Moving On Up
In my last book, Make Money, Not Excuses, I wrote about an epiphany I had—a good fifteen years into my finance career—when I realized there are only four things standing in the way of any one individual and financial security.
1. You have to make a decent living.
2. You have to spend less than you make.
3. You have to invest the money you're not spending so that it can work just as hard for you as you are working for yourself.
4. You have to protect yourself and this financial life you're building so that a disaster—large or small—can't come along and take it all away from you.
I am absolutely right on these four points. Absolutely. Positively. Without a doubt.
But what I have also come to realize is that these four steps are a bit of an unbalanced equation. There are two sides to living any financial life. The left and the right sides of the ledger. The assets and the liabilities. The money coming in and the money going out. Numbers 2, 3, and 4 are all about the money going out.
Spending less than you make? Most people in this country are not. We have been, for the last two decades, living on a diet supplemented (if not on paper, then at least with a little mental accounting) by the fat values of our tech-laden stock portfolios and then, when those petered out, with the rising values of our four-bedroom Colonials. As a result, Americans have been saving an anemic one-half of 1 percent of everything we earn. That's eight times less than the percentage of our income we spend every year eating out. Yet, it is fairly simple to right your ship by tracking your spending, cutting out needless expenditures (big and small), and reducing the interest rates you're paying on your debts.
Investing the money you don't spend? That's not something most of us are doing sufficiently, either. First, of course, you have to find the money. Then you have to deal with a convoluted system of accounts ranging from 401(k)s to IRAs to Keoghs to SEPs, figuring out which is the right one for you and how to fill it with the right mix of stocks and bonds once you open it. But again, this is a situation fairly easily remedied with a series of automatic monthly transfers from paychecks into retirement accounts, from bank accounts into 529 plans, from checking into savings. And once the money's there, if you don't care to spend your time picking stocks, you don't have to. Find a target-date retirement fund (sometimes called a lifecycle fund) geared to the date you plan to stop working full-time and call it a day.