There are two things in my line of work that make me excited. One is thinking up complicated ways to minimize tax liabilities in convoluted ways that I won’t remember how to follow the next day. The other is the exact opposite: people taking the most basic fundamentals of wealth building and applying them.
Unfortunately, one of those pays much better than the other. But at the end of the day, guess who has more money left over in their pockets? I can spend all day saving people money, but if that money goes straight to a dumb purchase then you are no better off than you were before.
I am convinced that some people are born to become wealthy. Not because of the family they are born into, but because of their attitude towards money. The fundamental attitude of treating money as a tool not a toy leads even the lowest income producing people to build unbelievable wealth over time. On the other hand, some people were born to be broke. No matter how much money they have, it is gone soon after. Living paycheck to paycheck is largely a choice, not a punishment.
Don’t get me wrong, I understand some people do not earn enough to not live paycheck to paycheck. Many of my friends from school fall into this group unfortunately, so I have my fair share of experience with it. This is another issue entirely I address elsewhere.
So how do we do it?
Lifestyle inflation and “keeping up with the Joneses” is a good way to get exactly what the Joneses have: buried in debt with nothing to show for it in the end. We need a shift in attitude towards what we need and what we want if we want to have something to show for it. A new car every year and a house three times as big as necessary are good ways to destroy your financial future.
“But if I have an old car then it will just break down and I’ll have to pay for repairs!”
Are you telling me that your $500 a month car payment is less than the occasional repair bill? Not only do you lose a significant amount of equity upon purchasing a new vehicle, you lose a bit every year. Sure you don’t have to pay for as much repairs and possibly gas, but when you’re paying such a high car payment you aren’t coming out ahead. Transportation is a necessity not a luxury, so you don’t need to spend like it is a luxury. A decent sedan from a few years ago will go for a fraction of the cost of new.
“But a house purchase is an investment since the equity will just go up!”
Sure, and the same goes for the repairs. And the taxes. And the upkeep. House prices are (almost) guaranteed to continue going up, but when you factor in just how much you spend to stay in the home, it is rarely worth it as an investment. The “investment” in your house could have been comfortably earning you a decent return year after year if you had put it towards a responsible investment portfolio, and the best part is you don’t have to mop the floors or mow the lawn of a stock portfolio. When you buy big, you get big: expenses, time to clean, and a drag on long term wealth.
Obviously there are times when upgrades are necessary, and seemingly wasteful purchases are actually vital to survival. If you genuinely have a safety issue with your vehicle or where you live, then a change would be for the better. If you rely on a high powered computer for your line of work then a model from 1998 is not going to cut it. But buying a sports car or lifted truck purely for vanity is a dangerous road to follow.
When I started this website, I did not go out and buy a brand new laptop in order to just type words, I borrowed old devices my family and friends had lying around they were no longer using. I even told myself if it came down to it I could just use a typewriter. Why? Because at the end of the day, all I needed was something to type on. I don’t need impressive specs or a light up keyboard on my computer to type, I just need keys.
Down to the Numbers
Enough words, why not use some hard numbers? If words will not convince you of how important your attitude is, then numbers are a great way. All of these numbers are assumed to be inflation adjusted.
We have a couple coworkers both earning $36,000 a year roughly (the average US income), Debby and Molly. Certainly a modest income, but they make it work.
Debby is living paycheck to paycheck, spending every penny the moment it hits her bank account. She can never get ahead. Times are tough she says. She spends her money on small luxuries like going out to eat multiple times a day. Ten to fifteen dollars a day in food is nothing and the time she saves is great! She carries a car note because she needs a reliable vehicle to get places. She rents a large apartment because she needs enough space to come home to and relax.
Molly has been taking $15 a day and stashing it. She packs her lunch and has learned to enjoy cooking. She drives the same old car she has for years, paying her savings account rather than a car note. She has a roommate splitting rent with her. Life is good to Molly.
Twenty years later, Debby and Molly are having a talk. Debby just does not understand why it is so hard to get ahead these days. It’s the government’s fault, it’s the traffic, it’s the weather. Molly isn’t quite sure what Debby is on about. Debby is looking at a grim retirement as she hasn’t managed to save much of anything. Molly on the other hand has been stashing her money and investing it responsibly.
Let’s break it down:
$15 a work day for 20 years is right around $75,000. Not too shabby, but nothing to brag about.
As of this writing, the average car payment is $563 a month. People on average keep vehicles for six years, or a little longer than a car note (see where I am going with this?) Debby has spent nearly $170,000 in car payments over the past twenty years! Molly had instead bought older vehicles with the cash she stashed away from not making payments. She wanted to keep up with the times as well, and bought a new car every six years for $5,000. For fun let’s factor in a ridiculous $1,500 a year in repair bills (over what Molly spends and 2-3 times as much as the national average). Molly has saved about $125,000 just from staying away from buying into the hype of new vehicles. A decent sum but again nothing you can retire off of. Of course this is assuming she has incredibly high repair bills, and I did not factor in the differences in insurance, taxes, and other costs of ownership which would easily close the gap.
As of this writing, the average rent is $1,124 for a two bed apartment. Molly split rent the entire time so she managed to stash away another $134,880 over 20 years. Again, nothing incredible but it is still a decent sum of money.
So What?
What I did not take into effect was Molly was investing this money for the past 20 years. If you assume she earned the average 7% in returns on the stock market (after inflation), then in reality she is sitting on over $700,000 as she is having this conversation with her coworker. These are just small differences in lifestyle; she’s not even “saving for retirement!”
Assuming Molly stops her saving immediately and has a plan to retire in 20 years after this point, she will have a little over $2,700,000 adjusted for inflation. This would afford her a comfortable $81,000 a year she can draw from without ever lowering her spending power. If she wanted to use up all her money and did not want to leave any to her family, she could spend the entirety of this by drawing a bit over $165,000 a year for the next 30 years.
Not so modest now, huh? For fun let’s take this even further and remember Molly is living on $36,000. She could easily replace her entire working income forever with less than half of that, around $1,200,000. In reality Molly is on track to retire in just 8 years after this conversation with her coworker, and that is assuming she stopped saving.
Don’t get me wrong, there is nothing wrong with eating out occasionally or living alone. The example above was just to demonstrate that anyone can become wealthy if they do what is necessary to get there. If financial independence is something you genuinely want, then you can reach it.
