One person has $1 million in the bank, the other doesn’t have $1,000. Who is richer?
You might automatically say, “Well, the millionaire.” And that’s right — until you consider the other side of the finance equation, the spending.
Yes, spending. We all know the story of the sports star, hit musician or lottery winner who was once on top of the world and now is broke. It only takes a few years of overspending to wipe out big money.
Just type “broke NFL players” into an Internet search engine and you’ll lists of them. Same with “broke musicians.” An estimated 70 percent of lottery winners don’t hang on to their sudden wealth.
Yet we also know of the quiet millionaire-next-door type. He drives a 10-year-old car. Takes small, close-by vacations, rarely eats out and yet has enough money to write big checks to charity, pay for educating family members and definitely owns his home outright.
It doesn’t matter if you have a huge current income or a big bank balance if you’re trying to maintain three homes, five cars and vacations to exotic locales twice a year. In fact, you’re probably in debt. Your future is probably broke, like the washed up quarterback.
The saver with $1,000 seems poor, but not if he manages to live off the income on hand with a margin of saving that pushes that figure to $2,000, then $5,000 steadily over a few years.
Emergency funds in hand, he can now set aside money in a retirement plan and invest. Diversified portfolio investing causes that saved cash to compound, doubling every so many years.
The really key thing is that the lifestyle doesn’t change. Having a few thousand in cash doesn’t mean it’s time to buy a new car. It’s time when the old one is too expensive to repair.
Having a retirement plan with solid balance doesn’t mean you should immediately look for a mansion with a pool. A big mortgage can seriously disrupt your savings plan, dumping money into an asset — the home — unlikely to compound in value into true wealth.
Subtract interest, taxes and upkeep and it’s a miracle when housing even keeps up with inflation. It’s only when people live in the same house for many decades that it turns into a significant investment, and then all you can do is sell it and buy something smaller but not much cheaper.
How can you retire with enough to be comfortable for life? Save early, save steadily and keep your spending in check. If you get a raise, set aside some of it saving rather than ratchet up spending.
Finally, make sure your investments are ones that are likely to grow with the stock market and compound. The key is using interest and past gains to reinvest and grow even more.
Eventually, you’ll be that man or woman with the older car, happy kids and no worries at all.
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