Life is short. One minute your at school, the next you’ve started working and then its its time to retire. The problem is that life is too short and most people, don’t think of their financial future. Over the years, I’ve met hundreds of people with that, “i’ll just keep working attitude”, but what happens if you cannot work? How are you going to live and support your family if you have no savings.
Across this website, we have talked about the importance of saving for the future. Recently I was reading article by Morgan Housel, a partner at The Collaborative Fund, and an expert on behavioural finance, who has nine words that are probably the most important nine words of your financial future.
The complete quote on The Motley Fool website, however I really enjoyed this section; “There are 56,956 personal finance books on Amazon.com. In aggregate, they contain more than 3 billion words. This seems absurd because 99% of personal finance can be summarised in nine words: Work a lot, spend a little, invest the difference. Master that, and the other 2.999 billion words are filler”.
The Thought Process
Becoming a multi-millionaire is the dream for many graduates leaving University. For most, it’s a pipe dream that probably won’t become a reality. For others, with some simple career development and basic financial planning, they will achieve it.
In its simplest form, to become a multi-millionaire, i.e. to have net worth of more than two million, you need to save £1,000 per month, between the ages of 23 and 49, and allow it to grow by 12% each year. If you did this, you’d have £2,154,437 by the end of your 49th birthday.
For most people, life is not as simple as this. Personally, I could not have saved £1,000 per month, aged 23, but I also managed to generate a better return than 12% on both property and speculative investments. For me, it’s the principle that needs to be taken away, rather than how you got there. Effectively financial growth comes down to this simple financial rule.
Work a Lot
The first phase of the nine-word rule is all about working hard. In my 40 years, I cannot think of someone who has been successful and not worked hard. In addition to working hard, success usually takes years. Experts suggest it takes 10,000 hours of practice to be competent at something. In contrast, the most accomplished people take decades of hard work before becoming anything close to becoming an expert.
The most famous example of this is probably Warren Buffet. Warren started his career in 1951, aged 21, although it’s well documented that he purchased his first stock when he was 11 years old and worked in his family’s grocery store in Omaha. The key point here, warren is 91 years old, he has been working for the majority of his life, and he has been successful, with a current net worth above $82 Billion.
Be The Best
Warren Buffet works hard and makes billions each year. While I’m not suggesting if you work hard, you’ll make billions, what I am saying, if you’re the best, you’ll make money. There are very few examples of people who are “the best” at something but are not hugely wealthy. Hard work and success usually mean wealth.
As an example, sailing. It’s the sport you’d expect to find lots of very wealthy owners, however, it’s not the sport that you’d expect to find wealthy sailors. Take Ben Ainslie, he’s worked hard to be the best sailor in the world. He has four gold medals, one silver medal and numerous world and European championships to his name. He is firmly the best sailor of his generation, and more importantly, a multi-millionaire.
We’ve talked about Billionaires and Millionaires, but what about the average person? How does working hard and earning money reflect for the average person? I think I’m the average person, and my lifestyle sums this up perfectly. Remember, up until recently, I earned £51K, and my wife Earned £37K, we had two holidays each year and still plan on retiring aged 50, a millionaire.
The critical point in the above paragraph is “we earn a combined income of £88,000 Gross income”, which equates to a Net Monthly salary of £5,218, but still manage to pay a 300K mortgage, fund two kids through school, have two holidays a year, and save for retirement.
Life in London’s not cheap by any means. What’s important to realise is that I have a day job and a side job. It’s the side job that allows me to have holidays each year and save for retirement and its the working hard that achieves this.
Spend a Little
The more you earn, the more you spend, at least this is the way for many people worldwide. I recently read an article about a couple in the U.S. earning $500,000 a year, who are just about scraping by. It’s not because they are not earning, it’s because, like many people, the more you earn, the more you spend.
The second part of the nine-letter phrase looks at ways to decrease your spending while keeping your lifestyle to the point that you’ve become accustomed. Spending less than you earn is probably the most critical principle for personal finances, but it’s one that so many find it difficult.
Track your Expenses
If you’re trying to save money by not spending it, you need to understand where you are currently spending money and on what. Over a month, write down where every single penny you spend goes, then evaluate where you’re spending your money and what you can cut out or reduce.
If you track your spending, you’ll be amazed at where your money goes. It’s often not the large purchases, but it’s the small things that in principle are not important, but together really add up. For example, my wife and I used to buy a Starbucks coffee every day. It cost £4.74 for a Venti Americano. Over the year, taking into account a 45-week working year, we’ve spent £426.60 on buying a coffee, rather than making a coffee ourselves—what a waste.
