Monday, July 9, 2012

Is it Possible? Yes, it is.

If you save regularly, over time, even a middle-income family can accumulate a million dollars by retirement.  And in the coming years, they will have to, as a million dollars really won't be a lot of money in 30-40 years.

I recently received a missive from a fellow in his 20's, clearly expressing skepticism that anyone, in this day and age, could really save up a million dollars by retirement, on an average income.  I hear this complaint a lot these days, on various online blogs and discussion groups, and in sardonic comments made by people in response to news stories.

The narrative is like this:  "You can't win, so you might as well not bother trying.   I tried saving up some money once, and all I ended up with was a hundred dollars, so I spent it on pot.  The whole system is stacked against you, and the Wall Street Fat Cats just take it all, so you might as well just spend your money on a car or a motorcycle or a new iPhone."

And it is a narrative that is worldwide.  In Japan in the 1980's, a new phenomenon occurred.  Young Japanese men and women, well into their 20's, with jobs, would live at home with their parents.  Housing prices in Japan were skyrocketing, and they felt there was no way that they ever, ever would be able to afford a house, so why bother even trying?   Besides, it was more fun to "hang out" with their friends, and spend all their money on flashy electronics, trendy clothes, and fun things do to (Japanese youth are very well attired, to be sure).  Was this a wise choice?  Of course not.

And today, we see the same argument raised in the USA - and indeed, many of my friends made the same argument when I was in that age group.   In a response to my posting about how idiotic "bling rims" are, a young wanna-be "gangsta" said that he expected to be killed in a drug violence anyway, so he might as well ride in style.

If this were true, I would say to go for it - we need more "gansta" types to die in this county.  But alas, many annoyingly live on, instead, clogging our nation's jails, and then going on welfare when they get out, living far too long to be of any use to anyone.  The "live fast, die young" theory has one huge hole in it - not enough die young.

No, the real danger is you living too long - which happens with surprising regularity.  You outlive your money, and end up on welfare or trying to get by on Social Security - wishing you had planned better for the future.

And you could have.  But chose not to.
And choosing not to save on the grounds that "the system is stacked against you" is nonsense - and often just an emotional justification to do something stupid like buy a new Camaro.

But if we go to our compound interest calculator, you can see that if you make an average salary (in this country, about $50,000 a year) for 45 years (a working lifetime) and invest about 10% ($5000) at a modest 5.75%, you will end up with about $1,046,193.36 by retirement.

You can play with the numbers all you want - your actual return on investment is likely to be higher.  Maybe you cannot afford to invest as much.  But over time, you will save an enormous amount of money if you choose to do so.

But you have to choose to save, over having Cable TV.  You have to choose to save over having a new iPhone.  You have to choose to save over having an Abercrombie t-shirt, or a new Scion, or some other foolish purchase.

Many people chose not to save.  I know I made some bonehead choices at that age - choosing a motorcycle over investing.  Choosing to buy a brand-new economy car, over the paid for car I already had, or even a secondhand car that would have cost half as much to own.

And I regret those decisions, as they cost me a lot of money, detracted from my peace of mind at the time, and degraded my overall net worth, cumulatively.   And let me tell you, it is far better to have money in the bank and peace of mind than a new economy car in your driveway.

I was lucky in that I ended up doing well in Real Estate and had a decent career in the law.  I was able to salvage my finances.   Others don't have those choices.  The poorer you are, the more important it is to choose well.

But of course, the poor make poor choices, in both senses of the word.  And maybe there is nothing we can do to "save" them.  They will get payday loans and title pawn loans and throw money at clapped-out used cars that they paid too much for, until they park the carcass on their front lawn.  They are not very bright, which is why they end up poor.

But if you are a fairly smart person making a middle-class salary, there is no reason you should end up stupid and poor - unless, of course, you follow the siren song of the media to consume more and more.  Or, if you listen to your broke and brain-dead friends who buy new cars and show off their smart phones and ridicule you for brown-bagging your lunch.

If you listen to them - and assume that spending is good and having a lot of fancy crap is nice, and you believe their depressed thoughts that "the systems is stacked against you, so you might as well live for today" - then yes, you will end up poor.

And that is the beauty of the thing.   It is all a choice you make, and you make alone.   No one forces you to buy a Scion and pay thousands a year to insure it at age 24.  But the car companies have entire lines of cars targeted at the youth market because they know that 20-somethings are idiots when it comes to money, and will spend it all trying to "look cool".  Who in their right mind would buy a Hyundai Veloster?

There are, of course, ways to live well, on not a lot of money.   You can buy a secondhand Miata and pay cash, for a lot less than a $20,000 Scion or Hyundai - and cut your insurance costs in half.    And you will have a lot more fun.    That's just an example.

These are the choices we make, in everyday life.  You choose badly, bad things happen.  Most people choose stupidly.

You'll have to pardon me if I don't feel sorry for folks when they make poor choices.   Why is this?  Because no one ever felt sorry for me when I made bonehead choices.  And I made a lot of them!