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Have you ever seen someone experience bad luck, and then immediately check to make sure you’re not going to experience the same? Maybe you drive past a car accident, and suddenly reduce your speed and check to make sure your seat belt is on? That’s the feeling I had, reading the comments of people who suddenly realize they’ve got 20 years of life left and no way to pay for it.
I read an article on the Money Ning blog called 5 Things to Do at 50 With No Retirement Savings. It offered some good suggestions, but from the title, I’d guess that people in their 20’s or 30’s might skim past it.
But the eye-opener to me, regardless of your age group, were the comments from readers.
Here’s a sampling:
- “Right now my husband and I are so depressed over our finances. He contributes to his 401K, which took a huge hit during the bank fiasco. He’s 53, I’m 64 & on disability. We made the mistake of getting credit cards. I’m trying to pay mine down, then shred them. I got a couple of no fee cards & transferred what I could to them. We don’t owe much, but I know it’s a drain, even though they’re rewards cards. Right now he’s talking about suicide. If I weren’t a Christian, I’d seriously consider it myself”.
- “I am 57 with no money, savings, or retirement account. I felt called to Christian ministry in my 20’s so I didn’t focus on a career. Long story short, sickness – illness, -home loss, -and a handicapped child took all my resources. I am not angry but the rest of my life is in God’s hands now. Please pray for me”.
- “I am 50 and it hit me in the face that I have no retirement savings”.
- “I’m a 55 year old single woman and don’t have a cent to my name and nothing for my retirement”.
Wow. I’ve always heard the advice, “save now, because you can’t finance retirement.” But actually seeing the despair that real people are facing is a jolt of reality.
I’m sure as each of these people entered the work force in their 20’s, none of them assumed they’d be almost penniless after decades of work.
How does that happen?
We all face setbacks here and there, but most people assume that over 3 or 4 decades, things will take a gradual upward trajectory.
Some of these people may be questioning some of the choices they’ve made in life. But the cruel part about that, is that as clear as it might be now, it wasn’t obvious when they were 25 or 35.
Steve Jobs talked about that in his commencement speech at Stanford University. He said it’s very difficult to connect the dots and make sense of your future, so you have to focus on making the right move for today. “It’s very clear”, he said, “to connect the dots looking back”. You’ll recognize that certain events were the catalyst that brought you down a certain path. Certain decisions you made (or didn’t make) would become pivotal in your future.
Steve Jobs was discussing your career path, but you can also look back and connect the dots in a relationship, or even your relationship with money.
When I look back, I see two very obvious dots. And if I had paid attention to them at 25, I’d probably be sitting on a beach right now.
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Adopting the Mindset of Paying Yourself First
You hear all the time, how starting a regular savings program in your 20’s or 30’s is a big factor in the quality of your retirement. But that’s also the time we’re finally starting to make some money.
After years of part-time jobs, hand-me-down cars and tuition payments, we can finally afford a few nice things. Or can we?
We all have a lot of the same fixed expenses, like mortgage or rent, utilities, food or transportation. And we spread what’s left of our paycheck among the things we want, like new furniture, a vacation or a new patio.
The problem is that paying ourself is usually lumped into the want-to’s instead of the need-to’s.
Haven’t you had the thought, “If there’s any money left over, I’ll start an emergency fund”.
Or, “I know I should be contributing to a retirement account, but maybe after my next raise.”
When that raise doesn’t come for two more years, the price of gas and groceries has probably risen more than your 2% raise. Now you definitely can’t afford another deduction, right?
And that’s the attitude most of us have while a decade or more slips by.
The key to getting past that hurdle, is to prioritize yourself over every other expense – over the rent, the phone bill, cable, food. Everything. Even if you spend 15 minutes to open an account and have just 1% of your salary direct deposited, it’s still a win.
It’s money you’ll never miss. And 6 months down the road, it’ll be just as easy to raise it to 2%. Then 3% and so on. Those small amounts do matter. Seeing your account grow is all the motivation you’ll need to starting thinking, “What if I raised it another 2%, or 3%”.
But what if you’re stretched to the limit? You know it’s important to save for emergencies and for retirement, but you’re already performing magic each month just getting the bills paid.
What if you absolutely can’t afford to save?
Defining What You Can Afford
Since most of us don’t have a budget consultant or a financial advisor handy, the decisions about what we can, and can’t afford boils down to priorities.
And since schools don’t teach about personal budgeting, we develop our priorities through the examples we see every day – parents, friends, older siblings, TV ads, Facebook, magazines.
- Can I afford a new iPhone? It only adds another $44 a month to my bill.
- I’ll be commuting 40 minutes each way to work. My coworker just bought a new car so I should be able to afford one too.
- We can’t really afford the 4 bedroom house now, but I should be getting a raise next year.
A few years ago, I had a mental lapse and opened the door when a Kirby vacuum salesman rang the bell. He tried for 30 minutes to sell me a $1200 vacuum because “the quality is so good, it sucks up microscopic particles!”.
