This is SO long… Sorry/Not Sorry.
- Intro
- What is Wealth?
- Caveat’s and Addendums
- Behavior is the thing you can change
- Savings/Emergency Fund
- Investments
- Retirement
- Insurance
Intro
I know that when I started out at 16 I was told that if I saved $100 a month I would be rich by the time I turned 60. At that time I was making $6.25 an hour and trying to figure out how to pay rent while passing high school classes. I needed to work with the school to have permissions and take special “classes” so that I could work more than 16 hours a week.
It was honestly a great piece of advice, and it completely disacknowledge the challenges that currently faced me. Where would I come up with an extra $100 a month, when I was struggling to pay for food each week?
In other words, I understand that eye-roll you probably feel (or display) when I tell you that you could actually build wealth. Please read through, I am not selling anything.
What is Wealth?
This is an important question. Most of us who grew up poor would say that $1,000,000 is RICH. If I had a million dollars, I would have a mansion, servants, and everything would be easy. Unfortunately, in many places in the United States, a mid-level home will cost around a million dollars. If you want that Lambergini you saw in the movies, it costs about a million dollars to purchase. And then, most people who are purchasing them will then spend another million dollars on customizations so it can be unique to the buyer. Basically, a million dollars is not the answer to this question.
Wealth is not a specific number. Costs change, and until you reach an absurd amount of wealth you cannot assume a specific amount in savings will solve the problem.
My definition of wealth is that you can live off your assets. Which means that there are 2 variables you can adjust to make yourself wealthy. You can increase your assets and/or you can decrease your spending. (When I say assets, I mean savings, investments, real estate, business, or anything you own that brings you income.
So we need to look at how you spend. If you are very frugal, if you don’t buy something unless you desperately need it, and you buy the cheapest option of car and home to suit your needs. You opt to make all of your food from food you have grown, and you heat your home with wood you chopped from your property. Let’s say you even make and repair your own clothing. In this circumstance, you could be wealthy, with very few assets. If your food cost are kept to $400 a month, and your utilities and taxes are about $300 a month, and your external other costs are $200 a month. That is $900 a month, so $10,800 a year to live. If you are earning 8% interest you need to have saved $135,000 to be wealthy.
A great place to clarify. $135,000 is your assets. You never want to touch this amount. You want to wait for it to gain interest for the year, then at the end of the year, if you had that 8% consistently, at the end of the year, that $135,000 would become $145,800 due the power of interest. You could then take out that $10,800 from your account to pay for your next year’s living. You would never need to earn more money because your assets are paying for your required costs.
I could not live on that little. I like to go out to eat sometimes, I like quality meats, and dairy items, and vegetables. My wife loves berries, and we both love coffee. Those choices, plus having 3 teenagers, our food budget per month is like $1,500 alone. With our utilities, insurance, mortgage payment, fuel for our vehicles, let’s say we had car payments, and we buy clothing and required things like dishes and toilet paper. Basically, while that first example was like $11,000 a year, I think that might be closer to a month for people like me. So, if I needed $10,000 a month to live, that is $120,000 a year to survive. That means that if I was consistently earning that 8% of interest, I would need to have $1,500,000 in an account to have it earn enough interest in a year to cover my expenses.
Thinking with the goal of being wealthy under my definition, that $1,000,000 COULD be wealthy. But you would need your monthly expenses to be less than or equal to $6,666,66 dollars a month if you could consistently get that 8% interest on your assets.
But remember, I have rarely found a place that will consistently promise you 8%. So you might get 15% one year, and 4% the next. The goal is that you average 8% over a 5 year period.
Caveat’s and Addendums
- When you have money, it is easier to save money.
Simple example. My Business Membership at Costco costs about $120 a year. If I purchased only toilet paper and gas from Costco, I would save money every year for simply having that membership. I pay $19 for a 30 pack of toilet paper. If I go to the grocery story, buying the same quality paper, it is usually about $12 for a 6 pack. That means that I am paying $19 vs $72 for the same amount of toilet paper. That is actually about 25% of the cost. Gasoline is frequently 25 cents a gallon cheaper. I have done the math, and I am sure you don’t actually want me to go through the numbers here, but ~ The savings on only these 2 items alone saves me more in a year than the cost of the membership. And they send me a check at the end of the year for $50 or so for my dividends on my spending. It is an incredible deal for me. So why doesn’t everyone use this deal?
You have to have $120 up front, and that you can afford to set aside for a year before you see the return. That is a real barrier for entry.
I love this example because it is so clear. But this is not uncommon. If you can do so without getting angry, it is worth looking around to really understand. Where can you save money by spending a bunch up front. - Sometimes you simply don’t earn enough to build wealth.
