How Much Do You Really Earn?
When you spend your entire career in financial services, you get to know a lot about money management. You also get to see some remarkable success stories when people follow sound financial practices.
One of my favorite success stories involves a man I met in his late 60’s. An immigrant who came to America at a young age, he never learned to speak English very well. He didn’t have much education, and spent most of his life working as a dishwasher – not a high-paying job by any stretch of the imagination. Yet, when I met this gentleman, he had a net worth of $4.5 million. Yes, you read that correctly – four and a half million dollars.
Financial Rule #1: Pay Yourself First
Over the years I’ve met a lot of people who started out with very little and went on to achieve great economic success. But they didn’t work as a dishwasher all their lives, so naturally I wondered how my friend accumulated such a sizeable nest egg.
My first question to this self-made millionaire was, “You don’t have a college degree. You can’t read a financial statement. How on earth did you manage to accumulate $4.5 million in savings?”
To my surprise he responded with a very basic financial principle, one that you can find in practically every book ever written on money management.
“Simple,” he said. “With every paycheck, I always paid myself first.”
I said, “Yes, but you were a dishwasher. How could you possibly put away enough money each week to amass such a fortune?”
He went on to explain. “Like everyone else, I have a pile of bills on my desk every month that must be paid. But then I add one more bill to the top of the pile – my personal savings bill. Every month I pay 10% of my income to myself and invest it wisely. Over time it adds up.”
How did this manual laborer, who knew nothing of stock markets or investment products, know where to invest his savings? He asked his more educated friends what they invested in. When enough people recommended a certain company, he bought stock. When the dividends came in, he put the money aside until he had enough to buy more shares.
Most important, he almost never sold his stock. On rare occasions, when he learned of potential problems within a company, he might divest his holdings in that particular stock. Otherwise he steadfastly maintained his “buy and hold” approach, regardless of what other investors were doing.
Winning the Lottery is Not a Good Retirement Strategy
Which brings us to the main point of this blog: how much do you earn? By that I don’t mean how much you bring home every week or month. I mean how much do you put aside for your savings with each paycheck?
We all earn money, but unless we save some of that money, we don’t really earn any. Instead, all we’re doing is acting as a conduit for the money to go somewhere else. What we save is what we really make. So if we’re not saving any money, we’re not actually making any.
In our society we’re trained to spend and consume. Obviously, consumer spending is critical for a healthy economy, but saving is just as important. And considering the uncertain future of Social Security and other entitlement programs, it has become even more important.
What concerns me is that the younger generation of American workers doesn’t seem to be getting the message. Too many seem to think that winning the lottery represents a good retirement plan. Or more likely, they have no plan at all. Saving requires patience and discipline, a message that doesn’t sit well with today’s instant-gratification Millennials. But the results are well worth the effort.
As industry professionals, we don’t need to be reminded of this most basic financial principle. But I think we can do a better job of getting the message across to those who need to hear it. For example, we could develop curriculums that teach elementary, middle and high school students basic money management concepts. We could also create online learning programs that could be used by both public and private organizations.
You can read more about my ideas on this subject in our two most recent blogs, It’s Time to Teach and A Little Education Goes a Long Way. The key is we need to start educating students about the importance of saving for retirement, and we need to start doing it at a young age. Doing so would benefit our companies and our clients – and help an entire generation prepare for a more secure retirement.
Peter E. Preovolos
President and CEO