If you want to get serious about your savings and try to retire early, you could look at the FIRE Movement. F.I.R.E. stands for “Financial Independence, Retire Early“, basically it’s a goal to save heavily, and we’re talking 60-80% of your income to try and retire in your 30s or 40s.
Your average follower of the FIRE movement tries to do two things, bolster their income, and bolster their monthly savings, but they take both to the extreme.
Your average FIRE movement saver probably has two or three side jobs to maximise their income, and they cut out almost every creature comfort possible. This means no sky T.V., minimal data plans, minimal socialising and no treats.
While I understand the want to choose whether to work, I disagree with FIRE movement and would not recommend it to anyone. Life is short, and while saving is important, so is living your life to the fullest.
Do You Really Need It?
There are things I’d like and things I need. Before any major, you need to ask yourself the question, do you really need it? Think about it this way, my friend Simon bought himself a brand new Mercedes Benz. It’s a lovely car, but it cost him £50,000. He put down 20%, and pays premiums of £1,297 per month. It’s a lovely car, and great to drive, but does he really need it?
My answer, No. I appreciate that you need to have a car, but you could quite easily buy a nice car for the £10,000 deposit that you have put down. This would mean the £1,297 per month that you were paying for the car could be put into a saving plan. Over four years, and growing at 12%, you could easily have £79,405.72 saved.
At some point, you need to treat yourself. There is no point going through life, saving every penny for the future. Yes, saving money is important, but you need to live your life as you only get one chance at it. What’s important is that you budget an amount of money each month to have fun, and then stick to that amount.
Where most people run into problems is in sticking to that budget. They start off with good intentions and set themselves an amount of money to spend that day. However, once they’re out having fun, they decide they’re having too much fun and spend three times the amount, wiping out any savings they wanted to make that month.
Remember, treating yourself doesn’t have to be expensive or something you need to feel bad about, as long as you do it correctly. Take date night as an example. Can you get a two for one deal at your favourite restaurant? With so many deals floating around, there’s often a dinner deal that makes sense and allows you to have dinner with your wife very cheaply.
Invest the Difference
Investing in yourself is important as you need to develop your skills and knowledge. Warren Buffett and Bill Gates are two notable billionaires who continually invest in themselves. Warren Buffett spends five to six hours per day reading while Bill Gates openly talks about reading 50 books a year to gain knowledge.
My Friend Sam
On a personal note, I have a friend call Sam who was a Geography teacher earning about £50,000 a year. Sam decided he wasn’t happy being a teacher earning £50,000 a year and wanted to earn more.
He invested in himself heavily by learning to code, and now, ten years later, is a senior manager working in I.T., earning upwards of £200,000. Sam has gone from saving £10,000 a year to saving £150,000 a year simply by investing in himself. I cannot tell you the effect of saving £150,000 per year, versus £10,000 per year, on your retirement plan, but he certainly talks about retiring in his 50’s, not 60’s.
The second part of investing comes down to doing something with your savings. Investment growth will play a significant role in determining your wealth at retirement. As an example, if you are saving £500 per month, between the age of 25 and 55 (i.e. 30 years), you will have saved £180,000.
If you had saved the same £500 per month for 30 years, but this time invested in on the stock market and made 10% each year, you’d have £1,139,662.66. Remember, investing your money on the stockmarket, is not a difficult process and should not be something that worries you. You can set an ISA in your brokerage house allowing you to transfer 20,000 per year into this tax free arena. Here your money can grow over a period of time and the growth is tax free.
You can do this yourself or with the help of a financial adviser or investment adviser. While a financial adviser will help you set up your account and point you in the right direction with regard to your investments, they will charge a fee for their services. As a consequence, its important that you find the right financial adviser for your needs and experience level.
Personally, I would do it myself and save the money. Choosing the right stocks to invest into, whether for the long term or dividend paying stocks, is not a difficult process to start with given the large amount of information across the internet.
Financial security and having enough money to retire early is not rocket science, but it does take commitment and dedication. For most of us, building a multi-million-pound portfolio is not going to happen quickly and therefore, we’re going to be saving and building this fund for the majority of our lives.
The one key message that this statement doesn’t convey is the importance of starting today and committing long-term. Over the years, I have met so many people in their late fifties who have lost their job due to being made redundant. They’re struggling to find a new one and don’t have enough money to retire today. It’s a common theme, just because the retirement age in the U.K. is 67 doesn’t mean that you’re going to be able to work until you are 67.