried to make big bucks by buying 'racier' investments, more often than not, I've come a cropper. On the other hand, when I've bought into what I view as 'boring' companies, I've had some outstanding returns (see section 7). Thus, I tend to invest with a higher 'margin of safety' these days, and the results so far have been outstanding.

Thus, I'm a great believer in my 'get rich by being boring' method, which consists of the seven steps to financial fitness which I mentioned above. For the record, here they are:

1. Budgeting

It doesn't matter how much bacon you bring home: £200, £2,000 or £20,000 a week. If you repeatedly spend more than you earn, you have a big problem. Your goal should to be generate a 'profit' (ideally, every month) by spending less than you earn and putting aside this leftover income. So, learn to track your income and outgoings, and get into the habit of squirreling away some spare cash as often as you can. Here's how to learn to budget.

2. Spending

Naturally, if you're going to become better at budgeting, then you need to curb your spending to some degree. To get you started, try these 25 quick money-saving tips and try keeping a spending diary for a month to see where you splash your cash. Of course, it pays to bash your biggest bills first, so start with your mortgage, motoring costs and so on before sweating the small stuff.

3. Insurance

Breakdown insurance, car insurance, health insurance, home insurance, life insurance, pet insurance, travel insurance -- there are more insurance policies than you can shake a stick at! Still, the basic rule of insurance is: if you must have it, don't pay more than you need for this cover. The ten tips in More Cover For Less Cash will help you do just that.

4. Borrowing

My basic rule of borrowing is: don't, unless you absolutely have to! Although it makes sense to find a low-rate mortgage when buying a home, it's a wise move to budget and save up for other major purchases.

With a typical credit card charging 16% APR, British banks are making billions from people who have yet to learn how to budget properly! If you'd like to turn your back on debt, try these ten tips for size.

5. Saving

One of the big 'lightbulb moments' in my life was when I went from paying interest to earning it. There's nothing quite like killing off your debts and beginning to save to give you confidence in your future. If you'd like to become a superior saver, read Your Ultimate Guide To Saving.

6. Pensions

At its most basic level, a pension is simply an investment, but one which is designed to help you to save for retirement. To encourage you to do this, contributions into company and personal pensions attract tax relief. What this means is that a £100 contribution into a pension costs a basic-rate (20%) taxpayer just £80, or £60 for a higher-rate (40%) taxpayer.

In effect, the taxman gives you back the tax that you've already paid when you direct money towards a pension. However, this tax donation isn't given lightly -- the downside is that pensions are much less flexible than other investment vehicles. If you'd like to learn how to boost your retirement income, read Ten Ways To Pump Up Your Pension.

7. Investing (the exciting bit!)

To a certain degree, I've skated over the first six steps of my get-rich-slowly plan, which largely show you how to make the most of your money and maximise your disposable income. It's at this stage that the fun begins: building future wealth by allowing the power of long-term compounding to make you rich.

History suggests that of the five main asset classes (cash, bonds, commodities, property and shares), shares tend to produce the highest returns in the long run. However, the downside of these superior returns is the tendency for stock markets (and, in particular, shares in individual companies) to be very volatile. In other words, in the short term, equity investing is like riding a rollercoaster, but over the long term, your wealth ascends an upward slope!

What's more, it's crucial to understand that small differences in your annual returns make for big differences in the long term. For example, let's say that you invest £100 a month for 25 years in investments which earn between 0% and 12% a year. Here's how the value of your pot differs at the end of the day:

• At 0% a year, your pot grows to £30,000;
• At 3% a year, your pot grows to £44,459 (another £14,459);
• At 6% a year, your pot grows to £67,958 (another £23,499);
• At 9% a year, your pot grows to £106,531 (another £38,573); and
• At 12% a year, your pot grows to £170,221 (another £63,690).

Over the past nine decades, the UK stock market has returned around 11% a year, with dividends (the income paid by shares) reinvested. However, no-one can say with any accuracy what the return will be next year, or in any coming year, so the 'invest and wait 25 years' strategy is no worse than any other.

If you feel confident enough to build your own portfolio by picking your own shares, then you might try your hand at value investing. Mind you, value investing doesn't mean putting up with boring returns, because it can be hugely rewarding.

Then again, if you can't afford to devote a sizeable amount of time, thought and effort into investing, then you can simply contribute to a simple, low-cost index tracker -- a fund which cheaply tracks a particular index, such as the blue-chip FTSE 100 Index or the wider All-Share Index.

Finally, I'll leave you with another quotation:

"Do not be fooled into believing that because a man is rich he is necessarily smart.

There is ample proof to the contrary."

(Julius Rosenwald, philanthropist)

This is a lovemoney.com classic article which has been updated for 2010. 

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