Following this post I got an email from a reader that went something like this.
Your posts are interesting but we have different financial situations. My husband and I don’t have company pensions. We’ve pursued our passions, we love what we do, but because of that it’s more modest living. We live frugally. Our house will be paid off by age 50. We have a good chunk of money in savings. However reading about your pensions and $1 M savings goal (which you feel is attainable) is probably not realistic for us. What insights do you have for people who aren’t exactly the same path as you?
I thank this reader for their email. It got me thinking about how I started my savings and investing journey 20+ years ago and what I envisioned for my life back then. It’s a bit different now. I didn’t see many of those changes coming. My life has taken some interesting turns but I’m happy where I am. It seems the reader is happy where they are – which is ultimately the most important thing in life.
When it comes to getting a handle on finances, building wealth if that’s your goal, I can only offer some perspectives based on my experiences (including my failures) and those success stories I have observed from others. Today’s post shares a few Millionaire Next Door saving and investing principles – for any salary – and at the end of the day, what it all really comes down to.
Principle #1 – I think you need some money to make money
One of my personal beliefs is you probably need a bit of money to make some money. I said as much in this post here suggesting folks do these three things before they start investing. Living below your means or at least within some (budgetary) means is critical to financial health. Once you find a bit of money to save then watch out for principle #2.
Principle #2 – Avoid lifestyle traps
I recall when I read The Millionaire Next Door avoiding some lifestyle spending traps were very important:
Avoid driving away your wealth
Financing cars or leasing cars (unless you can offset those car costs as part of small business expenses) less than every 10 years will generally be a wealth destroyer for most people. If you are financing or leasing cars often, you are borrowing money, and paying interest on this money, to buy a depreciating asset. Let that sink in for a moment.
Avoid buying too much home
Unlike most cars, most homes are an appreciating asset. This does not mean however you should mortgage yourself into the ground – although that’s entirely your call. If you bought too much home, you probably have too much property tax. You probably have too much utility bills. You probably have too much home maintenance and too much insurance as well. Those costs add up. Even if you bought too much house and you can afford those operational costs your financing costs might be too high. Given where bond yields have been and are now, there is very little reason why most folks should be paying more than 3% borrowing costs on their mortgage; it should be even be less.
Avoid buying too much stuff
Spending is good but to a point. Put some focus on what your money can do for you to build wealth instead of how you can just spend it.
“There is an inverse relationship between the time spent purchasing luxury items such as cars and clothes and the time spent planning one’s financial future” – The Millionaire Next Door.
Principle #3 – Plan for the unplanned
We’ve never been very good with emergency funds or cash savings until recently. It took me 20 years to get here (yes you read that correctly, 20 years) but at least some money is tucked away now. I personally feel emergency funds are important but everyone has their own risk tolerance. Whether your emergency fund is $1,000, $10,000 or even far greater I believe having a bit of money planned for the unplanned is better than no plan at all.
Principle #4 – Avoid paying too much financial advice for sub-par performance
Investing costs are a hot-topic nowadays and rightly so. Shouldn’t financial advice come with some quantifiable benefits – as in value for money? Fee-only advisors offer this. I believe tax experts and accountants also offer this. But paying more than 2% in money management fees for financial products that underperform the market is not good value for money. You are falling behind – academic research says so. What should you do? Consider indexed funds via Exchange Traded Funds (ETFs) across your portfolio that own stocks and bonds in the appropriate allocations you have determined fit nicely with your financial plan. Those decisions will likely save you thousands of dollars in the coming years, if not much more.
Back to the email, from what was written to me, the reader seems to be doing well and has a good plan in place. Actually they are doing quite well.
At the end of the day I think it comes down to this: you do the best you can with what you’ve got and you try and improve your life from there – even incrementally. Striving for a better tomorrow for you or your family is fine but enjoying any health and wellness you have today is a far greater gift. Enjoy today, have fun, and plan a little bit for tomorrow. I will leave it at that.
Thanks for reading.
What’s your take on my Millionaire Next Door principles for any salary?