Not Getting Time On your Side

The single most important thing you need to do in order to get rich, is also the most boring thing in the world... and it's something that, as Americans, we suck at.

It’s called saving money.

Saving doesn't come naturally. It's a learned habit. And the sooner you learn how to do it right, the sooner you will be on the path to long-term riches and eventual freedom.

If you can learn to do it, you'll also avoid the biggest money mistake most people, probably even your own parents, made in their youth.

Start Early, Keep Time On Your Side

How about an example to illustrate what I’m saying?

Steve and John are the same age, go to the same college, work for the same company, make the same salary, but have different habits and goals.

Steve’s parents taught him to “pay himself first” as a matter of the utmost priority—even when he was only working part-time or in college. “Paying yourself first” means that when you are paid, the first thing you do is to put money into savings… and you live on whatever is left over. No exceptions. That means, if your “ends” are not meeting, it’s time to downsize your lifestyle.

As a stringent rule, Steve’s parents recommended he put away no less than $200 per month, each and every month. As a part-timer making maybe $800 a month, this forced Steve to really stretch. He had to work extra to deliver pizzas, among other odd jobs, and forego a lot of the things his “rich” college friends were doing, like wasting time on beer, girls, or going on vacations with their extra loan money.

Steve graduates college and gets a job making $50,000, which stays constant until retirement many years later. He saves $200 per month religiously until he turns 40.

He earns a modest return of 11% on his savings for 22 years and by this time has amassed a small fortune of $194,914. He sits down with a calculator and figures that if he can invest his money in low-risk, dividend-growing stocks for the next 25 years, he can stop contributing to his nest egg, get into less risky investments, and still compound his wealth at an average of 8% until retirement and beyond. He will retire comfortably with no debt and just over $1.3 million in the bank—a modest retirement. He executes the plan.

Next comes John. He is the same age as Steve, but he doesn’t forego the "good things" in college, like beer, girls, and vacations. He also wasn’t advised by his parents to make regular saving a priority. He graduates college and gets the same job and salary as Steve.

John hits 40 years of age and begins to wake up to the reality of his future retirement. In order to make up for lost time, he puts away four times what Steve did for the next 25 years--$800 per month. This cuts into his lifestyle substantially. He manages to earn a higher rate of return than Steve, 10%. But with higher return, he is risking more, which he shouldn't be doing as he gets older.

Both Steve and John retire on the same day at age 65. They get together to talk about retirement, and realize that Steve is 27% more wealthy than John.

It's not a bad thing to have less money than someone else, but that means you'll have less security, and less freedom.

Steve is doing well. He hasn’t contributed to his nest egg for 25 years. He’s living well below 8% of his retirement per year, which is what is investments are still returning to him, so his wealth is still growing.

John is retired, so he can no longer contribute $800 per month to his account, unless he wants to dial down his lifestyle. He, too, must dial down his risk in his older years, so his investments begin to grow by much less per year. Even if John continues to earn a higher return (9%) than Steve (8%), John won’t amass more wealth than Steve for another 35 years. They can celebrate this event together on their 100^th birthday.

Time Is Not On Most People's Side, But It Can Be On Yours

This study is overly simplistic, and has lots of assumptions. But it illustrates a point: Saving and investing in the early years allowed Steve to have a higher standard of living than John in his middle ages, and allowed his wealth to compound at substantially higher rates when you he got closer to the age when he needed it. John, on the other hand, had to contribute an unrealistic amount to his account until retirement in order to make it work.

The majority of this country is like John. It’s time for us to wake up. Most of us don't save, don't invest, and think of the "money" or finance industry as dirty. If only we realized that money = freedom, lots of us could change our ways.

The government has unsustainable debt loads, which are likely to make it insolvent within the next of couple decades. There is little chance that those of us in our twenties or thirties will have the government to rely on later in life.

There are great benefits—not the least of which are emotional, spiritual, and psychological—to having peace of mind, independence, and a healthy financial situation, all of which come through saving.

No matter what age you are, start saving and investing NOW. Even if it’s just $100, put it to work. Even if you can only afford $50 per month—sock it away now and never stop.

If you need more of a lecture on how important it is to save, and how realistic it is to retire young, read this awesome article. Anyone, on any salary, can retire young.

And this one, about what real retirement means.

It just takes a little discipline, some willpower, and a little red pill called a "reality check." Down one right away, and get moving!

Live long nd invest,

Jeremiah