There are two ways to make money: 1) You at work; and, 2) Your money at work
Are old adages still relevant?
A proverb is a statement of practical wisdom expressed in a simple way. An adage is a well-known proverb that has been used for a long time. Adages offer advice and observations about life. One I tend to use, and try to live by, is ‘Be where you are’, or stated another way via a rhetorical question, ‘Where else would you rather be right here, right now’. Be focused and present at the moment, in the activity in front of you. Whether it is work, play, exercise, relaxation, meditation, or something else, it will center you and give you purpose to your day.
In the financial wellness world, an adage worthy of dusting off and giving a fresh look is, ‘There are two ways to make money: 1) You at work; and 2) Your money at work’ (YAW MAW). I first heard this adage from a prospective employer when I was exploring a job opportunity in the early 80’s. I didn’t take the job; however, I took the advice.
We tend to focus a good deal of our day on the YAW and not so much on the MAW. This is especially true early in our work life. For many, it becomes a mindset and stays that way for most, if not all, of a working lifetime.
Breaking that mindset is a critical success factor (CSF) to accumulating wealth or otherwise enjoying a financially satisfying life while at work and in retirement. The sooner it happens, the better.
Before we delve a bit deeper into YAW MAW, let's dispel some commonly held beliefs about wealthy folks (let’s say those with net worth north of $1.5 million) and how they ‘made it’.
An updated study was done for the 2010 preface to a great read, The Millionaire Next Door, by Thomas Stanley and William Danko, found, among other things, that 80% of wealthy folks are 1st generation affluent. (They also noted that a study conducted in 1892 of the 4,047 American Millionaires, 84% achieved their wealth without receiving any inheritance.) Stanly and Danko also identified that in 2010 less than 20% inherited 10% or more of their wealth, nor received any income from a trust or estate. More than ½ never received as much as $1 in inheritance, etc., etc.
Today the widely held belief is that baby boomers have accumulated $30 trillion in wealth. This will result in the greatest wealth transfer in history to next generations. My advice, don’t count on it. According to a 2016 Phoenix Wealth & Affluent Monitor, millionaire households still make up just 5.5% of US households and boomers make up 55% of that group. Wealth baby boomers currently account for 3.7 million US households. You may be lucky to consider yourself a potential heir to a share of the ‘greatest wealth transfer’, especially once you realize that the 3.7 million wealthy baby boomers represent only 3% of 125 million US households. And, it is most likely that 95/5 rule applies here, meaning that 95% of the wealth is held by the top 5% (or about 185,000 households). If you are one of the lucky ones, be good stewards of your ‘gift’ and pay it forward to the next generation(s).
Now to delve: Why YAW MAW now?
The benefits of being an early adopter of YAW MAW are up to sevenfold. An age 20 household earning $50,000 (growing 2% annually) and saving and investing 8% of that income annually will have around $1.6 million at age 67. By comparison, households with the same income stream that delay their savings and investing start date to age 30 will need to save 12% of their income annually to age 67 to have a similar outcome. Saving 8% will leave them with about $800,000, or ½ of the early adopter’s. Waiting to age 40 to begin? You would need to save 20% per year of your then income for the following 27 years to achieve $1.6 million at age 67. Saving at an 8% rate would accumulate about $550,000 or 3 times less than the early adopter.
Another benefit of starting earlier is your propensity for taking risk in your investment portfolio is greater than it would be in later years. You have time on your side, so you are better able to weather market swings for the opportunity to have higher average annual returns on your investments.
Lastly, the earlier you adopt your MAW, the easier it is to maintain the mindset, create the habit and increase your annual savings rate over time. Just maybe it can be as easier to envision and implement when your daily mantra is ‘investing in your financial future’, versus ‘saving for a rainy day’, or just ‘paying yourself first’ (that usually results in a spending habit). With this mindset, getting up and going to work each day has a dual purpose, making a living and building financial wellness.
Do you know people who make a good (or great) income but have lifestyle expenses that exceed whatever they earn? They emphasize consumption and usually have accumulated bad debt as well to support their consumptive lifestyle. They are chasing the dream…and likely won’t ever catch it. As the saying in Texas goes, ‘they wear a big hat but have no cattle’. They are an under-accumulator of wealth (UAW).
The other end of that spectrum is the prodigious accumulator of wealth (PAW). And how might you become a PAW? Emphasize the factors that lead to financial wellness. Put more emphasis on your MAW.
PAWs and UAWs can be found among all age groups and income levels. You can usually spot the UAWs. You may not see the PAWs at first glance. They tend to have a low consumption lifestyle. They live within their means. They save up to 20% of their annual household income and invest a good bit. They could sustain their lifestyle for a period without working.
Like the boa eating the elephant, you get there one bite (step) at a time. The most important concept is to plan your plan and work your plan. In this case, your plan is your budget. Be a meticulous budgeter. Practice ‘charity begins at home’ (another trait of PAWs). Create that bucket for your savings and investments. Start putting in 8% and grow it to 20% from there. Take advantage of ‘free money’ like an employer’s matching contribution toward a 401k plan, or into a health savings account. Think of budgeting as making your money do what you want it to. You control where it goes and what it does. It is the second-best tool you have available to build wealth (the first being your ability to go to work each day and earn an income.) Think of a budget as your ‘financial fitness’ tracker. Make it a habit, not a chore. There are many great budgeting tools at your fingertips, and they come inside a financial planning wrapper. Two we use in our practice are eMoney, and mint.
The second step is to get out (and stay out) of bad debt as quickly as possible, and good debt over time. Huh??? How can debt be good? Simply stated if you go into debt to consume its bad debt. It limits you in that it takes future income to pay the cost of the debt (interest) for something consumed. It is a disinvestment. Going into debt to invest in yourself (your ability to make a living) or build wealth (enhance your PAW) may be considered good debt. It has a purpose in moving you toward financial wellness. See a great blog on Medium by our company’s Chief Investment Officer (and advisor extraordinaire), Tolen Teigen, entitled, ‘Are Student Loans Bad?, for more.
Examples of good debt could be a college loan and a home mortgage. Just remember you don’t need to leverage into a sheepskin from the most expensive or prestigious university or own the mortgage in order to live in the best house in the neighborhood. A rule of thumb is to seek the highest return for the lowest outlay or incursion of debt. If you view a college degree as a way to generate a higher income and put you on a path to PAW, find a college that works. Many now offer online classes or remote classes in your city. Likewise, a mortgage denotes a leveraged investment in a home, or at worst case, tax-deductible rent. The equity built in a home can compound as you get to keep all the upside, while your initial investment was 10–20% of the purchase price. Generally, paying off the debt over 15–30 years leaves you with a good-sized asset for your financial wellness. Pay rent, and it's gone. You consumed living space.
Another low hanging fruit, take advantage of employment opportunities to ‘pay’ for your learning. Maybe it’s a program to reimburse higher education expenses or to earn work related designations. The employer generally pays you twice, once for the cost of the degree (including time away from work) and again in the form of higher earnings that last for your career (good PAW planning). And, you get to exercise your brain!!
All this will help you to find the money to save and invest. So start now. Live within your means. Create your savings and investment ports. An emergency savings account and your 401k plan account (or IRA) are great starters. Other ports for specific goals (ports) follow.
And remember, the path to PAW and your financial wellness is not always clearly lit or well-paved. Using your financial fitness tracker (with its built-in compass) will help keep you on that path. Some years you will slog along and other years you will skate downhill. Over time you will have a much greater likelihood of having financial wellness and you will have a much better journey. You may even find yourself there sooner than later and wouldn’t that be nice.
I’d say YAW MAW is still relevant, wouldn’t you?