I forget where I read this but "who is wealthier the man who makes $100,000 but lives like he makes $200,000 or the man who makes $20,000 and lives like he makes $10,000."
This is really a philosophy more than anything else, one that I embrace. My wife and I have lived below our means the entire time we have been together which has allowed me to take several financial chances that turned out to be gateways to much better things.
When we got married we bought a little house with a huge yard. Soon there after we could have afforded a bigger, newer house but we loved the house we owned. By sticking with our $700 mortgage instead of taking on a $2000 mortgage we left ourselves able to save more and better withstand any sort of financial shock. This is not to say you should stay in a house you don't like but we loved the house and it was very inexpensive. The reward for this came quickly.
In 1998 we bought our cabin (where we now live full time). The mortgage for the cabin was $600 (large down payment). Had we upgraded our primary residence a second home would have been out of the question at that time. For $1300 a month we had two houses that we loved and were still comfortable, financially.
The same idea can be applied to automobiles. How much simpler would your life be with no car payments? No payments ever is probably unlikely. But if you buy a brand new car on a five year loan, but drive that car for ten or twelve years you can go five to seven years with no payment. Money Magazine or Smart Money have had articles about saving huge sums of money over your lifetime by driving a car for ten years. I don't know if those exact numbers stand up but the benefit to this is big.
For the record we have a 1996 Jeep that we bought eleven years ago and for how little we drive it, it should last a while longer. Our other car is 2000 Forerunner that we bought used in 2002. Hopefully it will last until 2012.
The last item I think is relevant to this is credit cards. I have no idea what the statistics are about people that have ruined themselves financially with credit cards, including a couple of my family members, but all I can say is pay them off, keep one or two for an emergency and throw the rest away. I can not remember the last time I had a balance on a card rollover to a second month. This, more than the others, is about discipline.
To repeat, all of these points are more a matter of philosophy than anything else. In living this way we are not wanting for anything. Our cars are very reliable, we live in a beautiful cabin in the woods and we take some spectacular trips. We are giving up a $50,000 SUV for a $20,000 (back in 2002) SUV. I do not have a Rolex or Tag like so many people in my field do. I only need to wear a suit a couple of times a year so I haven't spent money on a closet full of them.
Some people would view this as large sacrifices. For people that can overcome that mindset they will have more money saved when they retire and will spend less in retirement. The benefit of taking less from a portfolio during retirement should be clear to anyone.
This first, real, post is a starting point to build on. By watching your spending you can save more now. This can mean your portfolio will not have to work as hard in retirement as it might otherwise have to do. The difference between a 7% income need from your portfolio and a 4% income need could make the difference between running out of money and not.
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12 comments:
Wow, Roger...great start to your new blog. You definitely should let more of these thoughts out of the bag.
And I got you beat...I drive a 1993 Mazda truck. :)
Good luck on your new blog!
MT
Good Luck. I bookmarked your new blog.
I can't tell you how important this point of "Living below your means" is to a financially secure retirement. We now have three homes, (a condo almost paid for, a cabin paid for, and a small house in a warm place for winter with a fixed rate mortage) and all of them together do not cost as much as my daughter's house.
When we got to mortage on our winter home the bank told us "you can have a much bigger loan, no problem"... and we told them the reason we were able to retire early was we live within our means, and a large mortage didn't fit within the plan.
In getting ready for retirement my husbands moto was "Enough plus a little"... he read that somewhere. But it works. That, and living below your "means".
Finally someone has articulated this overlooked avenue for creating an appropriate lifestyle. GREAT WRITING. I'm bookmarking this and forwarding copies to my clients and children.
As an aside, in reading the two comments before mine I thought, Wow! this is going to really bring out the cheapskates! --- Like me.
All kidding aside this is a great idea because the other places where I occasionally see articles about retirement preparation don't go far enough in covering the bases. They are more like human interest stories (like at CNN or any of the daily news sources), a bit of information on occasion. The tone of your first post indicates to me that I can expect more from this blog.
I'll throw out a line I read (and kept) several years ago:
If you want your nestegg to hatch you must incubate them yourself.
I don't think this means you have to do everything yourself, but you have to be aware of the right choices and remain active in your retirement investment decision making process in some way (unless you make the big bucks).
The car thing is a great point. I drove two used Toyota Tercels, a 1985 and a 1986 between 1997 and about 2002. I haven't owned a car since then and bus everywhere. I just got married (she has a car) have resisted the urge to buy a new car even though we could probably afford one. The longer commute by bus is a pain, but it's actually a shorter commute when you think about it, because while I am on the bus I can read; in the car, I can't.
WOW!
We have more in common than I thought: a 1998 pre-owned 4runner and a $700 mortgage lol.
Keep up the good work
Limiting your spending now for the future hope of an easy retirement is a worthwhile goal, but I think there is a lot more to consider.
If you work for someone else, you are always in danger of a restructuring, that will eliminate your job. (including health benefits etc.)
You need to consider your savings as a means of creating your own independent business.
Maybe your business is only an investment account, study investing and maximize returns. You have created an investment business, treat it as such. "Make the money sweat!"
Leverage your taxable investment funds to acquire rental property, i.e. small apartment units, small commercial properties etc. as a start. Don't overfund your 401k, you need a taxable account as well, to borrow against.
The main idea is to encourage yourself to save for an immediate goal, not a remote one, it makes it a lot easier to sacrifice.
At age 76 I have done this and highly recommend it.
I too, bought a used vehicle, a 1990 Ford Econovan. I use it exclusively for the rental property, so, of course, its expenses are all deductible on Schedule C. You get the picture.
Good luck!
OG
OG stole a little bit of thunder for a future post. I have been laid off (one of the best things that ever happened, I will write about this in the future) and now am my own boss.
This is a great comment.
Oops, sorry Roger, didn't mean to steal your topic.
The key I think, is not to just think Retirement Planning, but "Lifetime Planning" - for one's investment goals.
OG
Roger: Thanks for all the valuable information you post on both blogs. You are the broker I wish I had back in 2000! I've learned alot since thanks to the Internet Miracle: no, not "dot.coms", but information contributed by very knowledgeable bloggers.
My contribution relates to your view of credit cards. They, like guns, cars or drugs, can be used for good or evil. If you don't have discipline and live within your means you won't grow your wealth. But credit cards can be a help. I have several issued by Citibank which have no annual fee and which pay you 5% cash on all your purchases at supermarkets, drugstores and gas stations and 1% on all other purchases. Max $300 year in $50 increments. When I "max out" my Citibank Dividend Platinum Select card, I shift to the AT&T Universal Card, also issued by Citibank, with the same terms. Recently, Chase was forced into the same deal by market pressures. Obvious caveats: the monthly card balance must be paid automatically thru your CMA type account or checking account, to avoid the possibility of late fees etc. As a stocking stuffer, I gave my grandson a cupon I found for the Citibank card which deposited $20 in a new account just for opening it. Then you get 5% back. He looked at me and said: "This is free money, isn't it?" You bet it is. Gas at, say, $2.00 a gallon, well you do the math.
Bagholder makes a great point about using CCs. My comment was more philosophical about debt than the point Bagholder makes.
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