Later in the post I intend to talk about how powerful changing your behavior is for building wealth. But this is a powerful truth that I need you to hear. You can do a lot. And there are some times that the numbers don’t add up. Sometimes the only answer is that you have to earn more money. And I know life circumstances can make that very hard. I am sorry if you are here. - There are tradeoffs.
I could suggest 100,000 great ideas that are amazing. And each and every one of them might post challenges for you that others don’t have to deal with. We all have challenges and unique circumstances. So it is up to you. You need to be honest with yourself and see what YOU can change, and not judge yourself against every potential option ever. I was able to do a lot of the great suggestions, and others were simply not for me.
Example: I know that some people have Pervasive Drive Autonomy Which means, you tell them to do one thing, and they cannot make themselves do it. So, when you put a rule before them, like, NO ICE CREAM, it becomes almost a physical barrier to them. Even if they didn’t want ice cream, they will have ice cream, and you can’t stop them. This is not a choice. This is a real challenge that people face, and it makes their lives harder. So, If I were to suggest, that they stop eating take out for dinner, they might look at the money they would save, and then go order a burrito.
I want you to look at the reality of who you are and what challenges exist for you. And do your best with where you are. Then challenge yourself to do better.
Behavior is the thing you can change
Here is what people have a hard time with. If you can do this, you can win. Everything else in this post will be about tools you can use to help you. This is the thing that you can do.
We resist the changes that help us. How do you feel if I say the word… BUDGET. I know that for the longest time, I felt restriction, deprivation, frustration and the knowledge that I would never have the power to buy what I wanted. After learning a TON about money, I now think of a budget is the way I give myself permission to buy what I want. Once again, I would recommend taking Dave Ramsey’s Financial Peace University course. I don’t follow his exact program, but what I would recommend about budgeting is his idea. I can give you the most basic of ideas without feeling like I am stepping on his toes. Before the month begins, Map out every time you get paid or earn money on the calendar. Then, Map out when each bill/utility/debt payment is due. And plan a reasonable amount of money for your groceries, gas, and clothing. Then you can see it on paper. You see that you earn X amount in the month, and you are required to spend Y amount in the month. And with any luck, you are starting with X being larger than Y. I found that looking at my budget, when I saw that Y was greater than X, I needed to go through the things I buy and make some hard decisions. Cut what you have to cut. At a minimum, you need to have X and Y be the same number. After that, any extra you can earn will go towards your basics of Pay off Debt, and Build Savings.
I found that I had some real emotional attachments to behaviors that I had. I found there were behaviors I had that I didn’t want to admit to and I didn’t want to change. Let say you go out for coffee every day. Everyone else at the office does, and it feels pretty basic as far as luxury goes. But even if you get a cheap latte, it is still about $5 a day. That is $35 a week, and roughly $140 a month. That could make quite a difference. Imagine if you could find 2 or even 3 things that could save you $140 a month. And we also don’t have to go cold turkey. Even if you could change and only order a basic coffee, that might save you $3 a day.
Never pay late fees. I used to have a roommate that would pay his half of the rent and utilities every month. But it was never on time. I ended up paying the late fees because I couldn’t afford to pay the whole bill myself when it was due. (I didn’t even make him pay them, I just did because it was easier.). Late fees are completely avoidable with a tiny bit of planning and control over your money. Even if it is only $5, If you have 4 utilities every month, that is $240 a year you save by simply having a plan.
Never lease a car. (You can also replace the word car with phone most of this paragraph.) You do not need a new car. Leasing is the most expensive way to pay for a car. They lure you in with the fact that the payment is less than the payment of a car loan. But they forget to mention that you never stop paying. Even if you got a 5 year car loan, you would pay it off within 5 years. And do you know what happens after that time? You don’t have a payment any more. So, here is the thing, your car will last twice as long as it will take to pay it off. If it is a 5 year loan, you pay it off in 5, and then have 5 years of no car payments.
The more change you can find, the more power you have. Sometimes that change comes in the form of: What can I sell? How can I earn more money? (If you are at a space that you need more money to make things easier.)
Savings/Emergency Fund
Why? Why is this so important? If you have any sort of debt, or need something you currently cannot afford, you would see the value in having a lump of cash sitting available. The downfall can be, lumps of cash move quickly. Ever heard of having “liquid cash”? It feels like liquid when in my hands, for sure. This touches on the behavior part too.
We need to not look at money in hand as spendable. We need to look at it as part of a plan that allows us to organize when it becomes spendable. “Oh, Pizza! My bank account is bigger than zero, I am in!”
