No I am not claiming to be a millionaire at this point. No, the title of this post is actually the title of my favorite personal finance book: The Millionaire Next Door by Thomas J. Stanley and William D. Danko. I am writing about this because personal finance is what is currently on my mind.
Summer is over. I just started a new contract. It is time dust the cobwebs off of my financial game plan. My plan is simple:
1) Make the money
2) Save the money
3) Invest the money
Now that I have the contract step 1 has become fairly simple: Just over deliver like crazy.
The problem where people(and I am not exempt from this) often times come short is step 2: Save the money.
This is where the The Millionaire Next Door comes into play. People seem to have this idea that all millionaires drive fancy cars and wear fancy suites. The authors of The Millionaire Next Door polled thousands of affluent millionaires and found that that isn't so.
Yeah there were a handful of people that inherited their wealth and are squandering it on mansions and Rolex watches.
There were also many people posing as millionaires buying high status items like sports cars but often these types have little in terms of real wealth.
Income does not equate to wealth:
One of the points this book hammers home is if you make a lot of money and spend a lot of money you won't save/invest any money and will never actually become wealthy.
On the other hand if you don't make a ton of money but save a large percentage of what you do make given enough time you can amass a significant amount of wealth.
My Great Uncle:
An example of this would be my grandmother's brother who recently passed away. He was a school teacher his entire adult life. As far as we know he never made an extravagant salary. We were blown away to find that he left a lot of money behind. Not just to his kids and grand kids but to his nieces and nephews. this included my mother. She was blown away to find how much her uncle lefter her. He never showed off his wealth with fancy cars or gold watches. As it turned out he just scrimped and saved his whole life and invested conservatively.
Saving the Money:
The name of the game is save, save, save. I want to compare and contrast some interesting ways I have observed people fall into their saving patterns:
The problem with consistent income:
In reality there is no problem with consistent income. I love consistent income, but it has an interesting effect on most people's savings strategies.
Most people gradually make more income and adjust their spending accordingly to match. For example:
NOTE: For the purposes of this salaries are after taxes
- The first year they make 80K a year and spend 70K
- The next year they make 83K and spend 73K
- The following year they make 85K and spend 75K
And the cycle goes on. In the above example they are at least saving 10K a year which is more than a lot of people.
The benefits of inconsistent income:
Now let's look at someone like me that has lived on a boom and bust:
NOTE: I am not going to use real numbers for me so just use your imagination
- The first year I have a killer contract 9 months of the year and make a good chunk of change
- The second year I get involved with a start up and don't take a paycheck for 9 months then go to camp to coach for the summer.
- The third year I take a contract again and go back to making money.
Years of having these ups and downs I have conditioned myself to live like a popper even when I am making money. This means saving around 75% of my income. Mostly for a safety buffer for when things go bad.
How do I do put money away for a rainy day?
If you have been livin la vida loca then it may not be easy. I started doing it out of desperation, when things were tough and just never increased my spending.
As for how you should do it I can not be sure but I can tell you how I do it: I am a cheap son of a gun and darn proud of it. Most people wouldn't consider that a good thing but then again most people are not self made millionaires. I aim to be frugal; really, really frugal.
Here are some ways I have found to pinch pennies that might help you get on track to building that safety net.
I dress the part:
I wore the same pair of sandals until they fell apart then I patched them up with duct tape. Eventually the holidays came around and my mother bought me another pair to replace them and encouraged me to throw out the other pair. Months later I accidentally left my good pair of sandals in Wisconsin when I went to camp for the summer. My friends at camp tried coaxing me to buy a new pair of sandals. I thought on it for a while but figured it would be decadent to own two pairs of sandals.
A lot of my clothes are as follows:
1) Start up or gymnastics clothes I got for free usually as promotional schwag
2) Gifts - Since I don't really want for things I am tough to buy for so my family buys me the same black tank tops and footy socks every year and I am grateful for that.
3) Functional - Winter in Wisconsin is brutal. I need a good jacket, good boots, good gloves, etc. But that is it. I don't have one jacket for each day. Just the one giant black jacket and that thing is built to last.
Walking is good for you:
I went the last 6 years without a car and only recently bought one because my parents were about to get an awful deal on a trade in and I said I would match the trade in with cash. I bought a 10 year old car with 150K miles on it for a steal. My parents took great care of it so I know I got a great deal considering the I paid less than I would pay for a wild weekend of partying right here in Wisconsin.
I rent and have roommates:
I rent a room from my friend and live with him and a variable amount of other roommates(there sometimes is a guy living in our basement). This saves me a lot of money. Does it impress girls when, at my age, I invite them over and my roommates are drinking beer and watching TV? Probably not, but then again would I want to be pursuing girls that were into status symbols instead of building long term financial independence?
I hide my money from myself:
Most people have a process where when they get a paycheck then they put it into their checking account. They spend from the checking account as needed. Then at the end of the month they try and transfer a little bit back into their savings.
I do the opposite. I set a flat allowance for myself. I know how much I need to live the life I want each week. I put everything in a safe account(one where I can't easily spend from) then every two weeks I transfer exactly two weeks allowance into my personal checking. It creates the illusion that my allowance is all I have to spend and so I only spend as much. The rest goes into savings.
Where I come up short:
I still spend too much on food. I am an eating machine. I also enjoy going out with friends for a drink and often over spend on that as well. Now that I have the car I can more easily get to the grocery store and I love to cook so I need to get better at that. If you are out and see me eating out or buying rounds of shots please feel free to call me out on it.
Again let me repeat I am not claiming to be a millionaire at this moment. That is not what this is about at all. It's about understanding that making a lot of money and being wealthy are two different things.
As I get older and my systems for managing my business and my finance evolve I find I spend less and less time not making money. This means I need delegate less income each month to the safety net. So what to do with that 75% of my income I squirreled away? Blow it on a fancy new car? Over my dead body.
This is where I get started on step 3: Invest the money. Check out my other posts like How to hack your way to become a profitable real estate investor for some insights into my plans for that.