http://www.amazon.com/Millionaire-Next-Door-Thomas-Stanley/d...
Don't bother to buy it: Get it out of the library and skim it. It's not a difficult read and it belabors its own point a bit. My own summary:
The secret to retaining a high net worth is the same as the secret to accumulating it: Control spending. Don't waste money.
Most of the people you know who look like they're wealthy -- fancy cars, country club memberships, stylish clothes -- are actually spending money as fast as they can get it, or faster. They have no savings and are living paycheck to paycheck.
Meanwhile, many of the wealthiest people in your town are wearing four-year-old work clothes and driving ten-year-old trucks that they bought used.
It doesn't do your future any good if you make $300k per year and spend $325k per year. Contrariwise, if you make $75k per year and only spend $50k per year you'll be a millionaire in under forty years.
Link: http://www.amazon.com/Millionaire-Next-Door-Thomas-Stanley/d...
Then go read the Motley Fool's Guide to Investing: http://www.fool.com/investing/basics/index.aspx .
For now, leave the money in a bank or Vanguard low-risk bond fund (see www.vanguard.com) and don't do much of anything with it. Read a lot until you understand what you're doing. Don't trust any single source of advice, and don't trust financial advisers. Their interest is often in high fees and is often opposed to yours.
Finally, remember that no one can beat the market over the long term. Anyone who claims they can should be doubted (although they'll undoubted say that I should be doubted. The difference is that I have Efficient Market Hypothesis: http://en.wikipedia.org/wiki/Efficient-market_hypothesis on my side, and they have... promises).
I will admit to being an economics student, but I've known about this principle for years, I didn't just learn about it yesterday. I made this post because five people on a forum I frequent were all talking about how great it was for them that startups required very little capital.
"But the main difference is that regular people have the opportunity to actually strike it rich."
Regular people have always had the opportunity to strike it rich, and for most of the US's history, it was easier than it is today. The idea that technology startups are some sort of fundamental shift in US social mobility dynamics is a harmful, dangerous lie.
http://en.wikipedia.org/wiki/Andrew_Carnegie
http://www.amazon.com/Millionaire-Next-Door-Thomas-Stanley/d...
"High capital requirements tend to mean you need social connections to people with money."
You need those connections anyway. Or, at least, you need to be part of the upper third of society. It's not an accident that Bill Gates's father was a name partner in the largest law firm in Seattle. Why do you think Y Combinator has so many applicants? It's because they provide the connections people need, and the applicants know that.
"than you see low capital requirement markets are in fact a blessing,"
Low capital requirements are good for the customer, and I explicitly stated that fact. What I was saying is: they aren't necessarily good for the entrepreneur.
What do I do with the money?
Invest it in stocks or bonds.
How do I invest it in making more money quickly?
You don't. That's the problem: there is no way to reliably do this. In fact, there's probably no way to _unreliably_ do this either. At the moment, bank savings accounts and CDs are paying next to nothing.
As The Millionaire Next Door shows, most people who we might think of as "rich" don't actually get that way by being sports stars, or inheriting money, or TV, or whatever: they get that way by spending less than they make and saving as much as they can, usually in the form of investing in index funds.
This is a difficult problem to escape because it's one that I behaved myself into, and that it's self-reinforcing for a variety of reasons:
- When you're already on a fixed salary, the opportunity cost of spending time on being cheap is not obvious. You're not taking time away from that $500/hr side consulting gig that you don't have. Instead, you're at a situation where the marginal rate of return on clipping coupons (say, $10/hr) is significantly better than spending the next hour working on that iPhone app that is months from release and has no interested buyers (how long is it going to take to recoup the Apple developer fee?).
- Some people get a rush out of saving money, a feeling of "Ha! I beat the system." To them, saving money is a form of entertainment [1], and there's certainly far worse hobbies to have from a well-being perspective. Unfortunately, there are people who take this too far and end up as total misers or compulsive hoarders. I'm not a pathological case, but I've done things that would make some people cringe.
- Seeing people successfully live frugally can be a motivator to follow in their path. My parents are immigrants who worked hard and saved for 20 years before they were finally able to afford a house in an expensive neighborhood (and nearly paid for it all in cash). They drive Toyotas, shop at Costco, and cook at home. They are basically the epitome of the "millionaire next door" [2].
- There's also a moral justification for this. "Why do I have to keep up with my spendthrift neighbors? So what if I don't drive a Maserati or carry a Hermès bag? No thanks, I shall be comfortable in my own skin, since envy and greed are evil." This is now an identity statement [3], and while it's a good position to take from a financial perspective, it can be crippling in the way it makes some people closed-minded. Of course, this doesn't necessarily stop them from pontificating about retirement at 30.
I do still think that my years of being cheap are starting to pay off, mostly because I'm finally getting comfortable with the sort of "discretionary" expenses you mentioned in your post. The difference is that it probably took a much larger bank balance for me to consider them "affordable." I just flew across the continent purely on a whim to visit some friends that I hadn't seen in years, I no longer cringe at expensive bar tabs if they were time well spent with buddies, I can afford to make an impulse electronics purchase just to see what it's like, and I'm preparing for that self-funded sabbatical [4] to reboot my life.
Was it worth it? Well, it was really, really hard to re-orient myself this way, and it took much more sacrifice than necessary, but the good news is that aside from lost time, most of the rest hopefully can be recovered.
[1] http://www.budgetsaresexy.com/2009/08/saving-money-trumps-se...
[2] http://www.amazon.com/Millionaire-Next-Door-Thomas-Stanley/d...
[3] http://www.paulgraham.com/identity.html
[4] http://www.joelonsoftware.com/articles/fog0000000076.html