This mindset is very damaging to us long term. Let me relay it back to something we probably all know. Remember how hard it was to attend that class in high school that had the teacher that you HATED. Even if you loved the subject, the class was just impossible to wake up for because you detested the time you were obligated to spend in the presence of that jerk. Our brains and bodies want to stay away. But who does this hurt? Does it hurt that teacher? No. Does it hurt anyone around us? No. So… Who does it hurt? Only you. You fail the class, and hurt your overall GPA. And worst off, you have to retake that class. Knowing that colleges all want you to have a better GPA, this hurts you in 3 different ways. The best thing to do if you hate a teacher, is do your work as quickly and with as much quality as you can. Keeps you out of conversations, and minimizes interactions with them in general. You will pass the class never having to see them again, and increase the odds that you will do better getting into the college you want.
When we spend every penny we have, we don’t have funds available when something goes wrong. I got into so much trouble because I didn’t make enough, I would spend money when I had it, and when something big happened, I had no money to pay for it, so I either went without, or I went into debt. And once you have a credit card, it becomes so easy to put that “surprise” on the credit card so you can get by. Using these tools, Credit Cards, Loans, Pay Day Loans, really feed your need for “Now” but the expansive is “Later and exponentially more.”
Savings accounts are a great place to store you money that is not yet planned. While the average bank still doesn’t offer much for interest, it is an extra step for you to take before you can accidentally spend it.
This is also where you want to make sure your emergency fund is. An emergency fund is money that you hold onto for if something goes wrong. Let’s say the tire on your car blows. You need your car to get around, so do you put it on a credit card? Ideally NEVER. But I know I was in a situation where I needed to do that. Credit Card interest is one of the many things I would label as Poor-People-Tax. Look at the post on Credit to understand how much interest really costs us. When I finally had a small emergency fund, I took the $400 for that car repair out of my emergency fund, and it wasn’t an issue. I then changed my goals with month to re-fill my emergency fund before going back to paying off debt.
An emergency fund should be 3-6 months of your required expenditures a month. (3 for if your job is really stable, and 6 if it is not.)
Investments
This might be pretty far off. But it can be a goal, and I want you to have a basic understanding of them for when we talk about Retirement. And with a semi-decent job, you might have options for retirement that will allow you to access it sooner than you feel like you can access straight investments.
What is an investment? According to Investopedia.com an investment is an asset or property acquired to generate income or gain appreciation. In more plain words, it is something you can get now, that you have reasonable confidence will be worth more later.
Now there are a lot of misconceptions here. While there have been people who have won the lottery, or ended up with an old Mickey Mantle Mint-Condition Baseball card, neither the lotto nor baseball cards are something I would claim is an investment. There is too much risk, and the percentages of success are so low.
For instance, my grandma played the lotto frequently. She knew she would win one day. And at some point she did. She won $500, and everyone was so happy for her. But, how many tickets did she not win with before. If she played a single $2 ticket weekly for 5 years, she would have paid $2 * 52 weeks * 5 years = $520. So she was actually still $20 in the hole. And that is only If she had played for ONLY 5 years.
I remember when as a kid, everyone told me to: “Keep that, it will be worth something someday.” Looking back at the 100’s of things that people told me to keep… none of them are the exciting prize item that someone will pay millions for now. Zero. Not one. The Pee Wee Hermon doll, the life size Teenage Mutant Ninja Turtle figurine, the Tickle-me Elmo… None of them have value now. And even if they were worth something: How many people managed to keep them pristine in the box? Because I am pretty sure the Fieval doll from American Tale lost a whole lot of desirability when I drooled on it when I was sick at age 6.
As I noted: too much risk. Investments really become of value to others when they are something that continues to feel like it has value. Maybe you can start putting $50 in a savings account that earns 5% a pay check? If you can find a savings account to do that, then that is an investment. (Assuming you can leave it in there.) Investments tend to be bigger things. Real Estate is generally considered a good investment when you are careful. When I was 19, I saw a house in the city in a less wealthy neighborhood that I thought I should buy. I thought it would be great to have a house and it would be a good investment. It was $70,000. At the time I thought, how could I ever come up with that much money? Needless to say, I didn’t buy that house. If I look at the cost of that exact house right now, the estimate on Zillow is currently $278,000 dollars. Without looking deeply at it, that gives us the overall idea. If I could have purchased that house at $70,000, I could now sell it for $278,000. That would be $208,000 above what I paid for it. Today’s value is almost 4 times the value of what I would have paid. Imagine if I had the funds to do it, and I bought 5 houses like that. I would have earned more than a million dollars, for simply having purchased the houses.
While there are a lot of complications that I am not fully aware of with real estate, it can be a great investment. The more common thing that might be accessible to you would be stocks, bonds, ETFs, or mutual funds. These words often put people to sleep. But each of them is used by people to purchase and wait until they are worth more. The key is finding some funds, freeing them up, purchasing one of the above, and waiting.
