The great money manager John Templeton began his married life with almost nothing but a commitment that he and his wife would save 50 percent of their income. Years later they were billionaires. Most people don’t need to save or invest nearly that amount to achieve financial independence, but they do need to make a promise to themselves that they are going to be serious about money.
Financial commitments are turning points—points where a person or a couple makes a thirty year or more pledge to sound financial practices. These can make a big difference in a person’s life. They can mean he or she can achieve financial independence in a few decades. Yet many of the strategies I advocate in these pages don’t require enormous sacrifices; but a determination to stick to a regular money management program.
How?
You Save and Others Also Save for You
Say you have a kindly uncle who wants to encourage you in the savings habit. He tells you, “For every two dollars you save, I’ll add a dollar.” You would take advantage of that generous offer wouldn’t you?
That “kindly uncle” might be your employer. Many big or mid-size companies have generous 401(k) programs. Say you put $200 a month in your plan. Many employers will throw in another hundred dollars. So now you are putting $300 a month into your 401(k) plan. Now do that for 35 years, earning nine percent a year on average, and what will you have?
You’ll be 90 percent of the way to becoming a millionaire. You’ll have $900,000. Yet all you did was give up $200 a month of takeover pay. Actually it is less than that if you contribute to your plan on a pre-tax basis. Keep putting in $200 a month for three and half decades and you’ll be on the road to financial freedom.
I’ve worked at lots of companies with “kindly uncles.”
And I’ve also known lots of people who never contributed a dime to their 401(k) plans. Others started to save, then broke into their 401(k) assets before age 59.5, interrupting the critical compounding process. (For more on that, please see our column on the importance of compounding ( https://gregorybresiger.com/people-fail-achieve-financial-independence-problems-inertia-not-understanding-compounding/ )
Breaking into a 401(k) plan, unfortunately, usually triggers lots of penalties and investment taxes.
Over the years, this has represented billions of dollars of unsaved and uninvested assets. Don’t be one of these “I want to take more money home and I’ll think about the future in 20 years” types. Save and invest when you can because saving and investing opportunities are not limitless.
What a difference taking advantage of the kindly uncle offer could make in your life. It can also make a big difference for the worse if you make the wrong choice. I know many people in their 50s and 60s who don’t have anywhere near $900,000. Many of them face very difficult lives.
Are You Leaving $500,000 on the Street Each Night When You Park?
I live in a middle-class section of Queens in which many people own cars. That’s despite the city and state taxing authorities along with car thieves making their lives miserable. Our hired help in Manhattan and in Albany tax their cars endlessly. I’ve seen city tow trucks on the street at two minutes to eight, just waiting for the top of the hour so they could start hauling away cars to the city pound some 15 miles away. At the pound it can cost a driver hundreds of dollars to get his or her car back.
Is owning a car in New York City really worth it?
Generally, I would say no. That is unless the car is vital to earning a living. But consider this: When my wife and I were married over a quarter century ago, I had a car from my days of working for small newspapers in rural areas. When we were struggling to buy our first apartment I came to the conclusion that owning and maintaining a car in the Rancid Apple would hinder our chances to get ahead (At that point my wife—the ever comely Suzanne Hall—and I had small incomes. We had very little saved and invested. We were barely able to afford a down payment on our first apartment).
We got rid of the car. In retrospect, that was one of the better financial decisions we ever made. It was a decision with huge implications for our goal of achieving financial independence.
Why?
With car payments, taxes, tolls, repairs, tickets, etc, owning a car in New York can cost $12,000 or more a year. Over 25 years that can come to $300,000 spent on cars. But that doesn’t tell you the true value of the money we never had to expend on cars. It is actually more than $300,000.
I would say that of that figure we probably spent about half of it—or $150,000 over 25 years—on trips, schooling, nights out and, from time to time, renting a car. The other $150,000 we invested on a regular basis. That was some $500 a month over 25 years. And let’s assume we obtained nine percent a year a return—I will never be nearly as good an investor as the great John Templeton, who earned a lot more than nine percent a year—what did we get for our money invested and not spent on cars?
Some $564,000. Actually the value of that $300,000 never spent on buying cars comes to about $714,000. Here’s how I figure it. Some $150,000 we spent on ourselves and some $564,000 we earned through a program of steady investing with the other $150,000.
Would $714,000 accumulated over some 25 years make a difference to your life? You tell me. It certainly did in ours.
Keep It Simple
The point is whether it is getting rid of a clunker, putting automatic saving and investing vehicles in place or possibly doing something as simple as giving up smoking or lottery tickets, just a few simple commonsense decisions can make a big difference for the person who wants to control his or her financial destiny as well as help others. And it can be as simple as taking advantage of matched saving or investing programs.
However, this “let’s get ahead” mindset also entails a commitment to avoid all reckless, superfluous spending. That’s saved money that could be used for sensible expenditures and for investments that ultimately could improve the standard of living for you and your family.
This combination of smart spending and steady investing can create a virtuous circle. It is one in which investing allows spending and reasonable spending leads to more investing. But, most of all, the name of the game is don’t waste your money. The government, with its endless taxes, and a consumer society, with its various pressures to spend, make it difficult to retain it. Minimize, or better yet, eliminate money mistakes.
Indeed, the person who does the latter is following the same practices as the team that usually wins a football game: Most times it is the team that makes the fewest mistakes. In American football it is called the turnover ratio. The team that “turns over” the ball the fewest times—the team that fumbles the least and throws the fewest interpretations—is usually the team that wins.
Don’t fumble your income. Don’t throw away a happy life with silly spending.
Win the financial independence game by keeping it simple, regular and always taking up the offers of kindly uncles.
