Ten Roads and the Eighth Wonder of the World

Pssst-here's a secret about your tax refund: It can make you rich.

Not that I'm a fan of big refunds, mind you. If you get a fat refund, it means you gave Uncle Sam a fat, interest-free loan-instead of having use of those funds all year to invest. If you get big refunds regularly, talk to your CPA about adjusting your withholdings. But! In the meantime, if you got a refund, my first sentence stands: It can make you rich. Actually, either way can make you rich.

According to the IRS, the average tax refund in 2015 was $3,120. Now, $3,120 won't get you very far. If you live in the San Francisco Bay Area or Manhattan, it might be a month's worth of rent or mortgage payments. It might be a down payment on a car, or several months' car payments. If you're hunting on the secondary market, it's five field-level tickets for next month's U2 gig. But don't think of your refund in present-day terms. Think what it could become if you invest it now and don't touch it again for 30 years. If the stock market repeats its long-term average annualized return of 10%, that $3,120 would be worth $54,442 in 2047. Assuming you get the average refund every year (you shouldn't!) and invest it the same, in 30 years you'd have over $567,000. Even if we reduce the return to 8%, you're talking over $384,000. Not chump change. If you adjust your withholdings, you may be able to afford boosting retirement plan contributions and enjoy similar results. (Or pay down costly debt faster and more easily.)There is a reason why Albert Einstein called compound growth the eighth wonder of the world.^[i]

No, it won't come every year, nor is it straight-line or guaranteed. No road to riches is! But investing-compound growth-is the most common way people become wealthy. Not superrich a la Bill Gates, but wealthy enough to have a nice life and not worry about running out of money in their golden years. Saving judiciously and investing well can build you a marvelous nest egg.

I've got my mind on money (and money on my mind) right now not just because it's tax season, but because Fisher Investments founder Ken Fisher and I just finished updating his 2008 book, The 10 Roads to Riches, for a second edition (available on Amazon now!). As the title suggests, while everyone's story is different, there are really just 10 legal, planful ways the wealthy earned their riches. ("Legal" and "planful" because you can't plan to be the offspring of Mark Zuckerberg and Priscilla Chan; nor can you plan to win the lottery; and stealing is of course wretched and wrong.)

Some take the "richest road" and start a business-Gates, Zuckerberg, Steve Jobs. Some mimic Warren Buffett and Howard Schultz, becoming CEO of an existing firm and juicing it. Some prefer to stay in the background and "ride along" with a superstar CEO or founder, as Charlie Munger did with Buffett. Some folks make it on pure talent as athletes or performers, with a few becoming full-fledged media moguls like Jay-Z, Dre and Diddy (hip-hop guys excel here). A few-men and women both-have married money and lived happily ever after. The less scrupled practice legal piracy as plaintiffs' lawyers. Scores of wealthy folks earned their millions and billions managing other people's money. James Dyson, Dolly Parton, George Lucas and many more did it through creating and licensing (vacuums, songs, light sabers), booking perpetual income with royalty streams. Some Trumped their way to land-baron status with real estate empires.

But most got there the non-flashy way: saving and investing well.

The beauty of all this is that you don't need to be a pure-bred Ivy Leaguer who endured four cotillions in order to amass millions and have a wonderful life-true for any of the 10 roads to riches. The Forbes 400 is full of college dropouts, immigrants who started out penniless and average Joes and Janes. These days, with the Internet shrinking the world, it's easier than ever to turn your passion into cash. Design your own clothes, sell them on Etsy, hustle your way into the fashion pages, and you can be the next Diane Von Furstenberg or Marc Jacobs. If you like, be frugal, invest your tax refunds and eventually put the boodle toward a down payment on an abandoned warehouse in an up-and-coming city, convert it to trendy lofts, and watch the rent payments roll in. Or go write the next big app or engineer the next can't-miss gadget. Creativity and chutzpah are your currency.

So are hard work, patience and perseverance. Even if you don't fancy taking one of those nine flashy roads, as long as you work hard and have patience, you can let compound growth bring all the flash. Will you have to make sacrifices? Probably-though I'm sure I'm not the first to encourage skipping the daily $5 latte run, eating out less and sewing your own clothes. (Honest, it's actual fun.) But the rewards are astounding. If you max out a 401(k) and IRA this year, you'll save $23,500. If that is all you save ever, and we assume that 10% historical market return, in 30 years that sum will have morphed to $410,061. A 25-year old starting out now, saving $23,500 every year, would have over $6 million by age 60. That won't land you on the Forbes list, but it is a pretty great pile nevertheless. (Though, of course, it can't buy you happiness!)

So if you got a fat tax refund, I hope you'll resist the temptation to take it straight to Amazon or Priceline, and plop it in your brokerage account instead-and buy stocks. In 30 years, it'll be worth many, many more vacations (or house payments).

The Ten Roads to Riches - Second Edition, by Ken Fisher, Elisabeth Dellinger and Lara W. Hoffmans and published by Wiley, is available now.