I am not going to try to explain all of the options, and what they do, and what the differences are. I am not actually well enough educated to do that justice. But I can tell you that I purchase stocks in a company at $30 a share, and when I sold them, they were worth $72 a share. That means that for every share I owned, I earned $42 on top of getting a return on my $30. If you can find a stock that you feel is doing well, or think it will do well, if you made a good guess, you can earn money. But like any form of gambling, you have to be aware that you can purchase at $30, and watch it drop to $2 the next day. You can lose as much as you could win! So that is why I like Mutual Funds. These are essentially a collaboration of a lot of stocks. For instance, the S&P 500, it is basically made of the 500 best performing stocks in the market. It does go down, but it often goes up. It allows for smaller gains, but more consistent gains. I also recommending that you remember this is a LONG TERM investment. IT WILL GO DOWN. And, it will go up too. When looking at investments, you can easily find the 5 year track record of a stock or mutual fund. If you see that over 5 years, it has earned 10%, that is a pretty solid suggestion that it might do well in the next 5 years.
But this isn’t perfect. There is SO much to learn to try to keep up. So this is why I use a financial advisor. I communicate with my financial advisor, tell them the type of things I want to put my money into, and probably most important, I listen to their expertise. Their job is literally to understand the complexities of the stock market. They can also give you a 5 year track record of funds they have managed.
Retirement
A retirement is an investment that is protected from taxes (to a certain extent). You can never get away without paying your taxes. Please don’t try. But with retirement, you get to build funds while paying fewer taxes on those funds. The exchange is this: You are agreeing that by using this retirement fund, and by receiving this large tax benefit, you will leave the money in that fund until you are at least 52 years old. (That age may change a bit.) In agreeing to wait, you can earn a large amount of money that you do not have to give to the government.
Special note: These accounts will penalize you monetarily and amplify taxes if you take your money out before hand.
Often, companies will offer you a 401k (or similar) or maybe a ROTH 401k.
A 401k type account is named after the number for that clause in the IRS code. Basically, It is an account set up so that you put money into this account before you pay taxes from your paycheck. (This money feels like it is less than it is because you would never see it pre-taxed. You might put $100 into your 401k, but you only miss $83 that you would have taken home. So the money that goes in there is dollars you earned and have NOT paid taxes on. The idea here is that when you retire, you will have a lower income than what you make right now, so when you pull the money out of your 401k, and are then required to pay those taxes, it will be at a lower rate.
ROTH is a magic word. Adding ROTH in front of your 401k, means that you pay into it AFTER you pay taxes in your paycheck. So, $100 into your account feels like $100 from your paycheck. But here is where it gets exciting. You do not pay taxes on this money, when you pull that money out!
With the 401k, If you put in $100,000 over time with pre-tax dollars it feels like less when you put it into your account The 22% income tax you have now is not taken out. Let’s say it grows over time to $1,000,000. When you pull that money out, let’s say your tax rate at that time is 14%, you would pay 14% of whatever you took out when you needed it. So it feels like you get free money when you put it in, and pay 8% less in taxes when you pull it out.
With the ROTH 401k, if you put in $100,00 over time with taxed dollars, you would have paid your 22% in income tax at the time you put it in. So you feel every $100 payment as $100. Let’s say it grows over time to $1,000,000. When you pull the money out, let’s say your tax rate at that time is 14%, you would pay $0 in taxes on whatever you pulled out when you needed it. So you feel the full $100 you put in when you put it in. And don’t pay taxes on all of the money you earned.
And a side note: You can estimate that every 7-10 years, the money you have in a decent mutual fund, should almost double. So if you saved for 50 years, every 10 years, the amount you have should double.
Insurance
This is the hardest one for me. On average, every warranty or insurance plan you pay for will pay out 12% of what you put in. Which means, for every $1 you put in, they end up potentially paying out 12 cents. Most are taking money from you. But, I understand so little here. So here is what I recommend.
Insure the things that you need, and cannot replace with the funds you have access to. Cars, Apartments, Houses. I recommend life insurance if you have people that depend on you. (I only recommend Term Life Insurance. Almost anything else is a scam added to it.)
And for the things that you can pay for when they break, just pay for them when they break. If you have a $500 emergency fund, you can cover that pair of headphones you lost, or broke on the third usage. Don’t ensure it.
And beyond that, there are good people in every area. There are places you can call locally that are Insurance Brokers. They will listen to what you need, answer questions, and shop around to find the best deals they can for you. If you are calling a name-brand insurance company for insurance, they will, of course, sell you their name brand ONLY. But what if you can get a better rate for car insurance from company A but a better rate on Home Owners insurance from Company B?
Look for your local insurance broker.
I realize this has been a HUGE amount of info. But this is such an important thing to know about. If you know how to build wealth, it allows you to see the options in front of you.
Trauma steals choice. So learning your options and understanding the choice you have in front of you, can become so very powerful. Good luck!