source: Paul Goyette
Most of us get a cash infusion into our bank account every other Friday and promptly do things with our money that are ill-advised. At least for those of us who’d like to be financially independent one day. But so many of us feel to do anything other than spend our money like it will self destruct in seconds if we don’t, makes us the 21st century version of Scrooge. Very few of us realize there is a vast difference between frugal and cheap. Frugal will eventually make you rich. Cheap will have the ghosts of Christmas Past, Present and Future visiting you in the middle of the night.
So few of us understand the power of thrift, saving and investing for the rainy (or even the sunny) day. Having “it” now is the only thing most of us know. Waiting for the proverbial “it” is simply boring and most of us are unwilling to be bored even if in the long (sometimes not so long) run we are far better off. The truth is getting wealthy is not boring. And the art of wealth getting has always been earn, conserve, invest, repeat. Heck, Benjamin Franklin wrote of the same formula in The Way to Wealth about 250 years ago in one issue of Poor Richard’s Almanac:
"If you would be wealthy, says (Poor Richard), think of saving as well as of getting: the Indies have not made Spain rich, because her outgoes are greater than her incomes. Away then with your expensive follies, and you will not have so much cause to complain of hard times, heavy taxes, and chargeable families; for, as Poor Dick says, ‘Women and wine, game and deceit, Make the wealth small, and the wants great’."
What Benjamin Franklin, through Poor Richard, espoused was simply living frugally and investing the difference. Does living frugally equate to living like a pauper? Nothing could be further from the truth. Some of us just need a little education, need a little information, for us to understand we can enjoy ourselves without disturbing the “way to wealth” formula. We can actually have a little fun in the process. So a couple of weeks ago I starting posting a Payday Challenge on Twitter (link) with the goal of informing about saving and investing with the hope we might all be able to see the process of wealth getting can be fun along the way.
The first two Payday Challenges on Twitter were:
This was really difficult. I personally was unable to do it. A trip to the movie theater took care of that experiment nicely. One Facebook friend, R. F. said “No way. One latte is $5.” But as Poor Richard warns, beware of little expenses. What PR knew and most of us fail to consider is how small amounts can become great amounts given enough time. Five bucks a day invested well (read: in stocks) will be about $35,000 in 10 years and $525,000 in 30 years. Ten bucks, invested well over those same 30 years, will be over $1,000,000. When thought of in these terms the trade off your are considering is millionaire at retirement or movie popcorn (or creamy latte) today.
Trying to keep up with the Joneses will make you broke. But here’s a dirty little secret. The Jonses are broke too! Why are they broke? Because they are doing what we are doing. They are trying to keep up, and in most instances, outpace us. It’s human nature to think our neighbor is doing better than we are. It is not true. Very few of us are really going to bother looking past the glitz of the Benz in our neighbors’ driveway. We have a hard time appreciating what we are witnessing is hyperconsumerism. According to the Federal Reserve’s Survey of Consumer Finances (2009), 43.5% of American families spend more than they earn and 77% of families have debt of some sort. Another study (here and here) found in 2005 the typical American family had debt that is over 120% of its yearly income where it was 66% in 1963. And monthly debt payments as a percentage of disposal income the typical household makes has increased 32% in the last decade.
Trust, it is not the Joneses with the Benz and possibly the Beamer in the driveway who are wealthy, it’s the Smith’s down the road a bit with the 10-year-old Ford pickup that are rolling in the dough. So if you are going to compare yourself to your friend or neighbor which is inevitable, know all that glitters is not gold. And know the real numbers.
This week’s Payday Challenge however should be a little more fun. Payday Challenge #3 is “Get Drunk For Cheap”. I know, I know, Poor Richard said wine will “make the wealth small and the wants great”. This is true because most of us are highly influenced by external cues. The cue at work here is we feel like the more expensive something is, the better it is. Especially when it comes to wine and spirits. Some smart guys at Stanford studied this very thing (see here and here). They tested individuals by giving them samples of wine only telling them the price of each. To a person, these folks said they enjoyed the wines in order of price, the most expensive being the favorite. What the researchers did not reveal until the end of the study was the participants were drinking the same wine in each glass.
Those who are wealthy or likely to be are aware, either intrinsically or by trial and error, an item’s price has absolutely nothing to do with its worth. In other words, you don’t necessarily get what you pay for. In fact according to Thomas Stanley author of Stop Acting Rich the cost of the wine the typical millionaire serves to his guests when entertaining at home is $13.09. And the most expensive wine in the typical millionaire’s inventory (usually less than 12 bottles) is $25.
The point is Price = Quality is a myth that if adhered to will serve to make you broke. But that doesn’t mean we can’t enjoy the good stuff. So this challenge is to go out, get a bottle of your favorite type of wine or spirit and pay less than 13 bucks for it. Stay home with your sweetie and the two of you drink the whole bottle together while watching your favorite movie on Netflix.
And be sure to follow me on Twitter. I hope to post a Payday Challenge every week and will be updating it there.
Disclosure: Neither the clients of Brick Financial Management, LLC, nor I, owned any of the companies mentioned in this post. But positions can change at any time.