The 10% Solution
This chapter is about a technique that will allow anyone – yes, I said anyone – to accumulate substantial wealth.
That’s a huge promise, but I believe I can fulfill it because the laws of mathematics are on my side. Albert Einstein observed that “Compound interest is the 8th wonder of the world.” The plan is based on having compound interest working for you, rather than against you.
So, how do you get rich?
Very simple: Save 10% of everything you make, invest for the long haul, and you will retire rich. Period. The math makes it a sure thing.
From Biblical times right up through recent books like “The Wealthy Barber”, many people have advised, “Save 10% for the future.” And, for thousands of years, the vast majority have complained that they “can’t afford to”, and believing their own complaints and doubts, they never do. And, predictably, since they never start, they never accumulate any money! Some people question whether they can actually save 10%, and others ask whether the 10% is figured before or after taxes. To an amazing degree – if you get a calculator and do the math – it really doesn’t matter. And, if you can’t start with 10%, start with 7% or even less. But: start!
The key is consistency and perseverance over time. If you save only $3000 per year, in monthly deposits of $250 each, in 30 years at 12% interest, you will have over $882,000! If you start early, and have the discipline and the desire, almost every average, middle-class American should expect to be a millionaire before they retire. Unfortunately, of course, we know that most will not only fail to retire wealthy, but will in fact, be quite poor. That is unacceptable!
So, how can you find and save 10%? Easy! Here are a couple suggestions:
First, figure out how folks who make just a little bit less than you do survive! In your neighborhood there are people who make slightly less than you do. And, they are still alive! They have food and clothing, a roof over their heads, and shoes on their feet. Now, they may not have new shoes, or a fancy TV, and maybe they don’t eat out as often as you do, but they do survive! That’s critical.
To pay off your debts or to increase your savings, you are going to have to spend less each month. We’ve talked about increasing income, and that is an option. But, over and over again (we all know this story), as income goes up, spending goes up just a tiny bit faster!
Making more money will not make you rich!
Spending less will!
Second, pay yourself first. That old advice simply means that before you pay any other bills, even the mortgage, you put money in savings first! There’s a simple logic to this. No one will remind you or pressure you or encourage you to save. You must do that on your own, as an act of self-discipline and personal pride. But, you can depend on lots of people to remind you to pay all your other bills. Trust me on this!
If you forget to pay the phone company, they will remind you! They’ll send you a note, they might even call you up to remind you. They are very helpful that way! And, you know what? Everyone else you owe is just as helpful! The garbage collector, your landlord, even the nice people at VISA will remind you to pay them, if you forget. But none of them, not a single one, will ever advise you to pay yourself.
To save and invest 10% for your future, spend a bit less, and pay yourself first. And, it should go without saying, but I’ll mention it anyway: once you put the money in savings, it never – never – comes back out! That is for retirement. It is to pass on to your children, and their children, and their children after that.
If you want to save for a vacation or a new car or your kids college, that is in addition to the 10%. It has to be! Again, watch the logic. If you save, and then spend it all, what’s the point? Save 10% of everything you make and be very, very reluctant to ever take it back out! If you save 10%, within a very short period of time you’ll have to make some decisions about where to invest it. There are many books, magazines and planners you can consult, but my personal advice is always to start by paying off your debts.
Depending on your tax bracket, the “after tax, real rate of return” of paying off an 18% credit card debt can be as high as a 30% annual rate of return! You won’t get that good a return anywhere else! Pay off your debts!
Then, invest in the stock market through mutual funds. I respect that many people have other opinions, but for most folks, a good, solid, boring mutual fund is the golden path to riches. Yes, you should invest in tax-sheltered retirement plans first, and yes, there are other investment possibilities. And yes, the market can go down. But to retire wealthy, pick a great, long-term growth fund, invest regularly, and watch the system work for you. I am convinced the biggest hurdle that stops folks from getting rich is: They never get started! Pay off your debts, start saving, and don’t try to get rich quick. In this instance, boring is good!