The American Dream means different things to different people. Whatever yours happens to be, it’s a safe bet that it requires some kind of financial independence.
Money provides real independence. It liberates you from want, from work that is drudgery, from relationships that confine you.[ad#Google Adsense 336×280-IA]No one is truly free who is a slave to his job, his creditors, his circumstances or his overhead.
Wealth is the great equalizer. It doesn’t matter if you’re a man or woman, black or white, young or old, tall or short, educated or not.
If you have money, you have power… in the best sense.
Wealth is freedom, security and peace of mind.
It allows you to do and be what you want.
It enables you to follow your dreams, to spend your life the way you choose.
That’s why investing is a serious business. Getting it right is the difference between a retirement spent in comfort (or luxury) and spending your golden years counting nickels, worrying about whether you’ll have enough.
The difference could hardly be starker.
But here’s the part some people don’t like to hear. Financial freedom – like all freedoms – requires personal responsibility.
Unfortunately, surveys show that nearly half of all workers believe their retirement costs are the responsibility of their employers or the federal government.
Trust me, that mindset is not conducive to achieving the American Dream.
Financial freedom can be so simple… and so straightforward. It requires only time, patience and discipline.
For example, let’s say you are the typical American who earns little and saves nothing up to the age of 25. Then you get practical. You realize that with a net worth of approximately zero – and government entitlement programs headed for long-term insolvency – you had better do something. But what?
You can resolve this problem with a bit of math. If you are 25 and have 40 years until you retire, how much should you save every month?
That will depend, of course, on your rate of return. If you earn nothing more or less than what a diversified portfolio of common stocks has delivered with dividends reinvested for the last 200 years, that would be 10% a year.
Plug the numbers into a calculator and you’ll see that you need to save $190 a month. That’s because $190 a month compounding at 10% a year will turn into $1,017,710 in 40 years.
If you work until you’re 70, it turns into more than $1.65 million. (Congratulations. You’re now one of those deplorable one-percenters the Occupy Wall Street types are always going on about.)
Is it possible for most Americans to save $190 a month? With a little belt-tightening, of course it is. According to the U.S. Census Bureau, the median household income is $51,939. So you need save only 4% of your pre-tax income. (Or approximately 5% of your after tax income in this bracket.)
Alas. Not only have most Americans not done this, I routinely hear from readers who say it isn’t even possible.
These folks would benefit from reading The Millionaire Next Door by Dr. Thomas J. Stanley. Dr. Stanley, who died in a car accident a few months ago, was the country’s foremost authority on the habits and characteristics of America’s wealthy. Many of his findings were counterintuitive.
For example, he found the majority of millionaires – individuals with a net worth of $1 million or more – enjoy a fairly modest lifestyle. The vast majority:
- Live in a house that cost less than $400,000.
- Do not own a second home.
- Have never owned a boat.
- Are more likely to wear a Timex than a Rolex.
- Do not collect wine and generally pay less than $15 for a bottle.
- Are far more likely to drive a Toyota than a BMW.
- Have never paid more than $400 for a suit.
- Spend very little on prestige brands and luxury items.
This is certainly not the traditional image of millionaires. And it makes you wonder, who the heck is buying all those Mercedes convertibles, Louis Vuitton purses and $60 bottles of Grey Goose vodka?
The answer, according to Dr. Stanley, is the highly affluent (those with a net worth of $5 million and up) and “aspirationals,” people who act rich, want to be rich, but really aren’t rich.
Most millionaires achieve their wealth not by hitting the lottery, founding a Fortune 500 company or gaining an inheritance, but by patiently and persistently maximizing their income, minimizing their outgo, and religiously saving and investing the difference.
Most Americans could do this.
But what if you are closer to retirement and don’t have 30 or 40 years to compound your investments? Then your plan of action boils down to some combination of these factors:
- Increase your current income.
- Reduce your annual expenses.
- Save a greater proportion of your income and/or
- Increase your rate of return.
This is the nuts and bolts of achieving the American Dream – or at least the financial part of it.
It’s a shame that basic financial literacy like this isn’t taught in our public schools.
But then it’s never too late to learn… or to start saving, investing and increasing your rate of return.
Source: Investment U