In our last blog I wondered who you are working for and pondered what would happen if we quit being so selfish and started living a more frugal, simple lifestyle.My guess is we’d have happier marriages and children for one.And, over time, our financial well being would improve, also.
Marriage is a marathon. Building wealth takes time. And patience. And tenacity. And being frugal. And being wise. But it’s worth it. Blessed is the couple that gets this. I figured if you are going to be married, you might as well enjoy the journey. Having the same financial goals is a big part of enjoying that journey!
I happened on Thomas J. Stanley’s book The Millionaire Mind when I went to Borders to look for his latest book Stop Acting Rich, about people who have high incomes, but have nothing to show for it. I was looking for a book to read on Labor Day and that title struck me as interesting. I got to Borders without a coupon and the book retailed for $26 because it was just out and only in hardcover. Crap. No way I’m spending 26 bucks on a book. While there I thumbed through Stanley’s The Millionaire Mind. It looked like it had possibilities, but even in paperback it was $16. I asked my wife, Mary Sue, if she minded if we stopped at the Public Library. That was fine and at the library I found a copy of The Millionaire Mind for free and put my name on the Stop Acting Rich waiting list. I’m next in line, so I’ll let you know about that when I get to it.
Stanley is a researcher and writer and former professor of marketing, who specializes in how wealthy people act and think and how they got that way. He’s well known for his first book in 1996 with Professor William D. Danko titled, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. For The Millionaire Mind he sent out extensive questionnaires to over 5000 people in American neighborhoods where a high percentage were millionaires. Of these surveys over 1000 were returned and of those, over 700 were from bonified millionaires. He also personally interviewed a number of them. From this data he gleaned a wealth of information on how wealthy people got that way.
This reading has been a refreshing change of pace for me personally, because the writing and research in my field is mostly from a deficit, not from victory. For example, recently I’ve been reading professionally on affairs and how other counselors handle this problem. What fun to think about what makes people thrive! Dang, I guess I better know this stuff, too, as my slogan for Heart to Heart Communication is “We help couples thrive, not just survive.”
So there you go. Let’s think about thriving instead of all the problems that seem to suck the life out of us.
Dr. Stanley uses a formula to define a millionaire.It’s not too difficult to understand and in a minute you’ll be able to see how you are doing.He contrasts people who accumulate wealth verses those people that only look wealthy.He calls people who only look wealthy Income Statement Affluent or IA.He calls people who actually HAVE wealth Balance Sheet Affluent or BA.
Did you catch the difference? The IA has a high income, but spends it all on payments for fancy cars and other toys and huge mortgages. But NO money in the bank. The BA may or may not have a high income, but over time, has kept spending to a minimum, lived frugally and saved their money and over time it adds up to a ton. Wealth is one thing. Income another.
The core formula for determining which you are is based upon Net Worth. Your net worth is the sum total over everything you owe (your house, your vehicles, your cash, stocks, bonds, real estate, and possessions) minus what you owe (your mortgage, second mortgage, student loans, car loans, credit cards and other debt, such as past due taxes). A helpful web site on determining your net worth is www.networthiq.com.You can set up an account and password and it will direct you to figure out your net worth.
This is a helpful number to know, because it lets you know how you are doing over time. Years ago a wealthy businessman at my church encouraged me to keep track of our net worth every January first, because, he said, if you look at your bank account on any given day, it may be discouraging, but if you look at your net worth once a year, it should be growing!
That’s the idea anyway.If you are living the way you should be living that is.As you pay down your house and your student loans and as your house appreciates (well, hopefully!) and your savings and retirement accounts accumulate, your net worth should, over time, improve.Unfortunately, for many couples, they seem to go the other way!They keep buying new cars and upgrading to bigger houses and going back to school on student loans and charging their vacations and YIKES!If you are going the other way, that will suck the life out of you AND your marriage.
So, if you don’t know your net worth, go to networthiq now and figure it out.If you are a young couple it may be in the negative when couples are more likely to have huge mortgages and/or student loan debt.Over time, though, you want to dig yourself out and go the other direction. If you keep track of your net worth each year, you can see, over time, how you are doing. Networthiq.com will chart it out for you so you can see the trend. Unfortunately, networthiq.com only goes back to 2003, so you can’t fill in the numbers before that.
Here are a couple of made-up examples:
Example one: John and Mary, married 20 years, ages mid 40’s. House is worth $225000. They have $10,000 in savings and $100,000 in retirement and $20000 in vehicles. Total assets = $355,000. For debts they owe $150,000 on the house, $10,000 on their cars and $10,000 on credit cards for a total debt of $170,000. Their net worth would be $355,000 minus $170,000 = $185,000 net worth.
