In our guide to how to get rich quick, we analysed the different ways you could accelerate your net worth in a short period of time. In finance, there is no such thing as a free lunch. This meant that the trade-off for having the opportunity to quickly build wealth was to tolerate a high risk that you could actually lose money instead. In this article, we’re looking at this topic from the opposite perspective – what is the easiest, lowest risk way to get rich? In other words, how to get rich slowly.
How much money do you need to be rich?
In our article What does it mean to be rich? we concluded that you don’t have to be a millionaire to be rich. One useful measure is the net assets you would need to ascend to the ranks of the ‘top 5%’. In 2021 based on Census data, this figure was £1,988,500.
For this thought experiment, we’ll therefore use £2 million as the definition of rich.
How to get rich slowly using a bank account
Bank accounts are a natural place to begin saving. Deposits in British FSCS-protected bank accounts are guaranteed by the government up to £85,000 per institution. They’re consequently one of the safest places to keep your cash as you build up your wealth.
Bank accounts grow at a very predictable rate due to interest rates. Current accounts and instant access savings accounts may update their rate each quarter, but you will be warned of this in advance. Fixed-term savings accounts allow you to lock in an interest rate for up to five years. It can be very motivating to know that the outcome of your saving is only a function of how much you can deposit, rather than the unknown performance of your savings product.
How long to get rich using a bank account?
Getting rich with a bank account will almost certainly be a very slow process. In the period from March 2009 to April 2022, the Bank of England base rate was set below 1%, which meant banks offered low-interest rates to potential savers.
Saving a whopping £2,000 each month, it would take you 60 years and 8 months to hit your goal of £2,000,000.
That’s longer than the average Brit holds a job down during their lifetime.
Keep an eye on the ‘real’ interest rate
While interest rates have recently begun to increase in response to surging inflation, this is a poisoned chalice. The Bank of England has felt compelled to raise rates because of the rate of increase in prices across the economy. Inflation is currently running at above 10%, which means that the contents of a savings account can now buy fewer goods and services than they could one year ago. This means that once inflation is taken into account, the real interest rate on a savings account is negative because its contents would be worth less after a saving period than they began.
Rather than helping their owners get rich, savings accounts have resulted in a wealth transfer away from savers to borrowers due to inflation. The real return on a savings account is currently negative.
This doesn’t mean that savers lose money in £ pound terms, it just means that any savings many lose their spending power. If real interest rates are sufficiently negative, it is possible that a large savings account could lose more spending power in a year than a saver could deposit to top it up, meaning that in spite of a regular direct debit, the account could still have not grown in real terms during the year. This is something that books about saving money sometimes don’t mention.
The low rates of returns on savings accounts don’t help savers meet their long-term savings goals. If you want to save money in a conservative fashion over the long term, there are still other options:
How to get rich slowly using corporate bonds
If you want to pivot away from the negative real returns of bank accounts, the next logical step is to look at corporate bond funds.
A corporate bond fund will invest your money alongside thousands of other investors across a portfolio of corporate bonds. Corporate bonds are loans made to companies, which attract an interest rate and a return of principal at the maturity of the bond.
Corporate bond funds offer yields in excess of savings accounts – typically 1 – 2% higher than the best-buy instant access savings account available.
- Corporate bond funds can be bought or sold within a working day, so they provide instant access to cash if needed.
- The returns of corporate bonds tend to keep pace or exceed inflation over the long run.
How to get rich using corporate bonds
We suggest in our guide to investing in corporate bonds that you can buy bond funds using a UK stockbroker account, or a Stocks & Shares ISA you can deposit money and purchase units or shares in a corporate bond fund.
Here are some examples of corporate funds that cover a broad section of the market:
- Vanguard – Global Corporate Bond Index Fund
- iShares – Global Corp Bond UCITS ETF
- HSBC – Corporate Bond Fund
These are not recommendations but simply a prompt to help you begin your research.
Based on purchases of £2,000 per month, and an interest rate of 2.6%, it would take 49 years and 1 month to hit your goal of £2,000,000.
This is 11 years quicker than saving with a bank account but is still a significant period of time.
Getting rich slowly requires incredible patience
Overall, this article has probably explained why you will rarely hear bank accounts and corporate bonds mentioned in articles about becoming rich. With modest means and low rates of return, you will need to save for an incredibly long period to grow your pot to £2m.
However, let’s put £2m into context – it’s still a staggering amount of money. It’s enough to buy seven houses based on an average house price of £276,000. In reality, even if you only save 30% or 40% of this lofty target, you will have enough money to live a comfortable life, without the pressure to continuously work to keep food on the table.