A few years ago my son and I parked in a parking lot here in Lexington that was filled with Mercedes, BMW’s and Range Rovers. We were in a Honda Accord. My son, 12 at the time with a keen eye for nice autos, remarked that all these car owners must be rich! For a saver like me that was a big, fat softball that I intended to slam out of the park with a valuable life lesson titled, “You aren’t what you drive.”
I proceeded to explain that we shouldn’t assume that what someone drove or even where they lived gives us a clue about someone’s wealth. “What?!”, he asked, “How can you buy a fancy, expensive car if you aren’t rich?” Ah, my young ball of clay that I intend to mold in my own saver image – “Don’t confuse income with wealth.” If someone makes a lot of money but spends it all, are they rich? Or, if someone makes less money but spends part and saves part, maybe they actually accumulate more than the person with a high income, and they’re the rich ones.
The book The Millionaire Next Door found that “living beneath one’s means” was one of the keys to becoming rich for most people. In fact, if you’re not a professional athlete or movie star it may be the only path to wealth.
Here is the best advice: “Pay yourself first.” What that means is, with your regular paycheck, automatically put a certain, planned amount each month into your retirement and investment accounts. That is paying your future self. Then, the remaining portion is used on a home, a car, travel, entertainment, etc. And, if you have already paid yourself before buying those other things, there’s no need to feel guilty for any of those pleasures.
How much? While there are many rules of thumb, the real answer depends on your personal situation. How old are you? How much have you saved already? What are you financial and personal goals? Do you have a spouse that is also saving?
Bottom line: you need to save enough so that, at some point in your life, it will grow into an amount large enough to provide you with income for the rest of your life. I will discuss this further in a future post.
Recently, a client said it WAY better than I could: She said, “We make too much not to end up with a lot.” What she meant was, we have very good incomes but, if we spend it all each month, in 20 years we won’t have accumulated any more wealth than we have now. And, the reason that is important? Because they will need that wealth to provide them income when they are no longer working.
Next Friday’s Post will talk about balancing your financial life, while saving.