Example two: George and Betty, married 5 years in late twenties. She’s finishing up college and they just had another baby. House is worth $150,000. They have $200 in savings and $10,000 in retirement and $10,000 in vehicles for total assets of $170,200. They owe $130,000 on the house, $9,000 on the car, $4,000 in medical, $10,000 on credit cards and $40,000 in student loans for a total debt of $193,000. Their net worth would be $170,200 minus $193,000 = -22,800.
If your net worth is in the negative, that minus net worth number might freak you out and it probably should. But it’s also a great motivator to get your butts in gear as a couple and start paying down your debt and getting that emergency fund where it needs to be (3 to 6 months of expenses, so if you have an emergency, you don’t have to go back into debt!) and building up your retirement. In Dave Ramsey’s program (if you aren’t familiar with Dave Ramsey you need to be.He helps both couples and singles get their financial houses in order), the average person or couple who applies his approach becomes a millionaire in 17 years.
A millionaire, then, is someone whose net worth exceeds 999,999.99!
In the examples above, if George and Betty apply themselves and get out of debt and even pay off their house their net worth would be $355,000. But while they are doing that if they continue to add to their retirement and the stock market goes up and their house appreciates, they could be millionaires within 10 years, maybe even in a shorter amount of time.
Got it?It’s not really that hard to do.If, over time, your savings and debt reduction exceeds your expenses and debt, your monies will add up!HELLO!This is the idea.When you are old and gray there isn’t going to be anyone around sending you checks.If you think the government is going to sit around and send you money every month, you will probably be a pretty sorry poverty case.Don’t say I didn’t warn you.If anyone is going to be sending anyone checks it’s you sending the government checks!No one is responsible for you, but you, so you’d better figure out a way to take care of you.If you are too old or run down to work, you’d better have something saved to go to work for you.
Here’s a few calculations to a million dollars to give you an idea how quickly you can reach that number:
- If you saved 5466.08 a month for 10 years and earned 8 percent you’d have 1 million dollars.
- If you saved 4347.09 a month for 10 years and earned 12 percent you’d have 1 million dollars.
- If you saved 1010.86 a month for 20 years and earned 12 percent you’d have 1 million dollars.
- If you saved 286.13 a month for 30 years and earned 12 percent you’d have 1 million dollars.
- If you saved 85.00 a month for 40 years and earned 12 percent you’d have 1 million dollars.
- If you saved 25.60 a month for 50 years and earned 12 percent you’d have 1 million dollars.
My wife and I are saving $50 a month for our grand kids. It doesn’t seem like much, but if, when they get to age 21, they don’t need the money for college and they keep adding $50 a month till they are 70 years old? At 12% it’d be worth over $21 million! Even at 21 years it’ll grow to $56,000. Not bad. For only $50 a month.
You say that 12% isn’t realistic? Maybe in the future. Who knows. But we’re putting the monies for our grandchildren in mutual fund that’s averaged 12.25% since 1973. Not bad. Maybe it’ll be a bit lower in the future. So if we’re off by 50% we’re still not doing too bad!
Here’s the math if you save nothing: If you save nothing a month and have nothing to earn nothing on in 10, 20, 30 40, 50 or 70 years you will have nothing!
The point is that wealth is built over time.You can’t build wealth if you don’t have discipline and are frugal and are honest and accountable to your spouse.If both of you are doing your own thing, you’ll waste your life and money away.Piss it away.Then blame your spouse.Or an even quicker way to be broke?Get a divorce!This is the quickest way to the poor house known to man and to women.
The nice thing about paying off debt is that it increases your net worth. As your debts go down, your net worth goes up.
Here’s an interesting exercise: Go to networthiq.com and look up people with net worths of over 2 million dollars.Guess what?They almost all don’t have any debt!This is one of the secrets of wealthy people: Spend less than you make, save the rest and over a lifetime it adds up….a lot.Slowly.At first.
Think about this. Let’s say you didn’t have a $1500 house payment. Let’s say you pay off your $500 a month student loan. Let’s say you save for your next car instead of borrow money for it and you don’t have a $400 a month car payment any more. Let’s say you pay off all your stinkin’ credit cards and don’t have those $500 payments anymore. Look at how much you’d have extra every month:
- 1500 house payment
- 500 student loan
- 400 car payment
- 500 credit card
That’s $2900 extra a month!Save that every month in a decent long-term growth stock mutual fund and if you earned 12% in 12.5 years you’d have your million dollars!Crazy stuff.Your debt is standing between you and financial freedom.
In our next blog we’ll look at how Stanley uses net worth to calculate whether you are headed toward wealth or just spinning your wheels. Stay tuned.