But it’s all about perspective. I’m sure that Kirby is the Lamborghini of vacuums and it could run circles around my $89 Hoover. But as a percentage of my budget, it made no sense.
These are the dots we can look back on a decade or two later and see exactly how they affected us. Imagine looking back and recognizing:
- “We bought a bigger house than we needed 10 years ago, and the payments were tough. That’s when we stopped traveling anywhere, and didn’t contribute to our 401k for 7 or 8 years”.
- “We bought a forty-thousand dollar mini-van, and the payments were so high that we had to stop contributing to our emergency fund. Then I lost my job”.
Adopting the mindset to pay yourself first, is about prioritizing yourself over every other expense. Before the iPhone, the new car or the bigger house. Your budget should reflect what you can afford, not what your neighbor has, but what fits in to your budget.
Maybe mathematically, the $500 car payment fits into my budget. But if it’s at the expense of my retirement or emergency funds, then it’s not affordable. As your new car depreciates by 13% a year into a bucket of rust, your retirement plan could be doubling.
Confusing rich with wealthy
Seeing the comments of people who truly have no options in life is certainly a wake-up call. It made me check my own financial seatbelt. I thought about my own spending habits, and how I envision my life 5 and 10 years from now.
Sometimes things beyond our control can drain years of savings. Health problems, a divorce or legal issues can be devastating.
But I think many times, we develop our money habits right from the start by emulating rich people instead of wealthy people. And that’s because wealthy people can be hard to spot.
You can’t miss your rich neighbor. He’s the one with a different color BMW each year. There’s always a pool service, a lawn service or a carpenter parked outside his huge home.
But your other neighbor, the mailman who leaves the house at 5:30 each morning in his 9 year old Toyota isn’t someone your kids might aspire to.
What we don’t see, is that Mr. BMW probably pays $750 a month for his car, while Mr Mailman deposits $500 a month into his IRA. He saves in a vacation fund and takes the family on a trip when they can pay cash for it.
If Mr. BMW lost his job next week, the lifestyle of luxury he’s built would change drastically within months. But Mr. Mailman has been quietly building wealth. He’s saved six month’s salary in an emergency fund, and has started a blog in his spare time that’s starting to generate income.
The problem with a rich mindset is that it’s a series of short-term goals, which when you achieve them, become meaningless. Last years BMW can’t compare to this year’s. Each possession becomes crossed off and a new one is added, in a never-ending cycle of debt.
It’s understandable that someone who’s just clawed their way through college eating Ramen noodles would finally want a few things to show for it.
But I guess that’s where the transition from a rich mindset to a wealth mindset never happens. If our idea of basic needs is more like Mr. BMW than Mr. Mailman, then one day we too will wake up at 45 and realize that 2 decades have past. We have nothing saved, and are locked into a job we hate to pay our $8000 a month debt.
Developing a Wealth Mindset
A wealth mindset is usually associated with money. Becoming financially wealthy isn’t about chasing a certain dollar amount, but more about achieving freedom. Freedom to wake up each day and make your own schedule without worrying about money. Depending on the lifestyle you want to lead, the amount you’ll need can vary a lot.
So, living with a wealth mindset is about thinking longer term and then making choices that align with your long term plans.
Having a wealth mindset can cross into multiple areas of your life. Your health and physical condition, your spiritual life, your family, and the people you associate with all contribute to wealth in your life. But there are some habits you can develop that would contribute to wealth in every area.
Have Real Goals:
Take the time to decide where you want to be in 3 to 5 years. Any situation you’re in now can be changed. Choose the life you want and make it happen. Having a plan makes your day to day decisions much easier when there’s purpose behind them.
Make the Decision to be Wealthy:
This sounds obvious, but most people don’t do it. Whether it’s financial, physical or spiritual wealth, make the decision that you want it. Don’t be vague. When you have clear goals and make the decision to focus on long term wealth, it becomes much easier to filter out the choices you don’t need.
Think Like a Wealthy Person:
As you’re faced with decisions, consider what choice a wealthy person would make. Should you get up a little earlier and workout? Should you forgo a few nights out so you can work on your side hustle? How can you invest in yourself that’ll help you reach your goal.
Don’t be Complacent:
There’s no guarantee that we’ll all land in a good paying job for 30 years. In fact, most people have 7-10 jobs in their lifetime. No matter how secure you feel, always consider your next move, and think of the steps you’ll need to take to get there.
Have a Second Source of Income:
You’ll never be wealthy by cutting back on Starbucks. Pinching pennies is fine to meet this month’s budget. But to build wealth, you need to consistently deposit money into interest bearing investments. And a second source of income can possibly grow into much more.
Do Work You Love:
To achieve real success at anything, you need to love doing it. If you don’t love what you’re doing now, decide what it is that you do love and go after it.
You can begin to live with a wealth mindset whether you’re living on an estate or in a one-room studio apartment. It’s just a matter of deciding what you want and then living each day with intention. Your long-term goals put the why into your every day choices.
Here’s a question for you:
If you have long term goals, and you’re busting your butt to achieve them, can you call yourself wealthy now?