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Stumbling through YouTube last night, I came across a video about becoming rich. No, not one of those multi-level marketing pitches.
It was Tony Robbins explaining a conversation he had with Burton Malkiel, the economist who wrote the bestselling book, A Random Walk Down Wall Street.
They’d been discussing how your best chance of becoming a millionaire isn’t a matter of coming up with the next Post-it Notes, but much more a matter of simple, consistent behavior.
Burton gave an example of two imaginary guys, William and James, to illustrate how living within your means early in your career is the key to becoming a millionaire. Or in this case, a two millionaire.
So, I thought it might be *fun* to resurrect William and James and talk about what motivated them to take the path they each took.
Step #1 – Automating Your Savings – Early in Your Career
Our first imaginary guy, William, started saving $300 per month at age 20. $75 bucks a week, taken right off the top of his pay and deposited into an account that over the years, earned an average of 10% interest. Then at age 40, he stopped. Never invested another dime for the last 25 years of his career. Just that 20 year period.
James saved nothing from age 20 until age 40. But then at age 40, he did the same thing – invested $300 per month and earned the same 10% interest rate. But he did it for 25 years – five years more than William, until his retirement at 65.
So, how did they each do?
James, who started at 40, walked away with $400,000 at his retirement. A nice sum, but if he were to start withdrawing money using the 4% rule, he’d be scraping by on $16,000 a year. So, unless he has another source of income, James most likely won’t be retiring.
But William, after investing the same monthly amount, for five years less than James – and nothing after age 40, would retire with $2.5 million dollars. And using the same 4% withdrawal rate, William could safely withdraw $100,000 per year. Not too shabby for waking up and doing whatever you want every day.
Step #2 – Avoid the Debt Trap
For whatever reason, William put a high priority on paying himself first every payday. To do that consistently from age 20, William definitely made some sacrifices. He probably cut corners on the other expenses we all have, like food, entertainment or stuff for the house. Since he placed such high value on paying himself first, he probably bought most things only when he saved the cash for them.
What was James’ decision process? Or maybe lack of decision. Or even at some point, his inability to make the decision to save?
James wasn’t necessarily a party animal, or paying for a boat, a few motorcycles and a mini mansion filled with new furniture. Maybe he paid his own way through school and graduated with $60,000 in student loans. Maybe he had a health issue.
Or maybe he was like three quarters of us who finally get a decent job and want something to show for it. Now that he’s earning a steady paycheck, he’s able to get a few department store cards, and maybe a car loan. It’s nice driving around in a new car and having friends over to watch the game on your 60 inch TV.
And if William and James hung in the same group, their friends probably assumed James was ‘wealthier’. But while James nice car was depreciating at 15% each year, William’s weekly deposits were slowly multiplying like a colony of rabbits.
And even if James decided at some point that he wanted to start putting some money away, he had a third roadblock in his way…
Step #3 – Start an Automated Emergency Fund
Once James adopted the live for now, pay later lifestyle, debt payments became as much a part of his budget as groceries and rent. And when you’re funneling a huge chunk of your paycheck to credit cards and loans each month, you’re probably not funneling any into an emergency fund.
So, every time his new car needs brakes, tires or a repair, there’s probably no cash to pay for it. If he needs to take a trip somewhere or pay for a medical expense – that’s probably charged too, continuing the circle of debt.
What if James wanted to take a few classes to advance his career? Or worse, what if he lost his job? The need to have stuff now, and not when you save the cash for it not only puts your retirement on hold – it can put you into bankruptcy next month.
Related Post – Digit – The Painless Way to Build an Emergency Fund
We’d all like to be in William’s shoes, retiring with a cool 2.5 million. This example just illustrated him saving from age 20 until 40. Then the magic of compound interest took over. But just imagine if he didn’t quit saving at 40!
So if it’s that easy, why don’t we all do it?
Tony gave an example that may explain that:
“Imagine you were invited to a meeting next week where you’ll discuss your finances. The person hosting the meeting asks what you’d prefer at the meeting – chocolate cake, or fresh fruit.”
Apparently, 80% of people respond with, fresh fruit. Not much of a surprise from people planning to attend a meeting that’s somewhat health oriented.
But when people actually go to the meeting, the exact opposite happens. 80% of people will go for the chocolate cake. The idea is that dieting is always easier in the future. It seems like the right thing to do – until we’re faced with a choice.
Likewise, most of us push aside saving… just until our student loan is paid off. And then… just until I furnish my new apartment. Just until I pay off my car loan. Just until we take this vacation. Just until ...
Technology has given us a lot of great things, like medical advances, conveniences and cool stuff we never imagined. But it’s also marketed to us as if we need every one of them. And we need them now.
Shopping used to be a one-time transaction. But now it’s impossible to leave a mall without every salesperson asking for your email address. Every merchant wants to be in your mailbox once a week for the rest of your life.
I can order something on Amazon Prime in two minutes and have it in my hands in two days. I can order $200 worth of clothes without even sending money! Try before buying is now popular with online merchants because really, who’s gonna unpack those cool boots or that great looking coat, try ’em on, and then return it?
Seeing everyone around us acquiring stuff left and right can make you feel like you’re doing something wrong. “You’re 28 now. Why are you still using the furniture your parents gave you when your friend has a brand new sectional and surround sound?”
It’s easy to be lured into the idea that possessions = progress. But in reality, a decade will slip by while you’re paying off that sectional, the bedroom set and that trip to the Caribbean. Then another decade.
Now you’re James.
Almost 80% of us fall into the same trap James did. Living paycheck to paycheck for twenty years or more until we suddenly realize that our first monthly payment should always have been to ourselves.
And by then, that fancy sectional is probably sitting in a junk yard. Or in someone’s fire pit.
So what’ll it be for you? Fresh fruit, or chocolate cake?
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