By Ric Edelman
Companies often invite me to speak to their employees. At one recent seminar on financial planning, one worker raised his hand.
“Can you tell me how to get rich?” he asked.
His question evoked laughter among his coworkers, but he wasn't kidding. I pondered his question for a moment, and considered telling him about semicovariance or the harmonic mean.
Instead, I gave him a simpler, more direct answer.
“Get some money,” I replied.
My answer is a sad truth that most financial advisors are not willing to admit. If you don't have any money, there's not much that an investment advisor can do for you. All our strategies and methods begin with one assumption: that you have money to invest.
I don't mean to sound glib, and I don't want you to mistake my answer as dismissive.1 But the truth is that your financial success begins with your willingness to save. You already have the ability; you merely need to be willing to do so. Many people who tell me they can't afford to save are spending $50 a month or more on premium cable TV.2
Don't blame your income for the fact that you're not saving money. Making more money has nothing to do with it. You earn more than you did ten years ago - back then, you longed for the money you're complaining about today! It's a common occurrence: A study by the National Bureau of Economic Research shows that high-income households have just as much trouble saving money as low-income households; both groups save pretty much the same amount.
So don't blame your poor savings on your income. Don't wait for your income to rise. Just start saving, and save every month.
In Ordinary People, Extraordinary Wealth, I revealed that five thousand ordinary Americans became wealthy simply by saving small amounts of money on a regular basis. You'll find four ways that you can easily create savings in chapter 49 of The Truth About Money.
Here are three more ways: Stop smoking, stop drinking coffee, and lose weight. If you buy a pack of cigarettes and a café latte every day, you'll enter retirement with $2.8 million less than you'd have otherwise. 3
And a study at Ohio State University found that people thirty pounds overweight spend more on health care, earn less money, get promoted less often, and enter retirement with smaller amounts of savings and only half the assets of slimmer people.4 Cornell University says that women who are sixty-four pounds overweight earn 9% less than average, and Michigan State University found “consistent evidence of weight discrimination” that reduces the incomes of overweight people. The data also showed that as individuals lost weight, they significantly gained wealth.
So if you want to improve your personal finances, quit drinking coffee, stop smoking, and lose weight.
If you want to become rich, marry up - I mean, start saving money. Begin by joining your retirement plan at work. Once you're contributing the maximum, divert all additional cash to paying off credit cards.5 Once that's done, build cash reserves. 6 Then, and only then, are you ready to begin your long-term investment program.
1 I also told him to “marry up.” Okay, that was a little glib.
2 Go ahead, tell your kids, “Sorry you won't be able to go to college. But tonight we're watching HBO!”
3 It's true: A pack and a latte each costs $5. You need to earn $7.14 to spend those five bucks, assuming a 30% combined federal and state tax bracket. If you instead invested that money in a retirement plan for your forty-year career, earning 10% per year, you'd accumulate $2,792,084.
4 They also found that slimmer people get bigger inheritances. They speculate that slimmer people live longer and thus are more likely to receive inheritances. They also hypothesize the possibility of discrimination within families.
5 Don't accelerate the payoff of mortgages, car loans, or student debt; simply make those monthly payments on time. But do get rid of your credit card debt as soon as possible. To learn how, read chapter 51 of The Truth About Money. Sorry for all the references to TAM, but it's either that or reprint those chapters here.
6 To learn how, read What You Need to Do Now. (At least I didn't reference TAM.)